The Reserve Bank of India (RBI) on Friday superseded the board of Mumbai-based Abhyudaya Cooperative Bank for a year due to material concerns emanating from poor governance standards.

An administrator has been appointed to manage the affairs of the multi-state co-operative bank during this period. Former State Bank of India (SBI) chief general manager Satya Prakash Pathak has been named as the administrator. 

The RBI, however, has not placed any business restrictions on the bank and said it shall continue to carry on its normal banking activities under the guidance of the administrator. Unlike the case of PMC Bank, the regulator has not imposed moratorium on deposit withdrawals.

The central bank has also appointed a committee of advisors to assist the administrator. The committee comprises Venkatesh Hegde (former general manager, SBI); Mahendra Chhajed (Chartered Accountant) and Suhas Gokhale (former managing director of Cosmos Co-operative Bank).

According to a report by PTI quoting sources, much of the concerns stemmed from the way in which the bank was run under the chairmanship of Sandeep Ghandat, its lending to his friends and relatives, a reluctance to recover, and needless hiring done to win over voters in the Parbhani district.

Ghandat, however, denied any wrongdoing and told PTI that he will now ask all defaulters to pay up.

The bank has a deposit base of Rs 10,800 crore and a loan book of Rs 6,400 crore. When RBI placed restrictions on erstwhile Punjab and Maharashtra Cooperative (PMC) Bank in September 2019, it had deposits of Rs 11,617.34 crore and loans of Rs 8,383.33 crore.

Non-performing assets (NPAs) stood at a high of 12% and the cost-to-income ratio at 80%. The NPAs had gradually accumulated and the cost-to-income ratio deteriorated due to poor governance issues. But what is positive is that the bank had made operating profit in FY23 and its low-cost CASA (current account savings account) deposits is sizeable. The bank has also consistently maintained its statutory liquidity ratio (SLR) and cash reserve ratio (CRR).

Factors like excess SLR at the bank will help ensure that it will meet all its obligations, PTI quoted sources as saying. They also told the news agency that RBI has agreed to open its currency chest for the next three days to ensure that all ATMs of the lender dispense cash as sought by the depositors.

"The problem is with the bank management, there is no problem with the bank per se," PTI quoted a source as saying, adding that the bank, which was under close watch for the last 18 months, was not heeding to supervisory advice.

Ghandat told PTI that RBI had placed an additional director on its board since 2021, and was pressing for a faster reduction in the NPAs due to which the action has been taken.

The bank is headquartered in central Mumbai's Parel, which was the heart of the mill-land.

Quoting sources, PTI reported that the father-son duo of Ghandats, who are politically active, had hired three times more people at the bank than requirements that led to the cost-to-income ratio shooting up.

On the issue of asset quality, the bank management did not act against defaulters despite the ability of the borrowers to pay, they said, adding that the inaction was due to the close links between the borrowers and management.

About 70% of the defaulters have been impacted by the Covid pandemic, Ghandat told PTI. He also said that he has hit the road to cajole them to pay up right after the RBI action earlier in the day.

As per data posted by the bank on its website, its net profit reduced sharply to Rs 3.54 crore in FY21 from Rs 16.22 crore in the year-ago period.

The bank’s NPAs stood at about Rs 1,200 crore as of March 2023, down from Rs 1,550 crore a year ago, Ghandat told PTI.

He said the bank also shut two branches and shifted branches to smaller premises to reduce costs after the regulatory pressure.

He admitted that over 80% of its lending is to large borrowers, comprising businesses, but added that this is in sync with its peers.

The problem area, as per the ousted chairman, was the insistence to provide for asset sales done 5-6 years ago to asset reconstruction companies (ARCs) for which the regulator was pressing it to provide over Rs 800 crore over a five-year period, PTI reported.

He said the capital adequacy of the bank is over 6%, which is lower than the mandatory 9%.