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Banking Theory and Practice

Notes
In 2001-2002, many co-operative banks were rocked by scams that exposed the malpractices
in these banks.
Co-operative Banks – A Profile
In the early 20th century, the availability of credit in India, more particularly in rural areas
was non-existent. There was no organized institutional credit for agricultural and related
activities. People in the rural areas largely depended on money lenders who lent money
at very high rates of interest. Thus, there was need to create an institution which would
cater to the needs of ordinary people and was based on the principles of co-operative
organisation and management. In 1904, the first legislation on co-operatives was passed.
In 1914, the Maclagen committee suggested a three tier structure for co-operative banking
i.e. Primary Agricultural Credit Societies at the grass root level, Central Co-operative
Banks at the district level and State Co-operative Banks at the State or apex level. Co-
operative banks were expected to serve as substitutes for money lenders, and provide
both short-term and long-term institutional credit at reasonable rates of interest.
Co-operative banks operate both in urban and non-urban centres. The urban areas are
served by the Primary (Urban) Co-operative Banks (PCBs/UCBs) whereas the rural areas
are largely served by two sets of institutions, the PACSs and LDBs, dispensing short-term
and long-term credit, respectively. UCBs have a three-tier structure with the State Co-
operative Banks (SCBs) at the apex level, the District Central Co-operative Banks (CCBs)
at the intermediate level and the Primary Agricultural Credit Societies (PACS) at the grass
root level. Under the long-term credit structure, State Co-operative Agriculture and Rural
Development Banks (SCARDBs) are at the apex level and the Primary Co-operative
Agriculture and Rural Development Banks (PCARDBs) are at the base level.

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.
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 ` 10.56 billion in 1999-00, of which ` 6 billion
was from other co-operative 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 ` 10.2 million. Its deposits comprised 92.41% term
deposits, 5.42% current deposits and 2.17% savings deposits.
Scams in Co-operative Banks
In 2001, MMCB was rocked by a scam. The bank had lent ` 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 ` 10.56 billion in the financial year
1999-2000.
Its advances during the year were ` 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 ` 8.3 billion was lent to stock
broker Ketan Parekh and his companies, ` 2 billion and ` 20 million were lent to Bombay
Stock Exchange (BSE) broker, Mukesh Babu, and the Maniar group respectively.

Contd...

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