Co-operative Bank Scams in India

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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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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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"The objective of co-operative banking is to create enduring and sustainable financial institutions which remain responsive to the credit needs of weaker sections."

- RBI Report on Trend and Progress of Banking in India, 2000-01.

"There has been a mushrooming of co-operative banks in the country. Low barriers to entry spurred individuals with vested interests to start such banking ventures with a view to milk the depositors funds."

- Suresh Hemmady, chairman of the Shamrao Vithal Cooperative Bank.

"They are non cooperatives under the camouflage of cooperatives."

- Rama Reddy, President of Hyderabad based Cooperative Development Foundation.

Introduction

Cooperative banks were established in India to facilitate rural credit, and to cater to the needs of small farmers and businessmen.

They were popular with middle and lower income groups because of the high interest rates they offered as compared to commercial banks.

However, with the passage of time, most cooperative banks lost their purpose. Excessive state control and politicisation further led to their deterioration. By the 1990s, none of the public or private sector banks were willing to deal with cooperative banks and thus even otherwise healthy cooperative banks were facing a tough time.

In 2001-2002, many cooperative banks were rocked by scams that exposed the malpractices in these banks.

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Many of these banks did not adhere to the prudential norms prescribed by the Reserve bank of India (RBI).

The Madhavapura Mercantile Cooperative Bank (MMCB) had invested a huge amount in the equity market which was almost equal to its deposit base, thus, violating the RBI norms relating to exposure to the equity market. Another bank, the Krushi Cooperative Urban Bank (KCUB) had issued loans and advances amounting to Rs. 530 million as against its deposit base of Rs. 350 million. Not only that, most of its loans had not been secured. Similarly, the Charminar Cooperative Urban Bank (CCUB) faced liquidity problems due to indiscriminate lending to big borrowers against worthless land. More recently the Nagpur District Central Cooperative Bank (NDCCB) was involved in fraudulent dealings in government securities through brokers.¹

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1] Government securities are certificates issued by the Government of India through the Reserve Bank of India confirming money received from an individual or institution in the form of debt. Deals in government securities trading can be wholesale or retail. Wholesale trading takes place when the transaction value is more than Rs. 50 million. Most wholesale deals are conducted through brokers who bring the two parties together. However, the broker is not involved in settling transactions.