The failure of Mumbai-based Abhyudaya Co-operative Bank was caused by a dozen loans to small and medium-sized businesses rather than a couple of large debts.
The Reserve Bank of India (RBI), which detected governance flaws, has already stepped in to replace Abhyudaya's board.According to information obtained by Business Today, the co-operative bank was hit hard by a decline in asset quality, particularly in the corporate book.
Mithila Cars, Shambhu Mahadev Sugar & Allied Industries, Raphael Engineering, Shiv Kripa Ispat, and a dozen other companies have significant NPAs. In truth, the co-operative bank had attempted to recover the loans through the Insolvency and Bankruptcy Board of India (IBBI), but there were no purchasers. "The bank faced liquidation in many cases where the realisation was not enough to cover the loan amount," according to reports.
The RBI audit of the bank's books revealed that Abhyudaya, a tiny co-operative bank, was making corporate loans to mid-sized businesses. As of March 31, 2020, the bank had a deposit base of Rs 10,838 crore and advances of Rs 6,654 crore. In fact, no financial information is accessible after 2019-20. This bank was founded in 1964 and has been in operation for nearly six decades. The RBI granted it scheduled bank status in September 1988. It has grown into a renowned urban co-operative bank, with branches in three states: Maharashtra, Gujarat, and Karnataka.
The regulator responded just in time as the bank's gross NPAs skyrocketed, with no sign of recovery in sight. The worsening in asset quality has also had an impact on the bank's capital to underwrite new operations.
As part of the RBI's move, Satya Prakash Pathak, a former State Bank of India chief general manager, has been designated as the administrator in charge of managing the bank's activities. It has also formed a three-person advisory committee.
Venkatesh Hegde, a former SBI GM, Mahendra Chhajed, a chartered accountant, and Suhas Gokhale, a former MD of COSMOS Co-operative Bank Limited, are members of the committee.
During the post-reform period, the government readily permitted the establishment of many new urban co-operative banks (UCBs). This resulted in a rapid expansion in the number of these banks around the country. However, because of political meddling, many were neither financially sound or competently managed.
The RBI began taking attempts to address the governance issue in the mid-2000s. The central bank simplified the process of merging stronger UCBs with weaker ones. It also closed UCBs that had insufficient capital and governance. These actions resulted in a gradual decrease in the number of UCBs.
UCBs have encountered increased challenges in recent years as a result of technology and digitisation, as well as fierce rivalry from new sets of banks such as small finance banks and old private sector banks. Indeed, as metros and metropolitan centers become saturated, the larger private banks are venturing into smaller areas.
The universe of UCBs has been diminishing over time. The total assets of all UCBs at the end of March 2021 were Rs 20 lakh crore. This amounted to roughly 10% of the entire value of all SCB assets. It was close to 20% about two decades ago.
