Krushi Bank: Regulatory mechanisms fail again

By P. Vikram Reddy

HYDERABAD, AUG. 20. The developments on the Krushi Cooperative Urban Bank front have thrown up serious issues which need to be addressed by the apex bank, and the Central Resgistrar of Cooperative Societies, if they want to stem the rot that has set into the cooperative banking sector.

Investigations into the Krushi Bank affair have once again exposed the hollowness of regulatory mechanisms and shown how easily norms can be flouted.

This is happening after the Reserve Bank of India consciously encouraged cooperative banks as an alternative to non-banking finance companies (NBFCs) in the 1990s. Their growth since 1995, coincided with gradual demise of NBFCs, and formulation of stringent RBI norms for the latter.

While Mr. K. Venkateswara Rao, Chairman of Krushi Bank, and nine directors remain underground, police teams found that Rs. 16 crores had been siphoned off by the chairman. The modus operandi was `benami companies', sanction of unsecured loans, and delegation of power to bank officials in the name of speedening up the process.

The police commissioner said Rs. 16 crores benami loans were sanctioned between April and June last year. Interestingly, he said the RBI scrutinised bank accounts in March 2001, and gave a clean chit. The RCS officials categorised the bank as `A' among cooperative banks. If banks with such certificates can go bankrupt (undetected) within a few months, what about others? It appears that a penalty of over Rs. 30-35 lakhs for non-compliance with statutory liquidity ratio (SLR) norms was also waived on Krushi Bank.

It seems 67.6 per cent of loans and 52.8 per cent of net demand and time liabilities were unsecured, against RBI stipulated 33.3 per cent of net demand and time liabilities, the commissioner said. Temporary overdrafts were of Rs. 90 lakhs for one year in current accounts against the maximum limit of Rs. 5,000 for 30 days permissible.

With the kind of exposure Krushi Bank scam has received, other cooperative urban banks in Hyderabad are turning jittery and coming out with statements reassuring their depositors and trying to establish their stability.

Prudential Cooperative Urban Bank, for example, has put advertisements saying it has no advances against debentures or shares, nor has it given unsecured loans to any of its `directors'. It says secured loans to directors were just 0.47 per cent of advances, other advances were 200 per cent secured, and deposits insured by Deposit Insurance and Credit Guarantee Corporation of India. And it also paid premium till December 31 this year!

And to think the very same bank was in the thick of a controversy and infighting a few years back. Charminar Bank, also reassured its depositors and clarified that it had withdrawn deposits from Krushi Bank, following RBI's directive to cooperative banks to `unwind' their deposits (inter-bank deposits) with other cooperative banks, and took pains to explain it has nothing to do with Krushi Bank controversy.

The latest to this list is the Greater Hyderabad Cooperative Urban Banks Forum, asking people not to panic because of cheating by one cooperative bank. It has, of course, forgotten to mention that as many as four licences were cancelled by the RBI in the last two years, which includes Bhagyanagar Cooperative Urban Bank, First City, and Nizamabad Urban Cooperative Bank. In fact, according to banking circles here, another 4-5 of the 138 cooperative urban banks in Andhra Pradesh are in a `mess'.

Meanwhile, confusion continues, with reports that Krushi Bank chairman, may after all be in India and not in the U.S. as initially believed. As the drama unfolds, police have hinted at involvement of RBI and RCS officers. There is speculation that the son of a top government official is associated with the bank.

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