Co-operative Bank Scams in India
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ICMR HOME | Case Studies Collection
Case Details:
Case Code : FINC021
Case Length : 9 Pages
Period : 2001 - 2002
Pub. Date : 2002
Teaching Note : Available
Organization : Madhavapura Mercantile Cooperative Bank (MMCB), Cooperative Urban Bank (KCUB)
Industry : Financial Services
Countries : India
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FINC021) click on the button below, and select the case from the list of available cases:
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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Excerpts
Background Note
MMCB was established on October 10, 1968 in Ahmedabad, Gujarat, to cater to the varied financial needs of wholesale grocery traders in Ahmedabad's Madhavpura spice market.
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The bank was awarded the status of a scheduled bank in 1999, which permitted it to expand its banking activities outside Gujarat. MMCB had 22 branches and was undertaking regular banking activities. It had a deposit base of Rs. 10.56 billion in 1999-00, of which Rs. 6 billion was from other cooperative banks and organizations, while the rest was from the public.
The bank received huge deposits after being awarded the status of a scheduled bank by RBI. KCB, a Hyderabad based bank was registered on April 1, 1998. On March 31, 2000, the bank had a paid-up share capital of Rs. 10.2 million. Its deposits comprised 92.41% term deposits, 5.42 % current deposits and 2.17 % savings deposits...
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Scams in Cooperative Banks
In 2001, MMCB was rocked by a scam. The bank had lent Rs. 10.5 billion to the equity market. There was no security or collateral issued against the money taken as a loan. This exposure was almost equivalent to its deposit base of Rs. 10.56 billion in the financial year 1999-2000.
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Its advances during the year were Rs. 7.78 billion. The bank violated the RBI norms which stated that a bank's exposure to the stock market cannot exceed 5 % of its outstanding loans. Panicky depositors began withdrawing money on hearing reports that the bank had lent heavily in capital markets and that these loans had turned difficult to deal with, due to a steep fall in share prices. Only three entities accounted for the 10.5 billion. No security or collateral was deposited with the bank. While Rs. 8.3 billion was lent to stock broker Ketan Parekh and his companies, Rs. 2 billion and Rs. 20 million were lent to Bombay Stock Exchange (BSE) broker, Mukesh Babu, and the Maniar group respectively... |
Reviving Cooperative Banking
Cooperative banks have for long been the back bone of rural banking. Since their inception, they have been doing excellent work in the field of rural and cooperative banking. The recent scams in cooperative banks have been a jolt to cooperative banking system. Many analysts have suggested that cooperative banks should be brought under the complete control of RBI ending the dual control by the State governments and RBI-NABARD. According to N. Patel, Vice-Chairman of Gujarat Urban cooperative Banks Federation, control by a single authority will ensure smooth governance of cooperative banks. Some analysts also feel that interference from the registrar of cooperatives should be minimized...
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