RBI clamps down on Maha coperative banks

The Reserve Bank's drive to tighten its control over co-operative banks has taken a political twist but CNBC-TV18’s Gopika Gopakumar reports that according to the RBI, this was just another day in the office. The RBI has hit a nerve, as it cracks down on co-operative banks. Its order to the Maharashtra government to supersede the Board of Maharashtra State Cooperative Bank (MSCB) and appoint administrators has political leaders like Maharashtra Deputy Chief Minister Ajit Pawar and Union Agriculture Minister Sharad Pawar miffed. Sharad Pawar blames the state government for the mess and Ajit Pawar says the Congress leadership has instigated this politically motivated action. The reaction is not surprising; say sources, since the bank was a source of funds to run cooperative sugar factories, spinning mills and dairy units.  Sources say that this action has been on the anvil for a while now. In 2005, both RBI and NABARD had issued directives to the bank asking it to reduce its exposure to the sugar sector. They said that 50% of its Rs 7,800 crore loan portfolio was to the sugar sector, and this was unacceptable. They had also directed the bank to reduce the number of board members from 57 to 20. The RBI order says as on March 2010, MSCB had a loss of Rs 800 crore and a negative net worth of Rs 144 crore. Also, its gross non-performing assets stood at 20%. it also said that the bank board had taken several decisions that were not in the bank's best interests. These irregularities came to light at NABARD's annual inspection in FY10. The NABARD report also highlighted a Rs 778 crore shortfall in provisions and said loans to sugar factories were rescheduled in November 2002, March 2005 and March 2007 without sufficient provisions. Sources say the Maharashtra government will now have to either call for elections within the next two months to appoint a new board, or bailout the bank. For the RBI, this is just one more in an ongoing crackdown on errant co-operative banks. This year alone, it has penalised 27 co-operative banks for various irregularities and sources say more cooperative bank boards could be superseded going forward.