A recent report submitted by an ex- pert committee of RBI, led by Y.H.Malegam, lays down some of the principles for issuing new licences. It is, however, important for RBI to recognize the difference in the form of organization before em- barking on opening up the gates for new cooperative banks. Cooper- atives are distinct from other forms of organization as they are organ- ized on the principle of mutuality.
RBI needs to recognize the com- plexity of the cooperative form. This complexity emanates from the principles of cooperation, which treats capital as incidental and not central to business.
In this context we should consid- er one critical principle of open membership that defines coopera- tives. Most UCBs operate in viola- tion of this principle in spirit. The principle is: anybody who is willing to use the services of the coopera- tive as per the terms of engage- ment should not be denied mem- bership, unless there are genuine capacity constraints. Open mem- bership permits a member to walk out, when he or she does not want the services. Therefore, the share capital of a cooperative is inciden- tal and is in the nature of a fixed deposit where a member can sub- scribe to or withdraw from at any time.
RBI needs to recognize this oxy- moron--that there could be no co- operative “banking“. Banks seek deposits from public and uses them for lending. If we follow the cooperative principles there could be no “public“ as deposits come from owner-members. Thus, from a puritanical view one could argue for a neighbourhood level coopera tive society. Federated structures could provide the sophisticated services to the members by having multiple neighbourhood societies promote the upper tier organiza- tion. The European and the North American models are basically neighbourhood credit unions and federated structures. Neighbour- hood coops might need to be a bank to be a part of the payments system.
The UCBs (with the notable ex- ceptions like the Sewa Bank), work as neighbourhood banks rather than as cooperatives. It is impossi- ble to break into a UCB's member- ship club. So, as the expert report rightly recognizes, these are bor- rower-run organizations (page 54 of the committee report) with de- positors having optional member- ship. The conflict of interest of a borrower-run bank is stark. If RBI were to issue new licences, it should move the control entirely t the depositors (except for institu- tional deposits) rather than accept ing the recommendation that at least 50% of the deposits should be represented by members.
Till now, we had no instances of cooperatives going below the capi- talization requirements because of withdrawal of membership under the open membership route. Most UCB collapses were because of a `run', an indication that UCBs are close club--where members are too entrenched to withdraw mem- bership; and deposits were held by customers, not members.
A new formula proposed by the report that the new members should pay a premium to obtain membership (page 53) to represen the accumulated and indivisible re serves of the UCB appears fair, but has a dangerous flip side. The members withdrawing from mem- bership also get a premium repre- senting indivisible reserves. The implication is significant when considered with the other recom- mendation that the membership should represent more than 50% of the depositor base. These two to- gether would make a perfect case for a run led by members in case of trouble.
While the principle of withdrawing members getting a premium representing their un-en- cashed loyalty and patronage is de- sirable, it is dangerous in a bank.The cooperative should at least ring-fence the minimum amounts required for capital adequacy as non-distributable amounts.
The issue of professionalism in running a UCB is a serious issue and RBI should consider the rec- ommendations of the committee to have sliced governance--a board of directors (elected) for strategy for- mulation and a board of manage- ment (appointed/coopted) who satisfy the fit-and-proper criteria for governing the operations.
The committee recommends lower capitalization for UCBs oper- ating in unbanked areas. Granting a licence for starting/running an UCB is a technical issue, and this cannot be treated as a nation- building exercise. Cooperatives op- erate as neighbourhood institu- tions and it might not be a good idea to grant licences at lower capi- talization.
If a cooperative society could morph into a bank at scale, then the unbanked areas could start with societies than undercapi- talized banks. However, the even- tual question that RBI should stand up to is whether the regulator con- siders these institutions as banks incorporated as cooperatives or as cooperatives wanting to do bank- ing. This makes a world of differ- ence. This might be the one oppor- tunity for RBI to restore coopera- tion in cooperative banks.
