The Hindu Business Line : RBI move puts co-ops in a bind

Thiruvananthapuram, Oct. 5 The cooperative sector in Kerala has to get its act together or perish with Reserve Bank of India deciding to put the lending institutions under a mandatory licensing regime.

The RBI, in its annual policy statement 2009-10, has made it mandatory for cooperative banks to obtain licences by 2012. The central bank plans to draw a road map for achieving the objective in a non-disruptive manner in consultation with the National Bank for Agriculture and Rural Development.

Cooperative banks in the State are faced with a major shake-out that they are ill-equipped to deal with, a top official of the apex Kerala State Cooperative Bank told Business Line here.

Of the 28 apex-level State cooperative banks in the country, only 16 have licences. Only 10 of the 14 district cooperative banks in the State have licences.

The RBI policy merely wants “unviable” banks to be weeded out of the system. But there are no norms for ascertaining their viability.

The policy statement should ideally have mentioned a financial base or size for banks to exist after the watershed year of 2012, the Kerala State Cooperative Bank official said. This would have allowed States such as Kerala to decide on rationalisation of banks (mainly primary cooperative credit societies) by merging unviable banks and those having strong fundamentals.

For instance, the State has more than one primary cooperative society for every panchayat – 1,602 primary societies for 1,000 panchayats. This scenario lends itself to rationalisation through mergers. The State Government or the Centre can chip in with a suitable recapitalisation package for the merged entity.

Major Differentiator

Recapitalisation is the major differentiator that sets apart the viability aspect of a cooperative bank from that of a commercial bank.

Cooperative banks still have to live with the threat of potential NPAs from farm loans.

There is a heavy demand for farm loans but they are wary of lending merely against paper – receipt of tax paid against land holding in which case the debt servicing leaves much to be desired.

According to the official of Kerala State Cooperative Bank, farmer unrest has turned at least two districts in the State – Wayanad and Idukki – “unlendable”. Cooperatives no longer have the room to accommodate farm loan NPAs, if only for the high cost of servicing deposits.

For instance, one-year deposits are collected at rates ranging from 9.5 per cent to 12 per cent, often in defiance of the norms of the Registrar of Cooperatives. Several cooperatives are in a weak position as many farmers are unable to repay loan instalments.

Frequent changes in rules also put cooperative banks in difficulty. Earlier, after non-payment of instalments for one year the loan was considered as a non-performing asset (NPA). Later, the time period was reduced to six months, only to be further reduced to three months.

More Stories on : Co-operatives | RBI & Other Central Banks | Kerala

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