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Unit 11: Banking Sector Reforms

11. With the development of finance institutions, a degree of “…………………………..” of Notes
financial services was permitted and these institutions were allowed to set up mutual
funds and commercial banks.

Case Study Co-operative Bank Scams in India

“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 Co-operative Bank
“They are non co-operatives under the camouflage of co-operatives.”

– Rama Reddy, President of Hyderabad based Co-operative Development Foundation
The case, “Co-operative Bank Scams in India” gives an insight into the various scams and
malpractices in co-operative banks in India and their implications on the Indian financial
sector. The case begins with a history of co-operative banking in India. It briefly describes
the structure of co-operative banks and their characteristics. The case then discusses in
brief the scams that surfaced in four co-operative banks, viz., Madhavpura Mercantile
Co-operative Bank (MMCB), Krushi Co-operative Urban Bank (KCUB), Charminar
Co-operative Urban Bank (CCUB) and Nagpur District Central Co-operative Bank (NDCCB)
in 2001-02. The case also discusses how to revive the functioning of co-operative banks in
India.
Many of these banks did not adhere to the prudential norms prescribed by the Reserve
Bank of India (RBI). The Madhavapura Mercantile Co-operative 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 Co-operative Urban Bank (KCUB) had issued loans and advances amounting to
` 530 million as against its deposit base of ` 350 million. Not only that, most of its loans
had not been secured. Similarly, the Charminar Co-operative Urban Bank (CCUB) faced
liquidity problems due to indiscriminate lending to big borrowers against worthless
land. More recently the Nagpur District Central Co-operative Bank (NDCCB) was involved
in fraudulent dealings in government securities through brokers.
Co-operative 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 co-operative 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 co-operative banks and thus even
otherwise healthy co-operative banks were facing a tough time.
Contd...

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