RBI takes over Abhyudaya Co-op Bank, assures depositors

On Friday, November 24th, the Reserve Bank of India (RBI) superseded the board of the Mumbai-based Abhyudaya Cooperative Bank due to concerns stemming from poor governance. The central bank appointed Satya Prakash Pathak, former chief general manager of the State Bank of India, as the administrator to manage the affairs of the lender.

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The RBI's action aims to alleviate depositors' concerns, as no restrictions or moratorium on deposit withdrawals have been imposed. According to sources, the central bank is confident in the bank's finances. The statement from the Reserve Bank of India emphasized that the action was necessary due to material concerns arising from poor governance standards observed in the bank. However, it assured that no business restrictions have been placed, and the bank will continue its normal banking activities.

Committee of Advisors Appointed to Assist the Administrator

To support the administrator, the central bank has constituted a committee of advisors comprising Venkatesh Hegde, former general manager of SBI; Mahendra Chhajed, Chartered Accountant; and Suhas Gokhale, former MD of COSMOS Co-operative Bank. Sources close to the matter reveal that the primary concerns stem from the bank's operations under the chairmanship of Sandeep Ghandat, including lending to friends and relatives, reluctance to recover loans, and unnecessary hiring to gain favor in the Parbhani district.

In response to queries, Ghandat denied any wrongdoing and stated that he would urge all defaulters to repay their dues. He disclosed that the bank has a deposit base of Rs 10,800 crore and a loan book of Rs 6,400 crore.

No Restrictions on Deposit Withdrawals

Unlike the case of PMC Bank, the RBI has not imposed any restrictions on deposit withdrawals at Abhyudaya Cooperative Bank. Insiders reveal that factors such as the bank's excess Statutory Liquidity Ratio (SLR) will ensure that it meets all its obligations. Additionally, the RBI has agreed to open its currency chest for the next three days to ensure that all ATMs dispense cash as required by depositors.

Sources familiar with the situation emphasize that the issue lies with the bank's management and not the bank itself. The bank had been under close watch for the past 18 months and had failed to heed supervisory advice.

Ghandat Blames RBI's Action on Supervisory Pressure

Ghandat claims that the RBI had placed an additional director on the bank's board since 2021 and was pushing for a faster reduction in non-performing assets, which led to the current action. Sources allege that the politically active father-son duo of Ghandats hired three times more employees than required, leading to a surge in the cost-to-income ratio.

Regarding asset quality, the bank management did not take action against defaulters despite their ability to pay. This inaction is attributed to close connections between the borrowers and management.

Bank's Financial Situation and Regulatory Pressure

Ghandat acknowledges that 70% of the defaulters have been affected by the Covid pandemic, but he has embarked on a mission to persuade them to repay their dues following the RBI's action. According to data posted on the bank's website, its net profit sharply declined to Rs 3.54 crore in FY21 from Rs 16.22 crore in the previous year.

Ghandat discloses that the bank's overall gross non-performing assets (GNPAs) stood at about Rs 1,200 crore as of March 2023, down from Rs 1,550 crore in the previous year. To reduce costs in response to regulatory pressure, the bank closed two branches and relocated others to smaller premises.

Ghandat admits that over 80% of the bank's lending is to large borrowers, primarily businesses, but he asserts that this is consistent with industry practices. However, the ousted chairman contends that the main issue was the RBI's insistence on providing for asset sales made 5-6 years ago to asset reconstruction companies. The regulator was pressuring the bank to set aside over Rs 800 crore over five years for this purpose.

Ghandat acknowledges that the bank's capital adequacy ratio is over 6%, below the mandatory 9%. Despite these challenges, he maintains that the bank is financially sound and committed to serving its customers.

The Reserve Bank of India's decision to supersede the board of Abhyudaya Cooperative Bank underscores the importance of strong governance practices in the banking sector. The appointment of an administrator and a committee of advisors aims to address concerns about the bank's management and ensure the protection of depositors' interests. While the bank faces challenges, including high non-performing assets and regulatory pressure, the RBI's actions provide some reassurance that depositors' funds remain secure.