November 21, 2002
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Gujarat's rotting co-op banking sector
and the conspiracy of silence

Election 2002

Sheela Bhatt in Ahmedabad

Chief Minister Narendra Modi does not talk about it. Shankersinh Vaghela has not once mentioned it in his speeches. The Congress 'charge sheet' against the ruling Bharatiya Janata Party is mum on it. Political rivals are reluctant to use it against each other.

The near-collapse of Gujarat's co-operative banking sector, once considered the engine of its economy, is not in the headlines even as the state prepares for a crucial assembly election.

Modi must thank his stars. The scandal could have cost him his job. It didn't, because almost all political parties have had their hands in the co-operative till at some point or the other. In the capital Gandhinagar, people in the know call it a 'conspiracy of silence'.

Consider this:

  • Out of 353 co-operative banks in Gujarat, over 40 are on the brink of bankruptcy.
  • Eight have already shut shop.
  • More than 30 banks are not able to honour cheques for amounts as small as Rs 500.
In Gujarat, 65 to 70 per cent of banking transactions happen through co-operative banks. Till just a few years back, it was a thriving sector, enjoying the trust of hundreds of thousands of middle- and upper-middle-class Gujaratis --- traders, small-sector manufacturers, and professionals.

According to figures collected before March 2001, the 353 co-operative banks in Gujarat had a network of 1,108 branches spread across the state and Rs 18,000 crore [approximately US $3.71 billion] in deposits.

Thanks to a series of scandals that have rocked the state in the past year and a half, the co-operative banks' kitty stands depleted by at least Rs 5,000 crore.

"There is a perception that after the Madhavpura bank scam there has been a serious erosion in the credibility of co-operative banks in Gujarat," says Vishwavir Sharan Das, Ahmedabad-based regional director of the Reserve Bank of India. Though he quickly adds that a "majority of co-operative banks are not involved in such scams", it's almost an afterthought.

The fall of Gujarat's co-operative banking sector began with the fall of Ketan Parekh.

The Madhavpura Bank, which mainly served grocers and spice merchants, had given over Rs 800 crore to Parekh without even the approval of its board of directors.

When the prices of the shares Parekh had pledged against the sum began falling, all hell broke loose.

As the news spread, depositors lined up to withdraw their money. Soon, the panic spread to other co-operative banks.

The bankruptcy of, a Mumbai-based personal finance portal, too had an impact on Gujarat's co-operative banks.

In Nadiad town alone in the last 18 months co-operative banks have lost more than Rs 500 crore in business, claims Dinesh Patel, a Congressman and former banker.

Das says the RBI has lodged criminal complaints against the Sheth B B Shroff Bulsar Peoples Co-operative Bank, the Navsari Peoples Co-operative Bank, the Surat Nagrik Sahakari Bank, and some smaller banks in Adajan, Udhna, and Gandevi.

But these complaints have not yielded much in terms of action against guilty officials and their political masters. The unsaid, unwritten instruction to the authorities seems to be: let sleeping dogs lie.

The Modi government has refused to take quick action against the guilty as suggested by the RBI and the Registrar of Co-operatives. The government has even pressured the RBI against initiating bankruptcy proceedings against some banks, a step that has hindered small depositors' attempts to claim their money under an insurance scheme of the RBI.

There are strong political reasons for the Modi government's inaction.

C R Patil, a BJP strongman and convenor of Modi's Gaurav Yatra in Surat, heads the state-owned Gujarat Alkalis and Chemicals Corporation. He has been accused of swindling over Rs 52 crore from two co-operative banks --- the Diamond Jubilee Co-operative Bank and the Panchsheel Co-operative Bank. The Diamond Jubilee Bank has since shut down. Police claim Patil is absconding.

Kanaksinh Mangrola is widely believed to have bankrolled Shankersinh Vaghela's 'Khajuraho' operation when the latter led a rebellion in the BJP in 1996. Vaghela kept his supporters in Khajuraho in five-star luxury for several days before flying them down to the capital to vote on a confidence motion.

Mangrola, who had left the BJP with Vaghela, footed the bill. He was rewarded with a Rajya Sabha seat.

Mangrola, however, returned to the BJP fold later. Till last year he was chairman of the Suryapur Co-operative Bank. The bank has since shut down.

Mangrola is now building a hospital in Bharuch and the Suryapur Bank is its chief financier. Auditors were shocked to find that a loan of Rs 1.65 crore for the hospital was approved in 15 minutes by the bank's board of directors.

Vaghela is now leading the Congress campaign in the state as the party's Gujarat unit chief.

Chiman Sathi, or Chimanbhai, father of the BJP Member of Parliament from Anand, Deepak Patel, was on the run for a long time. He was wanted in connection with a case of financial bungling in the Charotar Co-operative Bank, of which he was a founder.

After tremendous pressure from the RBI, he was asked by top BJP leaders to give himself up. RBI sources say he had signed fake letters of credit worth Rs 21 crore. The case is under investigation.

In Gandhinagar, after banks led by BJP leaders began going bust, some close aides of Modi circulated a list of Congress-controlled banks which, they said, were either bankrupt or on their way there.

The Visnagar Bank headed by Bholabhai Patel topped the list.

The Visnagar Bank's credit list reads like the Who's Who of Ahmedabad --- builders, hoteliers, top traders, you name them. And all these credits were issued with little or no paper work.

It's no surprise then that the Congress election propaganda does not even mention a bank scam.

"The collapse of co-operative banks in Gujarat is a political issue," a senior RBI officer said. "Political lobbying prevents us from taking firm action. Invariably, bank managements are linked to one political party or the other. And it's an open secret that co-operative banks are the main funding source for most grassroots level politicians."

This is what three politicians in Ahmedabad had to say in response:

Jairam Patel, a Congressman and authority on co-operative banks: [Corrupt] managements of co-operative banks have been responsible for the weakening of as many as 35 banks involving almost Rs 8,000 to 10,000 crore of deposits.

Natubhai Patel, BJP leader-turned-Congressman and a co-operative banker: People from both parties [the Congress and the BJP] are involved, but it should not be made into a political issue. The weakening of co-operative banks was caused by the fall in prices of shares and the collapse of the real-estate market in Gujarat.

Amit Shah:, chairman of the Ahmedabad District Co-operative Bank, BJP MLA from Sarkhej in the city, and a confidant of Chief Minister Modi: The closing down of co-operative banks in Gujarat should not be linked to any political party. It's not a political issue.

The RBI on its part holds the "dual control" system to be the reason for the rot. Though co-operative banks function under the Banking Regulation Act, the RBI does not have any direct power to sack a corrupt management.

In the RBI's last annual report, Governor Bimal Jalan had acknowledged the problem. "The recent problems in the co-operative banking sector have made it clear that [the] present system of dual/triple regulatory and supervisory control is not conducive to efficient functioning of co-operative banks in the interest of depositors," he said.

The RBI chief even suggested a way out and proposed a "separate supervisory authority with representatives from the Centre, the states, and other entities".

For now, however, the co-operative banks will continue to dance to the tune of their political masters. The Modis, Vaghelas and others of their ilk have other things on their mind.

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