It’s time to clean up the banking system

The banking sector is the heart of any economy. Its the engine that drives the entire nation. It’s a place where surplus units(investors) meet the deficit units(borrowers of money). This is one sector which if fails, can have a domino effect on the entire system. It is, therefore, our responsibility to make sure the banking sector is always in a healthy condition. Recently fraud in the banking sector of India has increased like never before and cleanup is required in the banking system. The regulators must consider the following points during the cleanup drive.

1 The current banking crisis is just old wine in a new bottle. The RBI is expected to take preemptive steps and not reactive steps and therefore beyond a particular NPA limit, the bank should not be allowed to sink more. At NPAs crossing 25%, the bank should be force merged.

2 Audit every single account in the bank by hiring additional resources or by automated crawlers that mark an account suspicious or risky. The risky accounts can be audited manually.
21,049 dummy accounts were used by the Punjab and Maharashtra Co-operative Bank to hide accumulated non-performing assets of realty firm Housing Development and Infrastructure Limited (HDIL), mostly belonged to dead account holders, while some belonged to people who had closed their accounts with the bank.

3 The fictitious accounts in the PMC bank were mere entries in the Advance Master Indent submitted to RBI in March 2018 and were not created in the Core Banking System (CBS). Therefore all transactions should be recorded with CBS only

4 We already have strict rules on marking NPAs but strict rules should be enforced to ensure that all regulations are followed by the banks, breach of which should be penalized with heavy fines. A lot of banks hide the NPAs in the name of financial restructuring

5 Use section 61 of the MSCS Act to correct use in case of insolvency.

6 RBI should be made the sole regulator of banks with BR Act applying on all banks.

7 The resolution of larger NPAs under the Insolvency and Bankruptcy Code (IBC) has been taking much longer than the stipulated period of 270 days. It recommended that NCLTs’ resources be increased to enable them to dispose of insolvency cases swiftly.

8 As per international economies or the USA for that matter pay less than 3% on FD or Certificate of Deposits. The average national rate for savings accounts is 0.09 in the USA. According to, SBI(Chicago) which is an Indian bank itself provides APY of 2.25%. But they ensure that at least the principal amount is safe. Preservation of principal amount is a higher priority compared to the interest received. The international economies have been very prudential in the preservation of the principal. RBI should start thinking in that direction.

9 To protect the interest of the depositors, allow RBI to dispose of properties on a recourse basis even if the debt was based on a nonrecourse agreement. This would make sure that all the monies borrowed by lenders are returned back to the lending entity.

10 Allow RBI to force merge all types of failing co-operative banks.

11 All banks must directly come under the RBI and a single Finance Ministry. Presently 2 ministries govern the co-operative banks:
Ministry of Rural Development
Ministry of Urban Development

12 To make a clear distinction between Banks vs cooperative societies who also run banks.
By making a clear distinction of stripping the word “Bank” from the cooperative societies will let the depositors know that they are co-operative societies and not the normal public sector banks.

13 Rate banks comprehensively on various criteria and mandate the banks to put the rating symbols at the entrance and websites of the bank. Similar to the CRISIL ratings for bonds, the banks should be rated based on different parameters like solvency, liquidity, services, NPAs, CRR, SLR, Profits, etc. Let the citizens know by way of symbols that cooperatives are not safe and investment should be done at their discretion.

14 The following banks have been under RBI directives, some from the last 7 years. The list includes, but not limited to:

1 PMC Bank
2 Kapol Cooperative Bank
3 Rupee Cooperative Bank
4 CKP Cooperative Bank
5 The Needs of Life Cooperative Bank
6 Youth Development Cooperative Bank
7 Shivam Sahakari Bank
8 The City Cooperative Bank, Apr 17
9 Maratha Sahakari Bank, Aug 31
10 Karad Janata Sahakari Bank
11 Shivajirao Bhosale Sahakari Bank

Similar to bank recapitalization of the Public sector banks, the cooperatives banks in a mess should be provided with a bail-in package in the form of recapitalization/revival or they should be merged with stronger public sector banks.

15 Urban cooperative banks can start with a capital base of Rs 25 lakh compared to Rs 100 crore for small finance banks. Change it to 100 crores for UCBs as well or force convert the UCBs to SFBs after particular threshold criteria.

16 Make a standard range of fixed deposit interests that should be offered to depositors so that the underprivileged sections of the society who do not understand banking very well, will not fall for the trap of higher interest rates. Higher interest rates at cooperatives come with a higher risk of defaults.

17 According to this report, CRR ratio of developing countries is intentionally more than the developed economies for obvious reasons. Brazil was around 20% CRR and India is at 4% as of 1st Nov 2019. It should be at least 7% in India

18 In Indian banking terms, statutory liquidity ratio (SLR) refers to the minimum reserve requirement that needs to be maintained by commercial banks in the nation. In the case of the statutory liquidity ratio, these assets can be gold, cash, securities that are approved by the Indian government, etc. Keeping a higher SLR ratio will again make sure that the bank can use its cash when it is in dire need due to losses or an increase in NPAs. It is 19.25% as of 1st Feb 2019.
It must be increased to at least 25%

19 Let RBI keep % of profits in the name of ‘Concurrent provisions for losses’ which can be used by the bank when NPAs increase out of proportion or the bottom line of the bank turns negative every quarter/year.

20 The financial statements are the first source of truth a shareholder has access to.
It is the auditors that the depositors and shareholders/investors trust. If the auditors are involved in such shabby practices, how are the shareholders suppose to trust any balance sheet? More disclosure norms should be set up by ICAI especially in sensitive sectors like Banking.

21 When there is a distressed sale to recover bank NPAs, let the government keep those assets and make stop-gap arrangements.

In the end, the economists may argue that the stricter regulations on the banks may have spillover effects by slowing down the economic growth, but such spillover effects would still be far better than letting banks lend aggressively and then bailing in the banks from the ex chequer’s pocket. Being prudential in the first place itself would do more good than bad. Urban cooperative banks failures occur with alarming regularity. Their numbers fell from 1,926 in 2004 to 1,551 in 2018, as per RBI data. Such banks are sometimes hijacked by vested political interests. This could mean appointing political lackeys as senior bank officials and sanction of fraudulent loans which are later written off. Its time for the banking system to change.

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