Five years after gross irregularities were detected in the Nanded District Central Cooperative Bank Limited, which was headed by Maharashtra Chief Minister Ashok Chavan's brother-in-law and of which his sister is a former director, an inquiry will begin later this month.

For the first time since the bank was closed, the former directors have been issued notices for the inquiry under Section 88 of the Maharashtra Cooperative Societies (MCS) Act, 1960 for assessment of damages, according to official sources. The authorised officer for the inquiry will conduct the proceedings on March 23. The directors will be heard out. Their list is quite illustrious and includes Mr Chavan's sister and brother-in -law, Bhaskarrao Patil Khatgaonkar, who was elected Nanded MP last year.

The bank, set up in 1923 in Nanded, hometown of the Chief Minister, was doing well till the end of the 1990s.

According to a confidential inspection report, dated November 11, 2005, of the National Bank for Agriculture and Rural Development (Maharashtra Regional Office, Pune), the management of the cooperative bank was vested in a board consisting of 34 directors (elected 27 and nominated 7) elected on August 16, 2002, for five years till August 2007. “However, after financial irregularities were observed in sanctioning of loans and functioning of the board against the public interest, the Commissioner for Cooperation and Registrar of Cooperative Societies superseded the board of directors with effect from March 19, 2005 under Section 110A(iii) of the MCS Act.” The bank had a staff of 920 as on March 31, 2005 and 978 primary agricultural societies were affiliated to it.

The official sources said the fact-finding inquiry under Section 83 of the Act was still under way. Last year Mr Chavan tried to revive the bank with a grant of Rs 110 crore but the Reserve Bank of India disallowed the proposal. Reopening of the bank was an issue in the Lok Sabha and Assembly elections, and Mr Chavan promised the over 8,00,000 depositors that they would be able to withdraw money soon.

Negative net worth

The NABARD report, apart from slamming the bank's performance, pointed to the lack of professionalism on the part of the board of directors. Annual general body meetings had not been conducted during the last four years, nor was liquidity problem as well as funds management given due attention. There is a decline in advances, deposits and recovery, coupled with a liquidity crisis. The net worth of the bank is negative. Maintenance and balancing of books was a grey area and the bank was exposed to high risks of fraud and embezzlement. The bank gave loans to cooperative sugar factories which had a negative net worth and no borrowing power. Despite overdues from other factories, a new factory was given a loan of Rs 5 crore.

NPAs at Rs. 443.77 cr

The report said non-performing assets, at Rs 443.77 crore, constituted 67.4 per cent of the bank's total loans and advances. It had been incurring losses continuously for the last five years and the accumulated losses stood at Rs 272.03 crore on March 31, 2005. There was a 42 per cent deposit erosion. There were arrears in balancing of books, default in maintenance of the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio(SLR), and an overextended position of loans and advances throughout the period covered in the inspection (between September 15, 2005 and October 4, 2005). Apart from deficient internal checks and controls, the bank defaulted on repayment of loans to the Maharashtra State Cooperative Bank (MSCB) to the tune of Rs 85.86 crore on due dates. (The loans were later repaid).

The bank was not complying with the provisions of Section 22 (3) (a) of the Banking Regulation (BR) Act (according to which a company shall be in a position to pay its present or future depositors in full as their claims accrue); and Section 22 (3) (b), which says the company's affairs shall not be conducted in a manner detrimental to depositors' interests.

The bank defaulted on maintenance of the CRR on 19 occasions over 113 days and the SLR on 12 occasions involving 220 days during the period covered by the inspection. The bank rented out its premises as shops to various vendors, again violating the BR Act, and invested in the shares of six cooperative institutions outside its area of operation and without RBI permission. The defects recorded in the previous inspection reports persisted.

The NABARD report lists a large number of violations of banking rules and regulations. Though a Rs 1.5-crore loan had been sanctioned to a society, the Sahakari Patpedhi Shikshan Vibhag Maryadit, Zilla Parishad, for provision of colour television sets to its members, no supply was made till the close of the inspection. The bank sanctioned loans for buying vehicles to 15 directors and six former directors or their close relatives at a concessional rate of interest, without adhering to prescribed norms. Four directors and three former directors have repaid the loans after some action by the bank, but six accounts are overdue.

As on March 31, 2005, the total overdues of the bank amounted to Rs 446.17 crore, mainly under crop loan (52.10 per cent) and from sugar factories (26.05 per cent). The recovery process was also very poor.