How corporate loans spelled doom for Abhyudaya Co-operative Bank

It was not a couple of corporate loans but rather a dozen loans to small and medium enterprises that precipitated the downfall of Mumbai-headquartered Abhyudaya Co-operative Bank.

The Reserve Bank of India (RBI), which identified governance lapses, has already swung into action by superseding Abhyudaya’s board.

According to information available with Business Today, the co-operative bank faced a major shock from the deterioration in its asset quality, especially in the corporate book.

The big NPAs were Mithila Cars, Shambhu Mahadev Sugar & Allied Industries, Raphael Engineering, Shiv Kripa Ispat, and a dozen others. In fact, the co-operative bank had knocked on the doors of the Insolvency and Bankruptcy Board of India (IBBI) to recover the loans, but to no avail as there were no buyers. “The bank faced liquidation in many cases where the realisation was not enough to cover the loan amount,” say sources.

The RBI inspection of the bank’s books revealed that a small co-operative bank like Abhyudaya was dishing out corporate loans to mid-sized companies. The bank has a deposit base of Rs 10,838 crore and advances of 6,654 crore as of March 31, 2020. In fact, there are no financial details available after 2019-20. Set up in 1964, this bank has a history of close to six decades. It received scheduled bank status from the RBI in September 1988. Over the years, it emerged as a prominent urban co-operative bank with branches in three states—Maharashtra, Gujarat, and Karnataka.

The regulator has acted in time as the bank’s gross NPAs shot up with no recovery in sight. The asset quality deterioration has also impacted the bank’s capital to underwrite new business.

As part of the RBI’s action, the regulator has appointed Satya Prakash Pathak, a former chief general manager of the State Bank of India, as the administrator responsible for overseeing the bank’s operations. It has also set up a three-member committee of advisors.

The committee has Venkatesh Hegde, a former GM of SBI, Mahendra Chhajed, a chartered accountant, and Suhas Gokhale, a former MD of COSMOS Co-operative Bank Limited.

In the post-reform period, the government liberally allowed many new urban co-operative banks (UCBs) to set up shop. This led to a quick increase in the number of these banks in the country. However, many were not financially strong or well managed because of political interference.

In the mid-2000s, the RBI started taking steps to fix the governance problem. The central bank made it easier for stronger UCBs to merge with weaker ones. It also closed UCBs that were weak in terms of capital adequacy and governance. These steps led to a steady decline in the number of UCBs.

In recent years, UCBs have faced new challenges because of technology and digitisation, as well as intense competition from new sets of banks like small finance banks and old private sector banks. In fact, the bigger private banks are now exploring smaller geographies as metros and urban centres are saturated.

Over the years, the universe of UCBs has been shrinking. At the end of March 2021, the total assets of all UCBs was Rs 20 lakh crore. This was around 10 per cent of the total value of all SCBs’ assets. It was close to 20 per cent some two decades ago.

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