Is the Sarbanes-Oxley Act, the most sweeping corporate governance legislation in the last 70 years an over reaction that kills enterprise? Now for the first time Mr. Donaldson Chairman, Securities & Exchange Commission is siding with those who argue that the crack down is stifling entrepreneurship and paralyzing boardroom decision-making. Mr. Donaldson has said that Americans boardrooms must stop being frightened and get back to business. Corporate America's got to move on, he says. The worry is about the loss of risk taking zeal. People are confusing business risk taking with legal risk taking, which is a mistake. And the Chairman's worries about risk aversion are widely shared - only last week Alan Greenspan, Chairman of the Federal Reserve, told congress that "a pervasive sense of the caution" was holding back investment and job creation in the US.

The concern for India is not too much but too little of caution under conditions of relatively weak institutional mechanisms such as investor activism and docility of Institutional investors apart from a system that is reluctant to demonstrate that fraud indeed can result in suffering.

Editor

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Corporate Governance Journal is not responsible for the facts, figures, views, and statistics appear in this journal.)

BRINGING GOOD GOVERNANCE IN COOPERATIVE BANKS -
PERSPECTIVES FROM THE ANDHRA PRADESH EXPERIENCES

by

Shri Bhale Rao, IAS
Principal Secy to Govt, Agr & Coop Dept,
Govt. of AP
&

Dr. D Mastan
Faculty,
ICM, Hyderabad

While banks in the country are publishing their annual results highlighting their remarkable performance in the year 2002-03 in matter of raising deposits, reducing their NPAs, improving capital base, effecting cost control and so on, many Urban Cooperative Banks in Andhra Pradesh (AP) have very little to show by way of comfort to their investors. They face an unenviable situation of trying to convince the depositors that their money is safe in the coop. banks and they have done enough provisioning to protect deposits and are seeking the help of the Regulators viz., Reserve Bank of India (RBI) and Registrar of Cooperative Societies (RCS) in averting heavy deposit withdrawals and also recovering their non-performing assets (NPAs). For the last year and a half, bankers, RBI, Officials of Cooperative Department have spent sleepless nights making efforts to prevent a further run on the Banks, whereas the public and depositors are spending anxious moments worrying about the safety of their hard earned money kept in deposits in the Banks. They want stern action against the Board of Directors of the Banks for mismanagement and greater accountability on the part of the Regulators who have failed to prevent the collapse of several Cooperative banks.

The above situation has occurred in many other states as well during the last two years. This paper attempts to highlight the different measures that have adopted in Andhra Pradesh to tackle the financial distress situation in the Urban Cooperative Banks in the State.

Depositors' Panic - Why and How?

Depositors do not put their money in the banks only with a view to get good returns on their investment. Their main concern is the safety of their money invested with the bank. They got panic, once they come to know or even suspect that the bank has become weak or is sick or when they learn that the directors have played around with their money by advancing loans to risky borrowers or for risky purposes such as real estate business, financing, film making and so on. They are also greatly influenced by reports in the media, particularly when media reports about the action being taken by the regulators for failure of the banks to comply with the regulations.

Certain incidents particularly since March, 2002 are worth mentioning:

1. Krushi Bank – The Bank offered very high rates of interest on deposits. The promoters got a lot of media publicity for reputation and their standing in society, but the bubble burst when the Board of Directors diverted the Bank funds for speculative ventures and the Bank faced a severe liquidity crunch. There was a run on the Bank. The Chairman fled, along with some others. The collapse of Krushi Bank triggered a domino effect on the other Urban Cooperative Banks in the State.

2. Charminar Bank - This is a Scheduled Urban Cooperative Bank. It had deposits around Rs.400 crores at the time of giving it a scheduled status. The scheduled status was perhaps obtained by taking a inter bank deposit from other banks. In a brief period, one depositing bank withdraw its deposits of more than 100 crores with the Charminar Bank and the Bank faced severe liquidity problems. The bank failed to comply with the RBI Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) norms. The Bank has also lent crores to real estate business against weak securities. The Chairman of the bank who was a high profile socialite, committed suicide, and this triggered a run on the Bank. The poor and hapless depositors ran from pillar to post, seeking Government help in getting back their money. The media highlighted, how the depositors’ lives had been shattered with the sudden closure of bank. The Govt. of A.P. set up a Committee of Experts to study the financial health of th UCBs in the State and come up with recommendation on tackling the problem of systemic collapse of the Urban Cooperative Banks in the State. The Govt. of AP and RBI approved a reconstruction and revival package for the bank, wherein the depositors having deposits up to Rs.1 lakh would be paid fully and the larger depositors were asked to accept a deferred repayment of deposits after a moratorium period. The package also contains an OTS scheme with borrowers, including reduction in the interest rates and penal interest. The Govt. also appointed a Senior IAS Officer as a PIC of the bank along with professionals/experts to revive the Bank.

3. Vasavi Bank - This is another scheduled Urban Cooperative Bank. It had nearly Rs. 250 crores worth of deposits. It faced a severe liquidity crunch when there was a run on deposits after collapse of Krushi Bank. But it received a major blow when news about its weak status appeared in the press and a majority of the bank directors resigned. The Board of directors of the Bank belong to a business community and so long as the elders of the community managed the bank previously it was doing well. The new lot of Directors of the Bank put their hands in the bank’s vaults and helped themselves to substantial loans and became the “ big defaulters” to the bank. The Govt. have appointed officials and professionals to manage the bank. The bank has deposits from some other Urban Cooperative Banks and a collapse of the bank will trigger a collapse of the other banks also. A major share of the loans and advances went into the hands of board of directors and their relatives. Out of Rs. 120 crores of loans and advances, around Rs.50 crores were taken by the directors and their relatives. Perhaps the directors, thought that the money in the bank is their own and it would be safer in their hands than with others!! They floated every norm of RBI, and adopted every bad practice that a good governing board should not do. The Cooperative Department Officials have taken up measures to affect recoveries. Even the employees of bank have put in the efforts to persuade the directors to repay the loan. The staff not only tried to persuade them to pay their dues, they also came out onto the streets demonstrating against the directors. The bank is already excessively staffed, as directors gave jobs to their boys and one suspects that jobs were also “sold”. The staff have taken up a proactive role because their jobs are at stake but some elements also have past loyalties to their benefactors and are putting obstacles in recoveries.

4. Prudential Bank– This is a bank with more than 80 years of presence. Over a period of time the bank has grown with its deposit base of Rs.618 crores. Bank faced a run on deposits after collapse of Krushi bank received a big blow when news about enquiry on bank being ordered by RCS appeared in the press. This news report emanated from a Cooperative Department employee who wanted the bank to give employment to his crony. There was a heavy withdrawals by depositors. It received another jolt, when there news about its ‘weak’ status appeared in a leading daily.

The board of directors did not follow ‘prudent’ lending policies inspite of the name of the bank being “Prudential” Cooperative Bank. This bank lent to a defaulter of many other banks, lent 24 crores to a single borrower (the present overdue is Rs.40 crores) lent for high risk areas such as real estate, club and resorts, film studios. The Board of Directors did not head the warning signals given to them by the Regulators. The Government also took over the reigns of the Bank by appointing an administrator and a Person-in-Charge to look after the performance.

5. Other Urban Cooperative Banks – A large number of Urban Cooperative Banks in AP are in a state of financial weakness and sickness. About 1/3 of the Urban Cooperative Banks are weak. Today with the crisis hitting the larger banks, the smaller Urban Cooperative Banks face anxious moments of survival.

The crises in the Urban Cooperative Bank sector of A.P. has severally eroded the credibility of the Urban Cooperative Banks in the State. Even some good banks are facing a severe crisis of identity. To tackle the situation various measures were taken by the regulators.

New Initiatives of State Government

In the backdrop of crisis in Krushi, Charminar, Vasavi, Prudential Sravya, Praja, Sitara, Mother Theresa and some other banks, the State Government took active measures. The steps taken by the Government are (a) constituting an Expert Committee on Urban Cooperative Banks to study the weaknesses in the UCBs and to suggest suitable measures for strengthening them. The Committee submitted its suggestions to the Govt. for strengthening UCBs in AP, which are in the process of consideration by Government (b) appointing supervisory officers in weak and sick banks (c) Prosecuting directors of the banks involved in misuse of bank money. (d) Invoking the provision of the Protection of Depositors Interests Act to attach the properties of defaulters and directors of the bank. (e) Chief Minister has interacted with the public and in the “Dial your CM’ programme on Door Darshan (TV) Hyderabad and advised investors to be careful and not be greedy while investing their money. (f) Establishing a ‘Implementation and Monitoring Committee with a Secretariat’ (IMS) at the office of Registrar of Cooperative Societies. The purpose of IMS is to effectively monitor each bank and ensure implementation and follow up action on directions given to the UCBs. (g) Appointing senior IAS Officers to head the beleaguered banks like prudential, Charminar, Vasavi and deputing Govt. staff for speedy recovery of loans and ensuring refund to depositors. (h) Appointing professionals as PICs to these banks (i) Pruning the staff of the problematic banks, to control the cost of management. The staff strength at Vasavi, Charminar has already been reduced. (j) Sensitizing the cooperative bankers on the need to adopt good governing practices in their banks on lines of suggestions of the Ganguly Committee on Governance in banks. In this connection the services of Academy of Corporate Governance (ACG), Hyderabad are also being taken. (k) Lastly, brining a separate law to govern and regulate UCBs and Coop. Credit Societies in the State.

New Strategies of Reserve Bank of India

RBI has been conservative in its approach. The public want that the RBI should publish list of weak banks, but RBI feels that publishing such a list of weak banks would kill those banks, as the customers won’t turn up, depositors will start withdrawing amounts, and the borrowers will try to slow down their repayments. In the back drop of failure of UCBs in many states, the new approaches that have been adopted by RBI are; (a) Increasing the frequency of (off-site and on-site) inspections of UCBs (b) Calling the boards of managements of the banks for reviews, and work out strategies to over come the problem of weak/sickness (c) More disclosures of information on the risks/weaknesses of banks in their inspection reports and asking RCS too to initiate actions on the banks. (d) Asking the UCBs also to disclose certain information in the balance sheets for the perusal of stakeholders. (e) Taking stringent actions, such as cancellation of licenses when further continuance of bank would be detrimental to the interests of the present and future depositors. In the recent past, 10-15 banks’ licenses were cancelled in AP. (f) Coming to the rescue of banks facing depositors’ run with issue of directions on payment of deposits (limiting payment to Rs.1000 in each individual deposit account) and on prohibiting foreclosure of deposits. (g) Constituted a Committee (Ganguly Committee) to suggest measures to bring corporate governance in banks. It made certain recommendations like boards of banks be free of politicians, people with proven expertise in technology, marketing, finance, treasury, accounting to be inducted to oversee the work of bank executives and provide the strategic direction, Strong and Independent directors are to be taken in the board, with a responsibility to maximize the interests of all stakeholders, and directors to sign a list of “dos and don’ts”. The RBI accepted all of them and asked the banks to implement them. (g) Lastly considering a policy measure of constituting a separate Supervisory Board for monitoring UCBs under the control of a Deputy Governor of RBI.

Keeping the above perceptional changes in the actions of the regulators namely Government/RCS and RBI, the Directors of UCBs need to mend their ways and “walk the talk” to create confidence in their stakeholders. They have to change their present style of governance and adopt simplicity, transparency, accountability which are also cooperative values, in their governance framework and put in place best banking practices in UCBs. They can’t offer excuses that they are small, ignorant, or face lack of availability of professionals for their boards etc.

The UCBs need to adopt some of the key strategies suggested by Dr.Bimal Jalan, Governor RBI while inaugurating the recent banking summit organized by CII. The strategies he offered to the bankers are: building competence for competing, observing regulatory (RBI, RCS) systems, reduction in government ownership, (inviting more public partnership) adopting international best practices in corporate governance and introducing sound human resource policies and management systems which would help in strengthening the banks.

The road ahead for UCBs is rough. The Urban Cooperative Bankers have to modify their behaviour, otherwise they will not be excused by the regulators or by their members and by the public at large. Retaining and rebuilding the confidence of the public is their top most priority.

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