BW Communities

Madhavpura Mercantile Coop Bank: A Short Life

Business World Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[At eighteen you get a vote. The Ahmedabad-based Madhavpura Mercantile Cooperative Bank (MMCB) got one on Thursday -- a big vote of no confidence from Mint Road. Twelve years after it was taken on a joyride by former Big Bull, Ketan Parekh, the Reserve Bank of India (RBI) blew the whistle -- its license to carry on banking activities was annulled. In the case of MMCB, it was a question of when it will be asked to down its shutters. The central bank's inspection report showed as on end-March 2011, MMCB had a negative net worth of Rs 1,316.50 crore, negative capital adequacy of 1,941.1 per cent, gross bad-loans of Rs 1,126.55 crore (at almost 99.99 per cent of gross advances) and accumulated losses of Rs 1,357.41 crore. The End Game On March 16 this year, a show-cause notice was issued to MMCB as to why its banking license should not be revoked. Two days later, the bank replied its financial mess was due to the Rs 1,200-crore fraud perpetrated on it by share brokers (including Ketan Parekh and his associates) in collusion with the then members of its Board of Directors. The bank said a sum of Rs 803.00 crore or 72 per cent of the total amount "were unsecured due to unenforceable securities, defective documentation and hence not recoverable". It conceded that the reconstruction scheme for the bank failed due to non-fulfillment of commitment of UCBs (urban co-operative banks) to contribute as they feared for the safety of their monies. An attempt to salvage the bank with the help of a new set of investors failed to pass muster with the central bank. MMCB came up with a revival plan — a loan of Rs 1,000 crore sourced by a non-resident Indian from the World Bank and a few European banks. This unnamed NRI was to put in Rs 500 crore of his own funds for the next ten years. It was later found MMCB had no clue about the antecedents of the NRI or the source of funding. Worse the bank was also not sure if all this will help it to get back on its feet.   Shakeout in UCBs on Cards MMCB is a warning to other UCBs – they have to be relevant or the game's over. Few have a strategic vision or financial products worth a name. The shakeout has started. At end-March 2011, there were 1,645 UCBs. The RBI has received 158 merger proposals for merger, no objection certificates have been issued to 95 of these proposals. Out of the 95 mergers reported so far, 59 comprised of UCBs having negative net worth. The maximum number of mergers took place in the State of Maharashtra (58), followed by Gujarat (16) and Andhra Pradesh (10). The RBI Report on the Trend and Progress of Banking in India for 2010-11 (the latest available) shows the fragmented nature of UCBs. As on end-March 2011, only six UCBs had assets of more than Rs 500 crore, but accounted for 59 per cent of the total assets of the sector. UCBs with assets between Rs 100 crore and Rs 500 crore had 27 per cent of total assets. The remaining share of 14 per cent of total assets was attributable to UCBs with smaller asset size (Rs 15 crore-100 crore), but which accounted for almost 73 per cent of total number of UCBs.