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Harish Damodaran

NEW DELHI, June 15

URBAN co-operative banks (UCBs) have criticised the Reserve Bank of India's recent move banning them from extending any loans and advances to directors, their relatives and associated concerns.

"It is a knee-jerk reaction to isolated cases of bank failures caused by flagrant violation of lending norms laid down by the RBI. What is needed is proper enforcement of these norms, not an outright ban on loans to directors, which goes against the fundamental principles of co-operation", Mr D. Krishna, Chief Executive, National Federation of UCBs and Credit Societies (NAFCUB), told Business Line.

Mr Krishna said that the RBI had in its directive, dated May 26, 1994, fixed a cap on aggregate loans and advances (both secured and unsecured) to all directors, their relatives and concerns in which they were interested at 10 per cent of the UCB's net demand and time liabilities (NDTL). Through a subsequent directive, dated December 4, 2002, this ceiling was brought down to five per cent. It was also prescribed no single borrower could avail himself of loans exceeding 25 per cent of the bank's net-owned funds (share capital and reserves).

Thus, if an UCB's NDTL amounted to Rs 100 crore and its owned funds totalled Rs 10 crore, the maximum that could be lent to all its directors, their relatives and associated concerns was Rs 5 crore, with no individual permitted to borrow more than Rs 2.5 crore.

"In the Madhavpura, Charotar or Karamsad co-operative bank scams, you will find that banks had lent much in excess of what was permitted to directors or their relatives. These are specific cases of regulatory oversight", Mr Krishna noted.

But instead of viewing things in this perspective, RBI has placed a blanket ban on UCBs' lending to directors. The regulator's latest directive, dated April 29, states that "no primary co-operative bank shall make, provide, or renew either secured or unsecured loans and advances or any other financial accommodation to its directors, relatives and the firms/companies/concerns in which they are interested". Thus, RBI has placed UCBs on par with commercial banks, which are already prohibited from extending loans to directors/relatives.

However, according to Mr Krishna, a co-operative bank is different from a commercial bank because it is a `mutual organisation' existing to service its members. "Just as a milk co-operative services its members by buying their milk, a co-operative bank has been set up by members who avail of its services by virtue of taking loans. The bank's board is elected by and from within the ranks of the members themselves. Placing a blanket ban on loans to directors would mean that the latter could not be a member of the bank and only non-members can be directors. This goes against the very principle of co-operation", he stated.

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