Co-operative Banks Under RBI ...Risk on BFSI Segment

The condition of the Indian co-operative banks is weaker than the word weak. People have lost money and their wealth like anything. As far as my memory goes the journey started with Global Trust Bank and the few recent ones are known to you all. Our concern is that we think more pains to unearth once the guidelines are being implemented going forward. We are highlighting the risk of the same. Don't forget most of these banks comes under the strong political influence at the state and local levels.

The size of the co-operative banks are not to be taken on a lighter note. There are 1500 cooperative banks with nearly Rs 5 lakh crore.  Well, the investor community can be very happy but it comes with pain as RBI guidelines are not going to be an easy cakewalk for these co-operative banks. Well, the immediate risk which comes up for the BFSI industry and its ancillaries that under the RBI guidelines they have to now get capital adequacy ratios, improvisation in credit quality and more importantly every foul play will be opened up. The RBI guidelines will enhance the accountability of these banks which hold public money.

Most of the banks will be having wrong and over-leveraged mode of operating with clients like Punjab and Maharashtra Cooperative Bank- where irregularities were found in lending.  PMC’s results in FY19 show no issues with the bank, with net NPAs of 2.19% and capital adequacy ratio (CAR) of 12.62% — above the RBI’s 9% threshold. It was among the top five co-operative lenders in India, with a loan book of Rs 8,383 crore. However, this exposure excludes the bank’s Rs 6,500-crore hidden loans to HDIL as of March 2019, which is facing insolvency proceedings in the NCLT. In other words, PMC’s official exposure to HDIL constituted more than 75% of the bank’s total loans. Hence we will be getting similar stories or more shocking ones among the rest 1500 banks managing Rs 5lakh cr. The asset-liability mismatch will come forward in most of the banks and this will raise how these banks are risky and how less the investors are protected.  Now the borrowers go for sleepless nights as they enjoyed a lot with public money and now they are going to end up with major blow. We don’t know the detail list of the corporates who are into these 1500 banks playing foul games.

The risk is that we will witness some more shocking news and strange corrupt practices which lead to a significant impact on intricate financial space. Many Mutual Funds might be holding papers of co-operative banks. The risk increases there for all those holdings. The layer of credit risk might be a nightmare risk.  As the RBI guidelines come under practice all current disbursement which was going to happen will be placed under hold and review. The biggest nightmare is for that bank and their management where foul play is the protocol.  Another risk is the inter- linked banking transaction and treasuries and other money market instruments and how much foul play in one bank has impacted others.

Auditors will be under threat and also all those who are dependent on these banks for their loan books and other things. We all know that these banks have lenient rules and regulation for borrowing. Hence leaving the culprits outside the box the genuine ones are also going to face huge problem going ahead. The rural credit market will witness hiccups as the days of easy borrowing is over. Liquidity might get low and stringent enough for the borrowers and the eligibility criteria of the borrowers will be enhanced too. The relationship of owner and investor in a bank will now be under extensive scrutiny raising a million nightmares.

One more important thing is that we are confident enough that there will be a huge merger happening within these banks in the coming next 2 to 3 years.  1500 banks will require consolidation since many of them will turn out to be weak enough and hence merger is the pathway.