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Brokers ran Rajkot co-operative bank

Tamal Bandyopadhyay

The banker-broker nexus in the co-operative sector has reached alarming proportions with the Reserve Bank of India finding that an urban co-operative bank at Rajkot gave not only a power of attorney to a broker to play in the bond market but also authorised brokers to raise deposits from the public.

In this unique deal, the brokers raised deposits from the public as a direct sales agent of the bank and deployed the money in the gilts market. In other words, for all practical purposes, the brokers ran the bank.

The RBI has taken serious exception to this and is in the final stages of the paperwork to supersede the bank's board.

"It will be superseded any day now. This is perhaps the most serious violation of prudential norms by a cooperative bank in recent times. It will be dealt with appropriately," sources said.

An RBI inspection team recently unearthed the irregularities in the bank's activities. When contacted, an RBI spokesperson confirmed the development.

A senior executive of a Mumbai-based broking house that has a presence in the forex and money changing business is involved in the deal.

The executive told Business Standard that he was given a power of attorney by the bank to oversee its gilts trading in his individual capacity as a chartered accountant.

"The power of attorney was given to me and not to the broking firm. I was holding the power of attorney till December 2000. It was restricted to the purchase and sales of gilts and was not meant for any other activities," he said.

He also claimed that the RBI was kept informed about the "arrangement", which ran for many years.

Sources tracking the development said it was a serious affair although the money involved was not much.

"Under no circumstances should banks give a power of attorney or any other authorisation to brokers/intermediaries to deal on their behalf in the money and securities market," a recent RBI directive pointed out.

In this case, the bank first gave a power of attorney to an intermediary to deal in the bond market and then went one step further to give brokers the authority to raise deposits.

This will be the first urban cooperative bank to be superseded this time.

The RBI has already directed the Registrar of Co-operative Societies to supersede two district co-operative banks: Wardha District Central Co-operative Bank and Osmanabad District Central Co-operative Bank.

The board of the Nagpur District Co-operative Bank was superseded earlier and Sunil Kedar, its chairman, remanded to custody, as investigations into the gilts scam continues.

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