Community-focused banks face existential crises over a lack of capital cushion and inadequate oversight – The Economic Times

lipped from: https://economictimes.indiatimes.com/industry/banking/finance/banking/co-operative-banks-face-existential-crises-over-a-lack-of-capital-cushion-and-inadequate-oversight/articleshow/81485825.cms

Synopsis–Currently, community banking only exists in some rudimentary form among cooperative banks. But these too face existential crises. Lack of adequate capital, ill-equipped boards, poor technology and a dwindling customer base have sounded the death knell for several community-focused banks.

Not many storms brew over the Arabian Sea, but strong winds blowing off East Africa occasionally whip up currents and swells that even the most experienced boatmen find difficult to navigate. Fishermen hailing from Vasai, Uttan, Naigaon and Arnala — along the Mumbai coastline — often return home in battered and creaky boats, hauling torn nets that manage a meagre catch during their 10-12-day deep-sea fishing expeditions.

Often, these fishermen dock their boats and walk up to a branch of Bassein Catholic Co-operative Bank for a loan to meet the boat repair charges that can run into lakhs. In a good season, when the catch is significant and prices high, they request Bassein Catholic for financial assistance to buy a new boat. There are not many banks in India that offer a boat loan. Neither do banks offer fishermen loans to mend the nets. But Bassein Catholic has been doing it for over several decades now.

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“The local community we’ve served all these years is still very important for us. They comprise 80-90% of our 5 lakh customers — and there are Catholics and non-Catholics on our scrolls,” says Ryan Ignatius Fernandes, chairman of Bassein Catholic Co-operative Bank.

Bassein Catholic has offered loans worth Rs 300 crore to nearly 2,500 fishermen over the past five years. That apart, the bank’s loan book is split across several small retail borrowers, business owners, farmers and even horticulturists. Bassein Catholic is among the last of the community banks in India — the types that understand customers beyond spreadsheets and credit scores.

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Community-based banking started in India in the 1900s. In the initial days, these banks were set up on the basis of caste and religion. Take the case of the Saraswat Brahmins of Western India, who were considered “big savers” back in the day. Several Saraswat families would come together, create a deposit pool and start lending to Gujarati and Marwari businessmen. Likewise, the Vysya community of South India were successful tradespeople and were always on the lookout for working capital to run their businesses.

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The community came to their rescue by funding them.

In the post-Independence era, several of these banks started serving people outside their respective communities too. Community banks that served a specific geographical area came up in 1960-70, while 1980-90 saw banks being set up on the basis of political ideologies — with politicians helming them.

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But as banking became modern and more technology-driven, several of these community-focused banks lost their relevance. Currently, community banking only exists in some rudimentary form among cooperative banks. But these too face existential crises. Lack of adequate capital, ill-equipped boards, poor technology and a dwindling customer base have sounded the death knell for several community-focused banks. “We had several banks that came close to doing community banking but they were not community banks in the strictest sense of that word,” says Harshavardhan Raghunath, a banking sector expert and a board member of Karur Vysya Bank.

Harshavardhan finds no relevance for community-focused banks as large private banks have started acting like “local area banks” now. “Most community banks are small and they do not have money to spend on technology, which has become critical to modern-day banking,” he adds.

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The onset of private banks and the strengthening of the PSU bank network resulted in the death of several community based banks. Several of them were acquired by larger commercial banks — the most recent one being Lakshmi Vilas Bank, which was acquired by Singapore-headquartered DBS Bank. Lakshmi Vilas Bank (LVB) was founded in 1926 to help members of the Vysya community in South India. But as the bank grew in size, LVB moved out of the community fold to become a commercial bank. A few LVB oldtimers still believe the bank would have survived had it kept its old Vysya linkages alive.

“DBS managed to get a good deal with LVB. They got a bank with a very sticky depositor base and up-to-date technology. They need to just expand the retail network,” says a former LVB executive. “LVB is now DBS,” says a dark red banner on LVB’s website. The new website does not have any links to LVB’s glorious past. In a few years, LVB would cease to be in the living memories of its customers. In comparison, Ratnakar Bank (now RBL Bank) and DCB were more fortunate as they managed to retain their identities despite moving away from the communities they represented.

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Ratnakar was founded in 1943 by members of the Maharashtrian Jain community while DCB was promoted in the 1930s by a fund in the name of the Aga Khan, the spiritual leader of the Ismaili Shias. A decade into the new millennium, Ratnakar and DBS were taken over by professional boards and executives, who steered these entities away from the communities they represented and turned them into strong mid-sized commercial banks.

The remaining half a dozen “old private sector banks” (CSB, South Indian Bank, Dhanlaxmi and others) are also on a transformational path, with professional independent boards and use of technology. Once the old private sector banks change their colours and culture, there will be only a few cooperative banks that may retain some elements of community banking.

“Running a community-focused cooperative bank is difficult,” says Nagesh Pinge, an ICICI Bank old-timer and former board member of NKGSB Co-operative Bank. “Many of them are not able to grow.” The weaker ones are destined to be wound up, he says, if they do not learn to improve. “These entities will have to expand their operations to survive. They’ll have to weed out community biases and enroll more members. But these entities cannot grow their business at a face pace, as they do not have adequate capital buffers. So they’ll have to carve out a safe zone and expand business within that periphery,” explains Pinge.

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Inadequate capital base is the biggest curse for most cooperative banks in India. This genre of banks can only bulk up their capital base by expanding their share capital (by adding more members) or by raising more deposits from members.

“These banks cannot keep raising capital from the communities they serve. When they try to expand to newer territories to induct more members, they lose their community focus,” says PH Ravikumar, chairman of Bharat Financial Inclusion and a founding member of ICICI Bank.

“Some of the well-run cooperative banks have grown on the back of diversification to newer territories. The stronger banks in this category have multi-state operations.” According to banking sector experts, some cooperative banks have abysmally low governance structures. Their boards are not independent and there is severe political interference. This is more so in the case of state and district-level cooperative banks.

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“Often, board members of cooperatives banks do not want to cede control to professional executives. Many of them do not even want to grow their respective banks. Wellrun cooperative banks will have to turn themselves into a small finance bank if they want to survive,” says Ravikumar.

Small finance banks (SFBs) carry the RBI’s mandate to facilitate banking services to the unserved and underserved sections of the population. There are 10 SFBs in India. This category of banks, along with microfinance institutions, have begun eating into the customer base of cooperative banks.

Fernandes of Bassein Catholic says, “Community customer base is important, but if we have to survive, we’ll have to source business from outside the community as well. We’ve plans to expand to other states. In a few years, we’ll have to convert ourselves into an SFB. We’ll have to pack in cutting edge technology and also strengthen our board.” There are over 90,000 rural cooperative banks in India — and most of them are community focused. The ones having a chance to survive are the 50-odd scheduled urban cooperative banks. According to the RBI’s financial stability report, the gross NPA ratio of these banks collectively stands at over 10.3%. Weaker cooperative banks may face stress if credit situations worsens in the upcoming quarters.

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“Concentration of loan portfolios is the biggest risk faced by most coop banks,” says Madan Sabnavis, chief economist at CARE Ratings. “Several of these banks have lent money to sectors that are facing headwinds currently. It’s even more worrying when you realise their books are not geographically diversified. Many of these banks will remain niche – serving a class of customers in a specific geographic area. Many of them will not be able to grow beyond a point as well.”

If some of these cooperative banks survive, it will serve people who do not have bulky deposits, monthly account balances or large ticket payments. But then these banks will have to be overhauled to introduce governance standards and a professional management. “Large private banks will not want to serve people from low income categories.

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You’ll need some well-managed cooperative banks to fulfil the needs of poor people,” says K Cherian Varghese, a banking sector veteran and former head of Union Bank of India, Corporation Bank and South Indian Bank.

Banking is a sticky business. If banks do not take risks, they will not die. But they will not grow either. In time, they just fade away or become insignificant.

The community-focused cooperative banks in India should drop their hesitancy to expand their membership base and take customers from other communities. Else they may become a bank in a coma.

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