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Centre may scrap dual control over co-op banks

BS Political Bureau in New Delhi

The government is likely to scrap dual control of the Reserve Bank of India and the registrar of cooperatives over urban cooperative banks, and also ease the norms for placing deposits between them.

The RBI had imposed stringent restrictions on urban cooperative banks following the gilts scam involving Madhavpura Mercantile Cooperative Bank and Home Trade.

A draft report by a panel of MPs, headed by Minister of State for Finance and Banking Anant Geete, is also expected to suggest scrapping the dual control over urban cooperative banks through a law.

The recommendations of the draft report, to be submitted on Tuesday, gains credence since the panel was set up by Union Finance Minister Jaswant Singh to study the functioning of over 2,000 urban cooperative banks, and suggest measures to prevent scams.

The other members of the panel include Eknath Thakur, Prithviraj Chauhan, Nitish Sen Gupta, B Ramaiah, Murli Deora and S S Ahluwalia.

The panel feels the 2,000 urban cooperative banks, which played a significant role in Maharashtra, Gujarat, Karnataka and Andhra Pradesh, must be guided by a strict banking norms.

The panel feels a suitable law can be introduced to hand over "operational control of urban cooperative banks" to the RBI by amending the Banking Regulation Act. But the move to hand over effective control to the RBI is likely to meet with political resistance in Maharashtra and Gujarat, where urban cooperative banks are controlled by influential politicians.

Senior politicians in Maharashtra had consistently opposed the regulation of urban cooperative banks. "The move would undermine their capacity to manipulate functioning," an official said.

The panel has also decided to urge the finance minister to withdraw the restriction checking one urban cooperative bank from making deposits in another.

This restriction was put in place following the Madhavpura bank scam, which led to the collapse of many small urban cooperative banks with deposits in the bigger banks. "But this has stunted the growth of urban cooperative banks," a panel member said.

The panel's guidelines also direct the banks to exercise caution before making such deposits. For instance, urban cooperative banks should not deposit money in sick banks. Sick banks are those where the capital adequacy ratio would fall below the level of 50 per cent of the minimum prescription.

It has also suggested the 50-odd scheduled urban cooperative banks should be treated on a par with nationalised banks.

The panel has also taken into account the complaints of urban cooperative banks that they were provided loans at a higher rate of interest, which proved to be a major handicap in competing with nationalised banks.

"We have recommended the government should resolve this problem by providing easy loans to urban cooperative banks," a panel member said.

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