Ban on co-operative bank loans to directors deferred

In the April 29 monetary policy, the RBI had said that UCBs were not permitted to extend any loans and advances, both secured and unsecured, to directors, relatives and firms/concerns/companies in which they were interested with immediate effect. Keeping in view the representations received by RBI to provide some more time, it has been decided to make these instructions effective from October 1, the apex bank said in a notification to chief executive officers of all primary UCBs here on Tuesday.

This is despite the fact that a host of banks have diverted funds using through this route. “It’s a common practice among the directors on the board of co-operative banks to avail of loans and never repay the it. Most of these loans end up as non-performing assets (NPAs). These loans are extended without any collaterals. Directors on their part float benami companies to avail of loans,” sources said. Friends Co-operative Bank in Mumbai collapsed as it extended loans only to its directors who never paid back the amount. These directors were arrested by the Mumbai police recently. It is learnt that severe pressure was mounted by politicians who have interests in the co-operative banking sector in Maharashtra on the RBI. “Politicians and their nominees on the boards of co-op banks want to take maximum mileage out of the current guidelines governing the co-operative banks,” said a banker.

RBI had also advised UCBs that the existing advances extended prior to April 29, 2003 might be allowed to continue up to the date when they were due and that the advances should not be renewed or extended further. This decision (restriction on lending and advances to directors and relatives) was as per the recommendation of the JPC on stock market scam, it had added.

Earlier, Minister of State (Finance) Anandrao Adsul said the RBI’s decision, preventing co-operative bank directors and their relatives availing loans from banks, violate the freedom granted under the Indian Constitution.

Maharashtra’s economic fortunes are closely interlinked to the co-operative sector where politics and business have opted for a dangerous liaison. The sector has become the breeding ground of scams, defaults, fund diversion, losses and mismanagement. “Politicians with vested interests are misusing co-operative banks by diverting funds to various purposes and violating prudential norms. Whenever we try to take action against erring co-ops, there is heavy political pressure against the move,” a RBI official said.

Though there are nearly 650 urban co-operative banks and 31 District Central Co-operative Banks (DCCBs) in Maharashtra, most of them are controlled by politicians and financially weak.