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The Reserve Bank on Friday superseded the board of the Mumbai-based Abhyudaya Cooperative Bank on concerns emanating from "poor governance" and appointed an administrator to manage the affairs of the lender.
In what can be seen as a step that should allay depositors' concerns, the central bank did not put any restrictions or moratorium on deposit withdrawals because of the comfort it gets on the bank's finances, according to people in the know.
"(The) action is necessitated due to certain material concerns emanating from poor governance standards observed in the bank.
"No business restrictions have been placed by the RBI and the bank shall continue to carry on its normal banking activities," the Reserve Bank of India said.
It appointed Satya Prakash Pathak, former chief general manager of the State Bank of India, as the administrator.
The central bank has also appointed a committee of advisors to assist him, which includes Venkatesh Hegde (former general manager, SBI); Mahendra Chhajed (Chartered Accountant) and Suhas Gokhale (former MD, COSMOS Co-operative Bank).
According to the people in the know, much of the concerns stem from the way in which the bank was run under the chairmanship of Sandeep Ghandat, its lending to his friends and relatives, a reluctance to recover, and needless hiring done to win over voters in the Parbhani district.
In a response to PTI queries, Ghandat denied any wrongdoing and said he will now ask all defaulters to pay up.
According to him, the bank has a deposit base of Rs 10,800 crore and a loan book of Rs 6,400 crore.
The bank is headquartered in central Mumbai's Parel, which was the heart of the mill-land.
However, unlike the case of PMC Bank, the regulator has not placed any restrictions on deposit withdrawals.
The people in the know said that factors like excess Statutory Liquidity Ratio (SLR) at the bank will help ensure that it will meet all its obligations.
They also said the RBI has agreed to open its currency chest for the next three days to ensure that all ATMs of the lender dispense cash as sought by the depositors.
"The problem is with the bank management, there is no problem with the bank per se," said a person in the know, adding that the bank, which was under close watch for the last 18 months was not heeding to supervisory advice.
Ghandat said the RBI had placed an additional director on its board since 2021, and was pressing for a faster reduction in the non-performing assets due to which the action has been taken.
According to the people in the know, the father-son duo of Ghandats, who are politically active, had hired three times more people at the bank than requirements that led to the cost-to-income ratio shooting up.
On the issue of asset quality, the bank management did not act against defaulters despite the ability of the borrowers to pay, they said, adding that the inaction was due to the close links between the borrowers and management.
Ghandat said 70 per cent of the defaulters have been impacted by the Covid pandemic, but added that he has hit the road to cajole them to pay up right after the RBI action earlier in the day.
As per data posted by the bank on its website, its net profit reduced sharply to Rs 3.54 crore in FY21 from Rs 16.22 crore in the year-ago period.
Ghandat said the overall GNPAs of the bank had stood at about Rs 1,200 crore as of March 2023, which was down from the Rs 1,550 crore in the year-ago period.
He said the bank also shut two branches and shifted branches to smaller premises to reduce costs after the regulatory pressure.
He admitted that over 80 per cent of its lending is to large borrowers, comprising businesses, but was quick to add that this is in sync with its peers.
The problem area, as per the ousted chairman, was the insistence to provide for asset sales done 5-6 years ago to asset reconstruction companies for which the regulator was pressing it to provide over Rs 800 crore over a five-year period.
He said the capital adequacy of the bank is over 6 per cent, which is lower than the mandatory 9 per cent.