Banking

A Kerala model in banking sector

Print edition : January 03, 2020

The headquarters of Kerala State Cooperative Bank in Thiruvananthapuram. Photo: S. Gopakumar

Chief Minister Pinarayi Vijayan declaring the formation of the Kerala Bank in Thiruvananthapuram on December 6. Photo: S. Mahinsha

Kerala Bank, the first commercial bank in the cooperative sector in India, is presented as an alternative to the existing banking network.

One of the most ambitious projects of the Left Democratic Front (LDF) government in Kerala, a bank with a local focus, a common IT infrastructure and brand identity, and which retains the people-oriented character of the robust cooperative movement in the State, has finally come into being after some delay.

A State government notification for the establishment of the bank was issued on November 29, immediately after the Kerala High Court dismissed a batch of 21 petitions challenging, among other things, the modalities adopted for its formation—the last among the several major hurdles that had led to a delay of nearly three and a half years after the proposal for it was first officially announced.

“Kerala Bank”, formed by the amalgamation by transfer of assets and liabilities of 13 (of the total 14) district cooperative banks (DCBs) with Kerala State Cooperative Bank (KSCB), is the first Scheduled Bank in the cooperative sector in India, and is proposed to have, soon, the largest banking network in Kerala.

State Bank of India, the largest bank in India, for instance, has 1,216 branches in Kerala at present and a deposit base of Rs.1.53 lakh crore, nearly half of it being deposits from the State’s huge pool of non-resident Indians, or NRIs (over Rs.1.5 lakh crore every year). Kerala Bank, formed by the restructuring of the three-tier short-term credit structure in the State, merging the mid-level district cooperative banks with KSCB, will initially have 825 branches and over Rs.65,000 crore deposits—only “a negligible portion of it” being NRI deposits.

Kerala Bank aims to obtain Reserve Bank of India’s (RBI) sanction to accept NRI deposits too and to extend banking services to the rural areas of the State through its wide network of Primary Agriculture Credit Societies (PACS) and become the top bank in Kerala.

In addition to the 14 district cooperative banks, Kerala’s cooperative network has 1,692 PACS and 16 licensed urban cooperative banks, which now form the members/shareholders of Kerala Bank. The PACS and the urban cooperative banks together have 4,500 branches and over Rs. 1 lakh crore in deposits. The new bank is thus posed as an alternative to the commercial banking network in Kerala that includes 21 public sector banks, one gramin bank, 19 private commercial banks and two small finance banks.

Opposition to proposal

The opposition United Democratic Front (UDF)-controlled Malappuram District Cooperative Bank had opposed the amalgamation and is not part of the new Kerala Bank at present.

RBI gave “in principle” approval on October 7 to the proposal of the State government to amalgamate the district banks with KSCB, subject to the fulfilment of 19 conditions. While the Minister for Cooperation, Kadakampally Surendran, said that with the dismissal of the petitions by the High Court, there was no longer any impediment to the formation of the bank, Leader of the Opposition in the Assembly Ramesh Chennithala alleged that a lot of conditions still needed to be complied with and that the High Court, while dismissing the petitions, had only said that the RBI was the right agency to give the final approval.

There was resistance from a handful of other district banks too against the proposal for Kerala Bank because of political and financial concerns of the UDF. Despite this, the merger of 13 of the 14 district banks was eventually made possible with the government passing an ordinance amending the Kerala Cooperative Societies Act to the effect that the transfer of assets and liabilities of the district banks to KSCB could be done with the support of a simple majority of the board members of the DCBs (instead of the requirement for a two-thirds majority earlier). It was against this ordinance, among other issues, that the petitions were filed before the High Court. The Malappuram district bank, controlled by the Muslim League, a UDF constituent, alone thus rejected the proposal for the amalgamation.

The launch of Kerala Bank was officially announced by Chief Minister Pinarayi Vijayan in Thiruvananthapuram on December 6.

The bank is to serve primarily the PACS and their members and would offer them an entire range of banking products and services of any modern, IT-enabled bank soon, the government has announced. It is also meant as the “bank of first preference” for a range of other non-credit cooperatives in the State. It will be open to customers who are not members of the PACS or cannot use the service of the PACS and to institutions and body corporates as well, like mainstream banks. Moreover, it is meant to play a key role in the development of the State by providing financial assistance and services to development projects. It is likely to transform the cooperative banking sector and promises to offer more loans at reduced rates to customers, without pricing the services (such as charges for ATM withdrawal, cheque book and cash transactions) but only the products; offer a conduit for the direct transfer of government benefits to the accounts of rural beneficiaries; and increase the amount of agricultural loans disbursed in the State by accessing concessional finance from refinancing agencies such as NABARD.

Idea of the bank

The idea of such a bank, in fact, gained traction after two significant incidents. One was the merger of State Bank of Travancore, the only large public sector bank with its headquarters in the State, with SBI. The result was that a bank once considered Kerala’s own, doing the majority share of the banking business and offering support for development activities, thus became merely a regional office of the biggest bank in the country, with all its surplus savings from the State becoming part of SBI’s general pool of resources.

The second was the demonetisation exercise, during which the cooperative banks that held a large share of the business in the State were not allowed to exchange old notes because of the perception that they lacked professional management, were prone to “political capture” or “state capture”, were poor in their adoption of technology, and often were perceived as holding a lot of black money. It was therefore felt that Kerala would do well by having “a large bank that is clearly focussed on the State, but run professionally”, as an expert committee, appointed by the State government to study the various aspects of restructuring the cooperative credit structure in Kerala, said in its report.

The five-member committee headed by Prof. M.S. Sriram of Indian Institute of Management Bangalore submitted its detailed report to the government on April 28, 2017, after wide-ranging discussions with the stakeholders, including the 14 district cooperative banks in the State.

The committee suggested the establishment of “a strong, vibrant, technology driven and professionally managed universal bank in the cooperative sector with proper governance and business plan by merging the DCBs with KSCB”.

The primary cooperative institutions are a legacy of the State’s freedom movement and form the backbone of Kerala’s rural economy and were responsible for the gradual weakening of extortionate moneylending in rural areas. At a function in Thiruvananthapuram to formally announce the launching of Kerala Bank, Pinarayi Vijayan spoke at length about the legacy of the cooperative credit movement in the State.

He said: “Kerala’s cooperative sector, especially cooperative credit sector, is one that caught the attention of the country even decades earlier and had been watched by many with surprise and respect. This was because there was no other cooperative credit sector that was so strong in the country.

There are some States where some branches of the cooperative sector have become strong. But there is no other State in the country where all primary cooperative societies became banks and each of them in turn attracted huge deposits. It was something unimaginable for many. Moreover, each of these primary cooperative societies had remained unique and had been functioning for decades with their own individuality—in sharp contrast to the situation in many other places. The experience is that in Kerala, even in the remotest of villages, people use banking services. It was the cooperative sector, especially the service cooperative sector, that made banking so popular in Kerala. The strength of the State’s cooperative sector is the ubiquitous service cooperative banks that come under the category of primary cooperative societies. Huge deposits, huge loan transactions, effective support to farmers—all are hallmarks of this sector. It is on the basis of the strength of this sector that the district cooperative banks and the State cooperative banks too have so far functioned effectively in the State.”

Kerala Bank has now been proposed as the first such commercial bank in the cooperative sector in India, under the control of the State government and the cooperatives—a modern bank for the common people of Kerala that would undertake all activities now being done by mainstream banks.

By its nature, it should also become an effective alternative to the trend among commercial banks, including those in the public sector, to collect huge investments from the people of the State, including approximately the Rs.1.5 lakh crore from non-resident Keralites, but then to lend only a small section of it to agricultural, small-scale and industrial sectors and generally neglect the productive sectors where profits were minimal. Unlike such institutions, Kerala Bank should be under no compulsion to seek risky sectors that promise higher profits or, for instance, to lend to corporates or park their deposits in the share market, neglecting productive sectors where public benefits are high but profits are minimal.

Challenges

How the new bank will succeed in its stated objectives will from now on be keenly watched. The preliminary challenges before the newborn bank themselves remain enormous. They include integration of the IT platforms of separate banking institutions (including KSCB), functions, legal aspects, financials and HR systems without interrupting the services to customers. HR integration is widely expected to be the most difficult task, what with the logic of employee reduction that follows the needs of a “technologically driven, slim bank”, the need for retraining of “legacy staff”, and so on. Other challenges include bringing all the district banks under one licence regime in providing core banking and other such modern facilities and gaining permission for all of them to accept NRI funds.

The government has appointed Union Bank of India general manager P.S. Rajan as the CEO of Kerala Bank. Kadakampally Surendran said that with the official notification being issued for the formation of the bank, a government-appointed interim committee of officials would take over the administration of the 13 district banks initially for a period of one year. The bank should be able to offer standardised services and products by January 1, 2020, and that a decision on employee integration will be taken by March 31, 2020, in consultation with employee organisations. The integration of core banking facilities is to be completed by September 2020.

In his speech the Chief Minister said that Rs.5,000 crore would be disbursed by Kerala Bank by March 31, 2020, as short-term agricultural loans at an interest rate that would be lower than what a farmer had to pay until now. He also proposed the merger of cooperative institutions in a locality so that the merged entity would be able to handle the financial transactions of the local body in that area.

A vexing issue for the government is the antagonism of the UDF to the very idea of Kerala Bank and the decision of the Malappuram District Cooperative Bank to stay out of the merger process.

The UDF sees the move with much suspicion and has termed Kerala Bank as a “ploy by the CPI(M) [Communist Party of India (Marxist)] to indirectly gain control of the district cooperative banks” that were not under its hold. Ramesh Chennithala said that the final approval by RBI was still pending and the High Court had only said that RBI was the befitting forum to decide in what form the final approval should be given. He also indicated that the party would surely move court if and when RBI indeed gave a final approval.

The Congress party has even said that if it is voted to power in the next Assembly elections, it will close down the newly formed Kerala Bank. State Congress president Mullappally Ramachandran said his party would approach the court soon, as Kerala Bank had been created after destroying the cooperative sector in the State. “We have nothing against a new commercial bank, but it cannot be formed at the expense of the cooperative sector, which had all along been the lifeline of Kerala’s rural economy.”

In his speech at the formal launch of the bank, the Chief Minister said: “This is our bank, Kerala’s bank. Kerala is a State which draws attention in many respects. All should be part of our bank. At present, one district has kept away from joining this initiative temporarily. What I have to request them openly is that if they have any misunderstanding, they should discuss the issue with the Minister for Cooperation. If that does not solve their problem, I am always willing to talk to them.”

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