Reports of financial turmoil in MSCB lead to panic among co-operative housing societies

Some co-operative housing societies are worried over reports about the financial mess in Maharashtra State Co-operative Bank Ltd (MSCB), and they have started to withdraw they money from the bank or are considering doing so soon.
Yesterday, Moneylife had reported that MSCB, the nodal bank for all co-operative banks in the state, is in deep financial trouble due to its suspicious loan distribution to some of its favoured co-operative banks and some loss-making sugar co-operative factories.

Nagesh N Kini, chartered accountant and secretary of Mahim Co-operative Housing Society, told Moneylife, "We have moved our money from the bank, because if something happens to this bank, at the most, you'll get Rs 1 lakh deposit insurance cover and that too doesn't come easily. It's advisable for people to move the money from there to stronger co-operative banks or public sector banks."

The apex co-operative bank has been found to have misreported facts and has been given a 'D' grade for the financial year 2009-10 by its auditors, Joshi Nair and Associates. The bank has shown deposits of Rs21,500 crore and a net profit of Rs2.83 crore. However, according to the audit report, the bank has suffered a loss of Rs1,070 crore, mainly due to non-performing assets (NPA). As per the provisional figures for FY10 provided on the bank's website, NPAs are 20.9%. While converting the same into net NPAs, the bank has shown the figure at 7.7%. A majority of the directors of MSCB belong to Sharad Pawar's Nationalist Congress Party and many of the others belong to some of the other mainstream parties.

Vinod Sampat, advocate and founder, Vinod C Sampat and Co, said that the profit claimed by MSCB was nothing but "window dressing." He said, "Co-operative banks are not following proper laws and it is not run on a professional basis. There is lack of accountability and they are surviving because of monopoly and patronage of the co-operative department. No one likes to invest in a co-operative bank, but they are forced to do so under the statutory rules. There is a lot of political interference also. It is full of double-standards."

Mr Sampat was critical of the NPAs reported by the bank. "Anything becoming an NPA is a clear example of the casual approach of the bankers. In one day, the account will not become an NPA. There has to be continuous defaults for an account to become an NPA," he said. "When an amount is not being paid, why should there be political patronage? One of the basic reasons for NPAs is inefficiency and political patronage."

Mr Kini's Mahim Co-operative Housing Society is among the oldest in central Mumbai, and as MSCB was the only bank available to them when the society was set up, they opened an account with the bank. According to Mr Kini there are thousands of housing societies in Maharashtra that have their money locked up in MSCB. "Earlier, according to co-operative laws, you had to put your money in a co-operative bank only. But, now one has the choice of banking with a stronger co-operative bank, such as Saraswat Bank, or with any of the public sector banks."

SS Pai, advocate, S.S. Pai & Co., however, called for a "middle path" approach to resolve the crisis. "We have to go to the root cause of the problem and see whether we can have a middle path, so that there will be no political revenge. In future, if they are diverting funds to sugar co-operatives, we should stop them. Now, we should see that the bank survives after taking strong action. Maybe the Reserve Bank of India should call them and tell them to improve, and take stern action as the last resort."

Mr Pai pointed out that the sugarcane industry should be modernised. "If the bank survives, then also the industry survives. Otherwise, what will happen is that if the bank goes into trouble, small depositors will lose their money. So let there be no political revenge and let us have the best possible solution," he said.

On the NPAs reported by the bank, Mr Pai said that the focus should be on development and not entirely on NPAs. "Admitted, NPAs are high. But we are a developing country. Money in a stock exchange and money in the corpus of a bank are like lockers. They don't lose anything unless someone is using that money in an improper way. More than NPAs, we should think of development and look forward. Chinese banks have so much NPAs but they have moved forward. We should take precautions and move forward."

Mumbai-based consumer activist, Achintya Mukherjee, has called for awareness regarding the crisis in the Maharashtra apex co-operative bank. "Many consumers are not aware of this as many leading newspapers have not even carried the news," he said.