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Co-op banks told to get state backing

K Ram Kumar

The Reserve Bank of India has directed co-operative banks to seek credit enhancements from the respective state governments for their deposits, bonds etc.

The central bank has asked them to work out an arrangement whereby either the responsibility of rating their financial strength is taken up by the state governments or the states provide default guarantees for deposits taken by these banks. In effect, the apex bank has asked for structured obligations from the state governments.

This is a sort of quid pro quo that the central bank has offered for relaxing the stringent prudential norms in its latest monetary and credit policy. The issue was discussed threadbare at a high level meeting on May 11.

At the meeting, the RBI brass emphasised the importance of winning back the depositor and customer confidence, and suggested embracing credit rating or provision of default guarantee for offering "some relaxation" in the prudential measures.

The Maharashtra government has already moved in this direction and constituted a committee under the chairmanship of the state finance minister to examine the pros and cons of complying with the RBI suggestion. The committee includes two representatives of RBI's urban banks' department, the state chief and finance secretaries, one member each representing the district central co-operative banks, urban co-operative banks, state co-operative banks and the state co-operative secretary.

However, sources in the co-operative banking sector pointed out that seeking credit rating will entail a yearly expense of around Rs 3 million in addition to the statutory annual audit fees of around Rs 4 million paid to the state governments. They say that they can ill-afford to pass on these costs as in the current competitive scenario they were finding it difficult to net good quality borrowers.

"As the average cost of funds of the co-operative sector working out to be around 11.5 per cent per annum, and taking into account the management and risk weighted costs, the minimum rate at which they can lend works out to 16.5 per cent. With commercial banks having a prime lending rate in the 11.5-12 per cent range, it is a forgone conclusion that we will not attract good borrowers," sources explained.

The new prudential measures for co-operative banks, which are aimed at safeguarding the interests of depositors and member-shareholders, had raised their hackles as they were seen to hinder the smooth flow of credit for both agriculture and developmental purposes in the rural areas. The measures by the RBI comes in the wake of the recent episode involving the misappropriation at the Ahmedabad-based Madhavpura Mercantile Co-operative Bank.

The RBI in its monetary and credit policy announced that with effect from April 1, 2003, scheduled UCBs would have to maintain their entire statutory liquidity ratio assets at 25 per cent of net demand and time liabilities only in government and other approved securities. This will see a massive flight of deposits placed by the DCCBs and UCBs with the 30-odd state co-operative banks in the country in fulfilment of their statutory liquidity ratio requirement.

The policy stipulates that the daily borrowings in the call money/notice markets of these banks should not exceed two per cent of the aggregate deposits of STCBs/DCCBs/UCBs as at the end of March of the previous year, and prescribes 90 days for recognition of loan impairment from the year ending March 31, 2004. It states that provisions for the loan impairment will, however, be required to be made from March 31, 2002.

Bankers from the co-operative banking sector pointed out that their banks' were playing a vital role in the economy by providing direct finance to the agriculture sector and small trade, and that even the Planning Commission had accepted their role as sound channels of credit delivery.

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