Consolidation Coming? This Time In District Cooperative Banks...

On June 29, the Kerala cabinet approved a plan to merge 14 district cooperative banks and one state cooperative bank to form a state wide bank. Likely to be christened as the Kerala Cooperative Bank, the entity will have a deposit base of over Rs 1 lakh crore.

Soon after the news from Kerala, came another similar announcement from Chhattisgarh. The state said it intends to merge six of its district cooperative banks to help address the needs of the local population.

Both states are hopeful that they will get the regulator’s nod for this planned consolidation since a similar proposal from Jharkhand was approved in 2014.

With three states now opting to merge their district cooperative banks, it may be worth asking the question - why? While the individual business plans vary, the one common thread that appears to run through the three states is the need to have a lender which is more focused on the needs of the local community and businesses. An irony, perhaps, at a time the central government is planning to merge some of the regionally strong state-owned lenders with larger ones.

An addition reason, or atleast a collateral political benefit from such mergers, could be greater control of state governments over the cooperative banking system.

Kerala: Need For Scale

Kerala’s decision emerged from a ‘business case’ for consolidation, which would allow the state to build a cooperative bank offering value added services to its network of clients, said MS Sriram, visiting professor at the Indian Institute of Manangement, Bangalore, who headed a committee looking into the feasibility of the merger.

“The consolidation in case of Kerala is more to strengthen the already strong co-operative structure to effectively compete with the mainstream banking system,” Sriram told BloombergQuint in an email. The co-operative banking system in Kerala has 30 percent market share, said Sriram while adding that there is a “great need to modernize” this system.

While pushing the existing cooperative banking system to keep pace with the times was the prime motive, the recent merger of State Bank of Travancore (SBT) with the parent bank was an added factor. As of April 1, SBT along with four other associate banks of the State Bank group were merged with the parent bank.

The merged entity will operate through the nearly 5,000 touch points available with the primary co-operative banks in the state. Since the primary cooperatives are not allowed to offer a number of banking services under existing regulations, the state cooperative bank will use the network to provide its products and services.

Merging the district cooperative banks into one state level lender will also consolidate the control of this network in the hands of the state government. No surprise then that opposition parties in Kerala are opposing the merger. According to a June 29 report in The Hindu newspaper, the Congress party intends to petition the Reserve Bank of India and NABARD (National Bank For Agriculture and Rural Development) to reject the proposed merger.

Sriram, however, denied that the merger had anything to do with a desire of the state government to gain greater control over banking in the state.

Chhattisgarh: Improving Governance

The state of Chhattisgarh, which announced its decision to merge district cooperative banks earlier this month, also cited the need for more targeted services to local businesses as one of the key reason behind the proposed merger. In particular, Chattisgarh wants to improve the availability of banking services to the agricultural sector.

Improving the governance of the banks and reducing costs were other reasons that prompted such a move, said P Anbalagan, a senior IAS officer in the state government associated with the cooperative bank network. The idea is to strengthen the banking services available through the district cooperative banks and target those who are not adequately services by scheduled commercial banks, Anbalagan told BloombergQuint on the phone.

He said that while there were no specific governance concerns within the six district cooperative banks being merged, the consolidated entity will be easier to manage and governance will be strengthened.

A Drop In The Ocean

To be sure, these instances do little to consolidate the extensive network of cooperatives with varying degrees of regulation. They also do little to address the need for wider reform in the sector.

As of March 2016, India’s co-operative banking sector comprised of 1,574 urban cooperative banks and 93,913 rural co-operative credit institutions, shows data from the central bank. Under the existing governance structure, State Cooperative Banks, District Cooperative Bank and Primary Cooperative Banks are regulated by the Reserve Bank of India. However, political interference across this network has been rife due to the dual control of state governments.

In 2009, a committee on financial reforms headed by Raghuram Rajan suggested that authorities initiate long pending governance reforms in the sector. The report noted that the sector has underperformed “primarily because of excessive political interference, poor governance and a willingness of governments to recapitalize and refinance even poor performers.”

The report, following up on recommendations by another committee headed by A Vaidyanathan of the Madras Institute of Development Studies, said that the entire structure needs a rethink. It added that a strong prompt corrective action regime be put in place to ensure that unviable cooperatives are closed, while well run cooperatives are encouraged to convert to small finance banks.

No action has been taken on these recommendations since then.