Friday, September 12, 2008

South Indian Co-operative bank

The South Indian Co-operative bank story is a story worth telling. This bank, apparently 85 years old at some point in time went bust in 2004. Since then it has been a sordid tale for many investors there (one of whom happens to be my father).

The profile of the bank depositors mirrors my dad. Mostly senior citizens today, most of them were first generation migrants in Mumbai who put their money in a cooperative bank ostensibly formed to take care of their interests - that let them down very badly.

Somewhere in 2004, it was discovered that the bank had too many NPAs or too low a net worth. On investigation, much of the money was found siphoned off to a few "needy" people, from the "rich" depositors - a common story in the Indian cooperative sector. As usual, given the Indian judicial system, the scam accused got away on bail, leaving the depositors, where they are today, in a lurch. The report here, cached by google, notes how the scamsters "languished in jail for 3 months". The depositors whose life savings is locked languish in life since 2004 and now stand to lose a major part of it.

(Cached from google, heres a link)

And then, salvation happened: The bank was decided to be merged with the Saraswat cooperative bank - one of the few respected cooperative banks (read the comments in this article). But that did not bring much cheer to investors.

South Indian Bank customers with deposits up to Rs one lakh each can now get back their money if they want. However, those having deposits above Rs one lakh will have to forgo a part of their amount.

Why is this so? Presently RBI deposit insurance rules goes something like this.

RBI provides deposit insurance upto one lakh rupees for all deposits, whether the bank is nationalised/ private/ co-operative. RBI typically merges a failed bank into one with substantial reserves - the reserves can be used to repay the depositors. If your net worth falls to a particular level, the RBI anyway thinks that you're a weak bank and demands that you be merged into a stronger bank and in this case you as a depositor pays for the bank or bank staffs complicity in a scam. (Thanks Aadhist)

What about the thousands of depositors whose retirement kitty has been reduced by half? Where will they go with a begging bowl? Where is the government in all this? Or do they only bail out banks whose depositors riot or have nice juicy political connections?

My two cents learning from this: By and large, do not put your money in a cooperative bank if you can get into a regular nationalized/scheduled bank. The chances that your hard earned money in a cooperative bank (regardless of its names, regardless of the charms of its agents, wellwishers) will go is higher than a regular bank. Why? Because, overall cooperative banks have lower standards than regular banks and intends to reach people who would otherwise be unbanked. (Tx Aadhist) So, if you are a regular person earning his money through the salaried route etc., you are putting yourself at a greater risk by putting your money in such a place.

Disclaimer: There is a little bit of personal interest in posting this story. Many depositors in this bank are known to me and most of them are the typical first generation migrant to Mumbai who ended up locking up their retirement savings in this stupid bank and lost it thanks to some scamster(s).


Kavi said...

You can add my family to that list of people too !!

The fingers are thick and numb ! They have been kept crossed for a long while now.

Rohit said...

A general comment..

Don't the depositors share a part of the blame too? After all, they invest in these banks because of the allure of higher interest rates. Should not they stop and think why these banks are able to offer them larger, more established banks like state of bank India cannot?

Capitalism is based on personal responsibility. Some people will suffer--unfortunate, but does that mean the government should intervene?

Note: This is a general comment. In case of fraud, persecution would make absolute sense.

Neelakantan said...

Oh of course. Depositors should shun banks like this. Indeed, this was an advice I gave my dad too, but he had a different view. Serves them right, in a way.

I only wish the fraudsters were brought to book...

Savitha Rao said...

The RBI regulations on this are ridiculous .

shailesh iyer said...

thats good ..
i too had some money in there when i was in india .. but good sense that i just put under a lakh which was insured. though i was quite a lot worried about it. my dad was a shareholder of this bank. they were the first generation migrants to mumbai. but i know lot of people who are going to lose money ...agreed some of them went for higher interest rates. but hey, this is not an investment bank/stock trading firm which can justify such loses. i dont know how much these people are going to lose money. but no excuses should be given to the congress govt cm and some of his cohorts who had a hand in giving loans to people in dharavi. these are similar to the subprime crisis and a thorough investigation and confistication of property of the accused should be done.

Neelakantan said...

Actually yes Savitha. The US regulations insure deposits will 100K. Likewise, it should be atleast 10 lakhs in India.

Neelakantan said...

Right Shailesh. Prosecution of people who defraud banks and those who aid and abet them is necessary.

Mohan said...

One of my relatives had deposits over Rs.1 lac with this Bank. He has received a letter according to which he will receive only 55% of the total amount, of which, nothing will be from DICGC. If deposits upto Rs.1 lac are insured he should have got 100% of Rs.1 lac and 55% of the amount above Rs.1 lac. Can someone throw some light on this please?

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Girish said...

My father-in-law bought shares way back in 1949. I still have the share certificate. What happens to it?