A bank on the brink

The near-collapse of the 100-year-old Maharashtra State Cooperative Bank exposes the rot, and the politics, in the sector.

IT was the worst possible centenary commemoration. In what should have been a glorious 100th anniversary year, Asia's largest cooperative bank, the Maharashtra State Cooperative Bank (MSCB), saw an ignominious dissolution of its Board of Directors by order of the Reserve Bank of India (RBI). The Board of 44 directors was summarily dissolved and two Indian Administrative Service (IAS) officers were appointed administrators for five years.

The charges against the MSCB included accumulation of bad loans, a negative net worth, high level of non-performing assets (NPA), delays in loan recoveries, poor credit proposals and a lack of audit. The turmoil in the bank is nothing more than a reflection of the rot that had set in years ago and remained hidden. It also brings under scrutiny the old antagonism between the Congress and the Nationalist Congress Party (NCP) in Maharashtra.

Governed solely by politicians, the MSCB was controlled largely by the NCP. Of the bank's 44 directors, 25 belonged to the NCP, 14 to the Congress, two each to the Bharatiya Janata Party (BJP) and the Peasants and Workers Party (PWP), and one to the Shiv Sena.

The MSCB is a State-level apex institution and functions as a central financing agency. Under it come the district and urban cooperative banks, sugar factories, spinning mills, processing societies and service societies. If the MSCB had fallen, these institutions would have crumbled too. This was another reason to dissolve the bank's board.

The annual inspection report by the National Bank for Agriculture and Rural Development (NABARD) charged the bank with fiscal and administrative irregularities, including misuse of power and dodgy accounts. On February 24, 2011, NABARD submitted its report to the bank and instructed the Chairman to prepare a point-by-point compliance report in 45 days. The MSCB failed to do this. An official from the Cooperation Department said, Perhaps the board thought it was above disciplinary action because of its political clout. Whatever the reason, it was the last straw and the RBI moved to dissolve the board on May 7.

The NABARD report said the MSCB had a net NPA of 7.5 per cent and a negative net worth of Rs.144.22 crore on March 31, 2010. The bank's net loss in the fiscal year 2010 was Rs.775.98 crore, with bad loans totalling Rs.500 crore.

The MSCB is apparently a repeat offender. In March 1996, the RBI directed it to improve its performance and submit quarterly compliance reports to NABARD. This it did not do. In November 1997, the regulator told the MSCB to withdraw the Chairman's discretionary powers of sanction or withdrawal in excess of limits. Apparently, this remained on paper because the NABARD report shows short-term loans were allowed a roll over without sanction from the loans committee.

In May 2001, the RBI issued 11 directions to the MSCB but the bank was shown to have complied with only six of these. The NABARD report gave examples of loans that were issued on grounds as flimsy as the borrowers being related to the Chairman, Manikrao Patil of the NCP. His son, Vishwajit Patil, was sanctioned a housing loan in 2006, of which the outstanding on March 31, 2010, was Rs.11,74,166. His wife and daughter, both directors of a private company, were granted term loans and cash credit.

Nrupal Jayantrao, son of Jayantrao Patil, a director, was granted counterguarantee limits of Rs.75 lakh and Rs.2,376.02 lakh for two private limited companies in which he had a stake. The report also documented flippant expenses such as high-priced number plates of cars, costing Rs.1 lakh, Rs.75,000 and Rs.35,000 respectively for the Chairman, the Vice Chairman and the CEOs.

A statutory audit report for the financial year 2009-10 had raised similar issues. It found that the bank had violated the Banking Regulation Act, 1949, and the Maharashtra State Cooperative Societies Act, 1960. Its poor performance resulted in auditors dropping the MSCB to level D', which means the organisation is in poor fiscal health and requires intervention.

The RBI had also directed the MSCB to reduce the number of members on the loan committee so that it did not exceed 15. The move was meant to bring about, as one bureaucrat from the Cooperation Department said, some level of efficiency in the bank. Though the MSCB complied with this, it does not appear to have shown the desired results as is obvious from the negative net worth of the bank. The bank ignored an earlier recommendation by NABARD to reduce the number of its directors to 28.

Role of sugar politics

Sugar politics can largely be held responsible for the collapse of the MSCB. When it was established on October 11, 1911, the MSCB started by taking over from the government the scheme of taccavi loans, which were short- or long-term loans advanced in times of natural calamity at a low interest. It grew into a development bank and for many years carried out what the Gazetteer of India for Maharashtra aptly described as playing its role as a balancing agent, both in financial terms and in the matter of providing leadership to the cooperative movement.

Unfortunately, over the years, sugar cooperatives and cotton spinning mills accounted for the largest chunk of the bank's business and it neglected its primary role as a financier of district-level cooperative institutions. It is now revealed that close to 50 per cent of the bank's credit went to cooperative sugar factories. These make up 60 per cent of the NPAs. The financial health of many sugar factories has been poor, often deliberately so, and they have been major defaulters. In many cases the State government has supported sinking factories by guaranteeing the loans. In spite of the sugar cooperatives sector showing poor performance, the MSCB has invoked government guarantees for it to the extent of Rs.1,892 crore as of 2010. Despite this, the bank is in the red even though it has deposits of over Rs.17,000 crore.

The following examples from the NABARD report explain why. Congress Minister for Forest and R&R Patangrao Kadam's Sonhira sugar factory in Sangli has a huge debt of over Rs.100 crore. NCP leader Prithviraj Deshmukh's Dongrai sugar factory owes Rs.50 crore. NCP leader Suryankanta Patil's Jaywantrao Patil Cooperative Sugar Factory has to repay Rs.40 crore. Congress MLC Amrish Patel's Priyadarshini Cooperative Spinning Mill is indebted to the tune of Rs.182 crore. Congress leader P.K. Anna Patil's Satpuda Tapi Cooperative is obligated to pay over Rs.50 crore. And NCP Minister Rajesh Tope's Samarth Cooperative Sugar Factory has yet to pay back Rs.90 crore.

The MSCB's apex position and its pioneering role in rural finance make its fall all the more pitiable. The bank was set up to facilitate rural and agricultural development and, at least in its early years, it honoured its agenda. In Maharashtra, cooperative bodies are the mainstay of the rural economy and hence are power centres. The MSCB was the interface between power and money and it was only natural that it became the focus of politics and politicians.

The cooperative sector consisting of sugar factories, dairies, banks and credit societies was well established almost all over the State and has for long been controlled by NCP chief Sharad Pawar. After splitting from the Congress, Pawar retained his control and most of the cooperatives stayed with the NCP. So it was only logical that when the RBI superseded the MSCB's Board, the NCP saw it as a direct attack on its power centre.

Though the Congress has denied any role in the RBI's decision, insisting that the central bank was just following due process, the fact that the zilla parishad elections are only a few months away lends some credence to the NCP's fears. Strangely, Pawar himself has dismissed the idea of the RBI's move being politically motivated, saying that for long he had warned cooperative banks to act more professionally.

Pawar may sound blas but there is no doubt that the NCP has been rattled. The party's State executive meet on May 12 was postponed in an attempt to rally around and put up defences against the RBI's actions. At present, this consists of NCP Ministers pointing fingers at Congressmen who have defaulted on payments.

An official in the Cooperation Department said Maharashtra's cooperative sector could learn much from the Amul milk cooperative in Gujarat. There farmers continue to be at the heart of the business model unlike Maharashtra where corruption, nepotism, mismanagement and an overall feudal approach has ruined the cooperative sector.