What’s the Story Behind the Maharashtra State Cooperative Bank Scam?

The operation of the cooperative industry (banks and allied corporations) in Maharashtra has come under increased scrutiny over the past few months.

Here’s what happened in a nutshell.

As per latest reports, sugar mills are being auctioned one after the other, the most recent being the Gangapur Cooperative Sugar Mill based out of Aurangabad which is being wound up by the Maharashtra State Cooperative Bank (MSCB).

The theory is that the state’s “sugar barons’’ who have considerable stakes in the mills are also directors of the cooperative banks lending to them (like MSCB). Loans are extended to mills (particularly loss-making ones) and when they turn insolvent, the assets are auctioned off to recover the debt.

In short, conflict of interest translates into a quagmire of corruption and banking scams where directors blame each other for siphoning off funds and profits whereas farmers depending on the cooperative loans are left to fend for themselves.

That’s the surface. Let’s dig a little deeper and see what has led us here.

The (Non)Cooperation Movement

India has some 1,540 urban cooperative banks (UCBs) with a depositor coverage of 8.6 crore and deposits amounting to ₹5Lcr ($67.4bn). Almost one-third of all these banks are in Maharashtra with total deposits valued at ₹2.93Lcr ($39.5bn).

Why such concentration in one state, one may ask. It’s due to the history of cooperative culture that has culminated across the state’s famous sugar belt region since the 1950s. What started with the efforts of the Vikhe Patil family (Vithalrao and Balasaheb) — erstwhile politicians from the Congress — gradually expanded as a cooperative model across agro, dairy, agro-based products and other industries.

Five to six decades down the line most of the cooperatives in the state came under the control of politicians from across party lines. Commensurately, a rising number of financial irregularities and mismanagement in the affairs of the cooperatives have been widely reported in the media, most spectacularly the one which happened in MSCB.

The MSCB Scam

MSCB is the biggest cooperative bank in Maharashtra which controls a network of 31 district and primary cooperative societies. Its board was largely made up of NCP and Congress politicians.

The modus operandi of the scam was the same as we described in the beginning. Between 2007 and 2011, significant amounts of loans were doled out to sugar and spinning mills allegedly related to or controlled by the members of the Board in violation of all financial prudence and banking norms. The sick mills were then sold off to recover the dues, usually at nominal costs to known politicians (reportedly from the Congress, NCP and BJP). Once privatised, several of the mills started making profits.

In 2011, NABARD inquired into the scam and submitted a statutory audit report drawing particular attention to the abnormally high NPAs of the bank (31.2%). This was followed by an inspection and chargesheet filed by a quasi-judicial inquiry commission set up by the Maharashtra government.

Both the inspections reported “irregularities and connivance of the then board of directors of the bank” in conducting their 5 businesses.

The Headline Actions

This followed a series of regulatory and judicial actions.

First, the RBI dissolved MSCB’s board and appointed an administrator to manage its affairs.

Second, a public interest litigation (PIL) was filed in 2012 pointing at “collusion between the board of directors of the district cooperative banks, sugar cooperatives, MSCB and the state government”. The petition values the scam at more than ₹25,000cr ($3.3bn) and alleges that hundreds of acres of land was sold along with the mills in the auctions which were reportedly rigged to favour leading politicians.

Third, a two-judge bench of the Bombay High Court ruled on the PIL saying there was “credible evidence” against the accused in the case and directed the Economic Offences Wing (EOW) to register an FIR in 2015.

FYI: The EOW has now filed a closure report on this matter concluding that “no irregularities were involved in the loan transactions”.

Fourth, the Enforcement Directorate (ED) registered an Enforcement Case Information Report (ECIR) against former Chief Minister Sharad Pawar, Ajit Pawar (his nephew) and others in connection with the MSCB scam.

This was the first official charge filed against the Pawars by a regulatory agency in the case up until this point.

The ED’s case against Sharad Pawar and his associates (at least 70 directors of the MSCB) is two-fold. The first is in connection with money laundering to see if funds deposited by farmers in their cooperative accounts were diverted by the MSCB board members or office bearers.

The second major allegation being investigated is with respect to the sale of cooperative sugar factories which were reportedly sold below the reserve prices to “near and dear ones”.

Sharad Pawar’s involvement in the scam drew more speculation to a scam that had already been tied to massive political controversy. The Pawars have risen to the ranks of czars in Maharashtra’s cooperative economy in the last few decades through their close control and association with these institutions.

But the timing of the enforcement actions (in the run up to local elections) and the eventual fizzling out of investigative results (like the EOW clean chit) has also cast a huge question mark on the legitimacy of these regulatory efforts. It makes one wonder if this has ultimately reduced the cooperative sector into a shadow boxing arena between different political parties in Maharashtra.

And then there is the added layer of political incision that has deadlocked regulatory intervention in this sector — NCP leaders’ resistance to the changes in the Banking Regulation Act.

Stonewalled Banking Regulation

After waking up to the inglorious tragedies unfolding in the banking scene (cooperatives like PMC Bank and otherwise.), the RBI organised the passage of the Banking Regulation (Amendment) Act, 2020 in the Parliament last year.

This brought urban cooperative banks on the same lines of regulation as commercial banks, thereby increasing RBI scrutiny on them.

But this has drawn stiff criticism from political parties like NCP who claim it is designed to “encroach upon the states’ powers” under the federalism construct.

What this means is that with dual supervision over cooperatives, the central government’s scrutiny (through RBI) will increase in an area where regional parties like NCP had long established their uncontested presence.

But if instances of scams like MSCB or PMC Bank have any lesson to impart, it is that political interference in the appointment of administrators is a serious problem in the workings of cooperative banks which only amplifies their inefficiencies.

Besides, the political nexus in cooperatives is hard to miss. Between 1993 and 2005, at least 56% of all cooperatives had chairpersons who had either contested or won parliamentary/assembly elections.

Years of socio-economic hegemony of elite groups over cooperative institutions also proves detrimental to the progress of the farming community who are not only exploited out of their potential growth but also reduced to captive vote banks through such overlordships.

Perhaps it’s time to bring more accountability to the cooperative economy and put them under the scrutiny they have so far managed to escape.

(Originally published August 20th 2021 in transfin.in)