Madhavpura Mercantile Cooperative Bank: A Story of Regulatory Failures

The Madhavpura Mercantile Cooperative Bank was a cooperative bank in India that failed spectacularly, leaving many people wondering how it could have happened.

The bank's troubles began in 2015, when it was placed under the Reserve Bank of India's (RBI) watchlist for non-compliance with certain norms.

The RBI had been monitoring the bank's activities for some time, but it wasn't until 2020 that it was finally shut down due to a lack of liquidity and a large number of bad loans.

The bank's failure was a result of a combination of factors, including poor governance and a lack of oversight by regulatory bodies.

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Madhavpura Mercantile Cooperative Bank was registered as a cooperative society in Gujarat on 27 September 1968. It started its operations just two weeks later, on 10 October, in Ahmedabad's Madhavpura spice-market area.

The bank initially dealt with grocery traders, serving the local community. This marked the beginning of its journey as a financial institution.

It took the bank 26 years to receive its banking licence, which finally happened on 19 August 1994.

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The 2001 Sensex crash had a significant impact on Madhavpura Mercantile Cooperative Bank. The bank's share price plummeted from Rs. 3,500 to Rs. 1,000 in a matter of days.

The crash was triggered by a combination of global and domestic factors, including the dot-com bubble bursting and the Asian financial crisis. This led to a massive sell-off in the Indian stock market.

The bank's exposure to the market volatility resulted in significant losses, which ultimately led to its merger with the Ahmedabad Mercantile Cooperative Bank.

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The RBI took swift action to address the financial woes of Madhavpura Mercantile Co-operative Bank. The Reserve Bank of India (RBI) cancelled the bank's licence on June 4, 2012, due to its precarious financial position.

The RBI had issued a notice on March 16, 2012, asking the bank to show cause why its licence should not be cancelled. The bank replied on April 18, 2012, accepting its financial predicament, which was attributed to a massive fraud of Rs.1,200 crore committed by Ketan Parekh and his associates.

The RBI's decision to cancel the licence was a result of failed efforts to revive the bank in consultation with the Union Government. The bank's depositors had been inconvenienced by continued uncertainty.

The Central Registrar of Co-operative Societies (CRCS) was requested to issue an order for winding up the co-operative bank and appoint a liquidator. The RBI had granted the bank a licence to commence banking business in India on August 19, 1994.

The Reserve Bank of India (RBI) cancelled the banking licence of Madhavpura Mercantile Co-operative Bank due to its precarious financial position.

The bank's assessed net worth was a staggering -₹1,316.50 crore as of March 31, 2011, and its CRAR was a mind-boggling -1,941.1 per cent.

The RBI conducted a statutory inspection of the bank and revealed that its gross NPAs were ₹1,126.55 crore, almost 99.99 per cent of its gross advances.

The bank's accumulated losses were ₹1,357.41 crore and deposit erosion was 100 per cent, making it clear that the bank was no longer solvent.

The RBI issued a showcause notice to the bank on March 16, 2012, asking why its banking licence should not be cancelled, but the bank's response was unconvincing.

The bank claimed that the main reason for its failure was the unwillingness of other cooperative banks to fulfill their commitments, but this excuse was not enough to save its licence.

The RBI cancelled the bank's licence with effect from June 4, 2012, and requested the Central Registrar of Co-operative Societies to issue an order for winding up the bank and appoint a liquidator.

The co-operative bank held substantial amounts of inter-bank deposits from other banks, which posed a systemic risk for co-operative banks in Gujarat.

The bank's exposure to Ketan Parekh, a leading stock broker who had suffered huge losses in his share dealings, was a major contributor to its financial woes.

The Liquidation Committee was formed by the Reserve Bank of India to oversee the liquidation process of the Madhavpura Mercantile Cooperative Bank.

The committee was headed by a retired judge, who was tasked with ensuring a fair and transparent process.

The bank's assets were valued at ₹1,398 crore, which were to be liquidated and distributed among the depositors.

The liquidation process was expected to take several months to complete.

The committee was responsible for managing the bank's assets, including its properties, loans, and investments.

The liquidation process was a complex task, requiring the committee to navigate various legal and regulatory requirements.

The committee's efforts were focused on maximizing the recovery of deposits for the bank's depositors.

The regulator has recognized the need for a review of cooperative banks, including urban cooperative banks regulated by the RBI. Several committees have looked into the matter, but so far, no concrete action has been taken.

The RBI committee chaired by K Madhava Rao in 1999 raised concerns over the rise in the number of urban cooperative banks and their weak financial performance. The committee pointed to a lack of professionalism and corporate governance, which was leading to these cooperative banks being in weak health.

A number of committees have been formed to address the issues with urban cooperative banks, including the NS Vishwanthan committee in 2006-07, the R Gandhi committee in 2007-08, and the VS Das committee in 2009. These committees have made recommendations, but their impact is yet to be seen.

The fate of Madhavpura Mercantile Cooperative Bank hangs in the balance, with its existing board of directors' term ending on August 23. The Central Registrar of Cooperatives has no power to discontinue or revive the present board, only the Reserve Bank of India can take a decision.

The depositors of MMCB have offered to forgo half of the amount the Bank owes to them, which would be a considerable sacrifice to help reduce the liabilities substantially. They have also offered to waive their claim on 35 percent of their deposits if it leads to continuance of the bank in business.

The Story of Madhavpura Mercantile Cooperative Bank is a cautionary tale of how a bank can go from being a scheduled cooperative bank to facing insolvency. The bank was established in 1968 and became a scheduled cooperative bank in 1994.

The bank's troubles began in 1999 when it started providing finances to stockbrokers, including Ketan Parekh, who used these funds for speculative trading. This led to significant losses for the bank.

In 2001, the Reserve Bank of India (RBI) issued a press release asking stressed banks to borrow from scheduled commercial banks against government securities. The RBI also provided special liquidity support to such banks against their eligible holdings of appropriate assets for a temporary period of up to 90 days.

The RBI's inspection of Madhavpura Mercantile in March 2001 revealed some alarming figures. The entire capital and reserves, as well as 91 percent of deposits, were eroded. The net worth was a negative Rs 1,150 crore, and the net loss was at Rs 1,200 crore.

The RBI's inspection also found that non-performing assets were at 88.2 percent of gross advances. This was a clear indication that the bank was in deep trouble.

Here are the key statistics from the RBI's inspection:

In August 2001, the government and the Central Registrar of Cooperative Societies decided to reconstruct the bank and placed it under a scheme for 10 years. The scheme included infusing capital, retaining deposits, and improving governance.

The fate of scam-hit Madhavpura Mercantile Cooperative Bank (MMCB) is uncertain as its existing board of directors' term is ending on August 23. The central government's decision on the suggestions for corporate debt restructuring made by bankers will be crucial in determining its future.

A delegation of banking industry representatives met with Union Agriculture Secretary P K Basu and other officials in New Delhi to suggest ways for the bank's revival. They hope their suggestions will be accepted to avoid cancellation of the bank's licence.

Jyotindra Mehta, chairman of Gujarat Urban Cooperative Banks Federation, was part of the delegation. He believes dissolution or cancellation of the bank's licence will not help either the bank or its depositors. Instead, it will only benefit those responsible for the bank's liquidity crisis.

The Central Registrar of Cooperatives lacks the power to discontinue or revive the present board. Only the Reserve Bank of India can take a decision on whether to appoint an administrator or extend the term of the present board of directors or let its licence be cancelled.

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As part of the revival strategy, urban cooperative banks that have their money stuck in MMCB have offered to forgo half of the amount the bank owes them. This would be a significant sacrifice to help reduce the bank's liabilities substantially.

The 13,000 depositors have also offered to waive their claim on 35% of their deposits if it leads to the bank's continuance in business. Another way to keep the bank afloat is to convert depositors' money into equity and maintain liquidity levels.

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