Why is the ED knocking at the doors of Kerala cooperative banks?

Lack of auditing and political interference is dragging down the sector, which is a lifeline for Keralites and the Kerala economy, experts say.

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WHY is a century-old cooperative society system in Kerala now at risk?

Could it be due to the Enforcement Directorate's (ED) investigation into one of the cooperative societies, where reportedly ₹500 crore have disappeared, or is there something else?

A deep dive into the cooperative society records reveal that some societies have missed mandatory audits for unknown reasons, leading to issues in 390 societies in the state.

Additionally, as an example of financial mismanagement, 100 societies have not returned depositors' money even when it is due, and documents available in the public domain reveal that thousands of societies are operating at a loss.

In short, failure in auditing and financial mismanagement have led to a crisis, pushing depositors to the brink of suicide.

The cooperative movement in Kerala had begun functioning before the formation of Kerala as a state. Between 1910 and 1920, some major societies were formed, of which a few became 'banks'. One of the main 'banks' is the Trivandrum Cooperative Bank, which was restructured and renamed as the Kerala State Cooperative Bank Ltd (Kerala Bank), with deposits of a little over ₹69,000 crore.

As of March 2022, there were 998 cooperative banks in Kerala. Of them, 456 are in rural areas, 404 are in semi-urban areas and 138 are in urban areas.

There are some 1,644 primary agriculture cooperative societies (PACS). The PACS form the short-term credit structure of cooperatives in the state. They had issued total loans and advances of ₹1.08 lakh crore to their members and collected deposits of ₹1.39 lakh crore.

According to the registrar of cooperative societies, in all, there are 16,352 societies, including 'banks' in the state. Among them, only 12,241 are functional. While 3,466 societies are dormant, 645 are under liquidation. In India, there are 8,54,355 cooperative societies.

Interestingly, cooperative banks are not seen as banks by the Reserve Bank of India (RBI). However, by amending the Banking Regulation Act, 1949, the RBI has certain powers to regulate cooperative banks. In 2017, the RBI issued a circular stating that cooperative societies using the word 'bank' in their names is a violation of Section 7 of the Banking Regulation Act, 1949.

The circular added that such societies have neither been issued any licence under the Banking Regulation Act, 1949 nor are they authorised by the RBI to do banking business.

"Insurance cover from the Deposit Insurance and Credit Guarantee Corporation is also not available for deposits placed with these societies. Members of the public are advised to exercise caution and carry out due diligence of such cooperative societies before dealing with them," the circular states.

Even the Kerala Bank formed in 2020 is not recognised as a bank by the RBI.  

Marred by scams

Cooperative societies are the lifeline of Kerala's economy and play a vital role in the life of Keralites. About 33 percent household debt in Kerala was raised from credit cooperatives in 2018, the corresponding share was only 8 percent at the all India-level, states the Kerala Economy Review, 2022.

Unfortunately, for the last two years, cooperative societies, especially 'banks', are hitting the headlines for the wrong reasons.

Societies in Karuvannur, Kandala, Maylappara and Pulpally are the few to be named in the cooperative 'bank' scam.

Sreekala, secretary in-charge of Karuvannur of the Service Co-Operative Bank filed a case alleging that Sunil Kumar, former secretary of Karuvannur Service Cooperative Bank; Biju, former branch manager; Jils, former senior accountant; Kiran, member; Bijoy, commission agent; and Reji Anil, supermarket accountant together swindled approximately ₹100 crore from the bank between 2014 and 2020 by cheating the bank and making pecuniary personal gains for themselves.

They sanctioned more than one loan to the same person against the bank's loan limit, gave more than one loan on the pledge of the same property, created memberships for people who did not have memberships using fake documents at fake addresses, made the bank's software a mess, gave loans to people using the collateral of someone else's property without the owner's knowledge, and created inaccuracies in the stock of the bank's supermarket.

Recently, the ED initiated an investigation based on a first information report (FIR). The ED investigation revealed that Sathish Kumar P. had layered the proceeds of crime worth ₹50 lakh through a fixed deposit in the name of Aravindakshan P.R.

Satish Kumar is the alleged middleman behind the money laundering, reportedly a close associate of A.C. Moideen, a Communist Party of India (Marxist) CPM state committee member, member of legislative assembly and former local self-government minister; and M.K. Kannan, the vice-president of Kerala Bank. 

Aravindakshan is a Communist Party of India (Marxist) (CPM) leader, municipal councillor and a close aide of Moideen.

Further, the ED found huge transactions in Aravindakshan's bank account, which were not disclosed during the course of the investigation.

The ED also found that Jils had availed loans in the name of his family members and several others, and an outstanding amount of ₹5.06 crore was due on these loans.

The accused were produced before the designated Prevention of Money Laundering Act, 2002 special court in Ernakulam, Kerala. Earlier in the case, the ED had provisionally attached properties worth ₹30 crore, including a resort in Thekkady that was built with the proceeds of crime.

Further investigation is ongoing and Moideen was grilled for his connection with Sathish Kumar P. Additionally, Kannan has been grilled about his closeness with Sathish.

Similarly, an investigation has found that crores are missing from Kandala Cooperative Bank. The alleged embezzlement occurred in the 2005–21 period. A report of the investigation held under Rule 65 of the Kerala Cooperative Societies Act reveals that former bank secretary Joshua Mathew alone embezzled ₹18.83 crore by approving 28 loans.

In the same bank, former president Jerry Oommen Easo and his family also took loans worth over ₹2 crore from the bank. Similarly, ₹6.34 crore in loans was granted to John George of Vazhamuttom and his associates. There are reports that the total amount would be around ₹180 crore. 

In Pulpally, the case is that a loan fraud of ₹8.5 crore was committed under the leadership of K.K. Abraham, who was the president of the bank, using the documents of farmers and other members of the bank. The chargesheet names ten people, including Abraham. According to the probe, Sajeevan Kollapally is the main mastermind of the fraud and the ED has arrested him.

K.T. Rammohan, a political economist and economic historian, told The Leaflet that "lack of auditing has led to this crisis". He also questioned whether the auditing that is done is fair, given that the auditors are often members of the same political parties (CPM) that rule the 'banks'.

Rammohan is a former dean of the Mahatma Gandhi University, Kottayam. 

Interestingly, according to the Kerala Department of Cooperation, in 2022–23, a little over 18,000 societies are auditable, but only 3,569 have been audited. This is a decrease from 15,500 audited societies in 2021–22 and 16,000 audited societies in 2020–21.

The number of cooperative societies making profit has decreased from 8,116 in 2020–21 to 2,254 in 2022–23.

Meanwhile, while confirming the numbers cited, B.A. Prakash, a former Kerala Planning Board member who marked 50 years of writing economy books and research materials recently, told The Leaflet, "This is expected when the governing bodies of these banks are run by politicians who do not have financial skills."

Additionally, he said, cooperative societies have changed their priorities.

"Cooperative societies were formed to help farmers. Now, the societies are building shopping complexes, which is not their objective," Prakash added.

The Kerala Economic Review, 2022 confirms what Prakash said. The data reveals that, as of March last year, 998 cooperative bank branches had loaned only ₹10,094 crore (14 percent of total advances) for agriculture sector while ₹34,704 crore were advanced for priority sectors, which includes buying vehicles and purchasing land and property.

The total advances were ₹54,031 crore. Interestingly, the micro, small and medium enterprises (MSME) sector advances were only ₹3,005 crore, which is only 4 percent of the total advances.

"The cooperative societies are the oxygen of Kerala. If greedy politicians derail this system, it is going to hurt Kerala economy and depositors' life badly," Prakash added.

In July 2022, an elderly woman could not afford treatment despite a deposit of ₹30 lakh at the Karuvannur Cooperative Bank. When her husband approached the bank to retrieve their deposit, the bank was unable to pay them. Tragically, the woman died.

Meanwhile, a Kerala assembly document (in the possession of The Leaflet), reveals that nearly 400 cooperative societies have not returned depositors' money even after the maturity period.

Roy Mathew, a senior journalist who keenly follows the cooperative scam, told The Leaflet, "These societies were run on the trust of the people of Kerala. Now, people are losing that trust, which is going to shake the sector and the Kerala economy in a scary way."