Do depositors need a say in UCBs?

By P. Vikram Reddy

HYDERABAD, AUG. 24. With about 240 urban cooperative banks (UCBs) out of 2,080 in the country categorised as `weak' banks, and the experience of UCBs like Madhavapura Mercantile Bank in Ahmedabad and more recently the Krushi Cooperative Urban Bank in Hyderabad, is it not time for the Reserve Bank of India to put its act together? But what can it do? Can it give more powers to depositors? Can the insurance mechanism be strengthened? Or do the powers of the directors of UCBs need to be clipped? These are some of the issues that have been considered at one point of time or the other, when raised by the affected parties. But so far nothing concrete has emerged.

As Mr. D. Krishna, Chief Executive of National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB) says `` The fundamental flaw in the system is that UCBs are run by members `who only' can borrow, while depositors who bring in the funds have no say in the management".

There have been suggestions in the past that depositors must have a say in management. Some people's view was to have elected representatives from among the depositors (on the board). In fact, the federation, which represents more than 1,000 UCBs in the country, has been advocating the concept of non-voting shares wherein anyone can buy shares but cannot vote. These should be transferable at a premium so that the value of the share reflects the health of the respective bank.

But then such a concept has not been implemented even under the Companies Act, pointed out Mr. Krishna, while speaking to The Hindu during his visit to Hyderabad recently.

Mr. Krishna says the existing regulatory mechanism is sufficient to protect the depositors' money. However, what is required is strict monitoring by the supervisory bodies and intensive checking. The Banking Regulation Act stipulates that no directors should be given `unsecured' loans, but the problem is the UCB set up is a democratic one.

And if a few UCBs collapse, though they cause hardship to depositors, as a percentage they are a very small proportion of the sector.

In this backdrop what role has the Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) to play? Interestingly, unlike the life insurance or general insurance, the DICGCI has limitations, in that it can only insure up to Rs. 1 lakh, though there have been moves recently to consider increasing this to Rs. 2 lakhs per depositor. It is no consolation to think of the 1960's when the DICGCI used to insure Rs. 1,500 per depositor before it gradually increased it to Rs. 1 lakh. If this is the state of affairs, who will hear the depositors voice?

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