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September 15, 2001
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Madhavpura Co-op Bank blew up 96 per cent of deposits

BS Banking Bureau

Madhavpura Mercantile Co-operative Bank had not only wiped out its entire net worth (capital and reserves) as on March 16, 2001, but also 96.2 per cent of its total deposits, the Reserve Bank of India has documented before the Joint Parliamentary Committee probing the recent stock market scam.

The bank had downed shutters on March 13, 2001, after a debilitating run on its deposits, but had reopened on March 16 "on (the) persuasion of the Reserve Bank and the assistance of the Gujarat government."

The RBI has estimated the net erosion of value at the bank as on March 16, 2001, at Rs 12.11 billion. The real (exchangeable) value of the bank's paid up share capital, reserves etc., worked out to (-) Rs 11.66 billion, which has not only wiped out the paid up capital and reserves but also deposits to the extent of Rs 11.66 billion, forming 96.2 per cent of the total deposits, the RBI has said. The percentage of net erosion to net owned funds worked out to 2670.3 per cent, the RBI noted.

On the issue of MMCB's rehabilitation, the RBI has documented for the first time that it had favoured the option of liquidating the existing bank, and resurrecting it as a new bank which would take over all existing liabilities of MMCB bank along with the realisable assets.

The RBI rationalises that such an option would have been better because:

  • the balance sheet of the new bank would be much stronger which would make the bank more viable;

  • Public confidence in the new bank, which is essential for the viability and for attracting new deposits, will be greater as accumulated losses in the new bank will be much smaller; and

  • Institutional restructuring, as recommended by the working group set up by the Central Registrar of Co-operative Societies in April 2001 to work out possible alternatives for MMCB's revival, is likely to be easier in the new bank (as suggested in the RBI's preferred plan) than in the old bank.

Though the RBI has studiously refrained from making its displeasure known over its suggested plan not being accepted, it said "the Reserve Bank of India would go along (with the other proposal of continuing with the existing bank", provided:

  • its opposition to the plan is made known to the central and state governments as well as co-operative banks in the revival process; and

  • Bonds worth Rs 8 billion to be issued in the revived banks are guaranteed by the central/state governments despite lower viability.

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