Admitting that urban cooperative banks (UCBs) are being regularly misused for money laundering, Union finance minister P Chidambaram has advocated strong restrictions including cancelling of bank license of errant banks. Such violations by UCBs are serious considering their immense penetration across the country.
Addressing a recent top-level meeting to review the economic intelligence apparatus in the country, Chidambaram observed: “Many UCBs are being regularly used for money laundering.”
Started off as money-lending institutions only for non-agricultural purposes in urban and semi-urban areas of the country, UCBs’ role has widened considerably. There are 1,645 UCBs across the country, with more than 8,150 branches, Rs. 2 lakh crore of deposits and advances valued at Rs. 1.3 lakh crore.
As the Reserve Bank of India (RBI) looks after the banking side of the UCBs, the minister said besides strengthening legal provisions, the RBI should look to “restrict the lending aspects of such banks, making provisions of narrow banking or even canceling of their banking licenses.”
Like scheduled commercial banks, many cooperative banks have been accused of violating anti-money laundering norms (set up by the RBI) and KYC norms with impunity.
A big drawback in effectively controlling UCBs is the duality of control. While RBI regulates deposit mobilisation, loan grants, etc. a bulk of the functions is government-controlled through the multi-state cooperative societies or state cooperative societies.
UCBs have already crossed the March 2013 deadline set by RBI to complete a process of risk categorisation besides furnishing a complete list and profiles of existing customers.
Another issue that makes it difficult to arrest such illegalities is the RBI reluctance to share inspection reports on grounds of confidentiality.
“It is appreciated that banks are not extensions of enforcement agencies and are bound by their functional obligations and confidentiality grounds. However, cases of frauds or violations detected or committed by banks could be shared by the RBI as intelligence inputs,” a top government official quoted from a note.