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RBI to seek more teeth to tackle co-op banks

Kausik Datta & Pradeep Gooptu

The Reserve Bank of India will seek legislative authority, namely the power to supersede boards of erring co-operative banks and cancellation of licences, to effectively monitor the co-operative banks following the Rs 4-billion scam that rocked the sector.

Senior officials said the long-pending demand for legislative changes transferring these powers from state governments to the central bank, which were recommended by the Madhav Rao Committee in 1999, has been strengthened by the recent scam.

Many cooperative banks have an investment board only on paper and even the main board knows that it can flout RBI diktats with impunity.

Currently, RBI lays out the functioning norms for the co-operative banks but has no right to either supersede board of a bank, if required, nor proceed with liquidation, which is vested with the Registrar of Companies and subject to sanction of the concerned state government.

Although theoretically RBI can recommend that a board be superseded, it cannot be implemented without the permission of the concerned state government with which the co-operative bank is registered as a co-operation is subject on the concurrent list.

RBI's suggestions for superseding the board of a number of co-operative banks have been ruled out by the state governments in the recent past.

Though RBI has the right to cancel a bank's licence, it should be seen as an extreme step which could be applied only as a last measure.

RBI officials said recent scam showed that the co-operative banks were not equipped with the required human capital as well as infrastructure.

The erring broking firm, Home Trade, managed to get buy order for government securities (G-Secs) from a handful of co-operative banks but did not execute trades in reality.

In the process, Home Trade's owner, Sanjay Agarwal, vanished from the scene with the money he took from the co-operative banks.

Stock market experts said Agarwal operated through a number of sub-broking firms which had no physical presence. He managed to siphon out his clients' money through these non-existent firms which had bank accounts only.

In addition to legislative power, the apex bank would call for implementation of a fully computerised G-Sec trading mechanism. Currently, a broker takes at least a month to deliver physical securities. The time lag was too large to abuse the system, market experts said.

However, it is not clear what Agarwal does with the money. One school believes that he lost the money in the share market, another section feels that he might sent the money abroad through hawala route.

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