Karuvannur Service Co-operative Bank scam | Depositors in dire straits

A multi-crore loan scam at Karuvannur Service Cooperative Bank in Kerala’s Thrissur district, has pushed the cooperative sector into a trust deficit. This may have a ripple effect on other institutions working with community-owned and controlled assets, finds Mini Muringatheri

October 19, 2023 08:42 pm | Updated February 08, 2024 04:05 pm IST

The multi-crore loan scam of the Karuvannur Service Cooperative Bank has rocked the entire cooperative sector in Kerala.

The multi-crore loan scam of the Karuvannur Service Cooperative Bank has rocked the entire cooperative sector in Kerala. | Photo Credit: K.K. Najeeb

Sindhu A.V. of Manithara village in Kerala’s Avanoor panchayat, a nursing assistant in a private hospital, took a loan of ₹18 lakh from the Mundur branch of the Thrissur District Cooperative Bank sometime in 2014. She wanted to build a paying guest facility for medical students in her small plot near Thrissur Government Medical College Hospital. A 32-cent plot with a 2,000-sq-ft house in the name of her mother and sister was pledged as collateral.

In a freak accident, a concrete plank fell on her head, leaving her bedridden for more than two years. She lost her job and construction was disrupted. Sindhu started defaulting on the loan repayment, the EMI of which was about ₹29,000. “Debt started mounting. I thought of selling the property to close the loan. Then came demonetisation as a thunderbolt.”

In 2017, her husband’s friend introduced Sindhu to a private financier P. Satheesh Kumar, who allegedly promised to take over the loan and help find a new loan. She agreed, thinking that she could escape the mounting interest of the existing loan.

“In two weeks, Satheesh Kumar claimed to have closed the loan at Mundur branch paying ₹25.5 lakh. But later I realised that he had to pay only ₹19.5 lakh.” Satheesh Kumar allegedly charged an excessive 10% interest a month for the money he shelled out for her.

Shortly after a month, he arranged a new loan for Sindhu from the Thrissur District Cooperative Bank’s Medical College evening branch at Peringandoor. To her shock, Sindhu realised that a loan of ₹35 lakh was sanctioned for her. The money was handed over in cash, she said. She told the bank officials that she did not need such a big amount, as she might not be able to repay it.

“While I was speaking to the bank staff, Satheesh Kumar came with two well-built men, looking like his bodyguards. In a split second, he snatched the packet with all the money from my hand. Even before I could realise what was happening, he left the bank in his car. I was numbed. Later, when I called him, he said he would arrange a buyer for my property if I could not repay the loan,” she says. “Now the loan amount has mounted to ₹70 lakh and the bank is threatening us with revenue recovery procedures.”

The kingpin

On September 4, 2023 the Enforcement Directorate arrested Satheesh Kumar as the key accused in a multi-crore loan scam of the Karuvannur Service Cooperative Bank, which rocked the entire cooperative sector in Kerala. He had allegedly siphoned off illegal loans worth ₹14 crore from the bank. It was the first arrest by the ED under the Prevention of Money Laundering Act, 2002 in connection with the Karuvannur scam.

After his arrest, Sindhu, who had already lodged a complaint with the Medical College police against Satheesh Kumar, approached the ED against the cooperative bank’s Medical College evening branch at Peringadoor accusing it of colluding with Satheesh Kumar to rob her of ₹35 lakh.

Satheesh Kumar’s arrest blew the cover off the multi-crore ‘loan takeover’ scam. On the same day, the ED arrested P.P. Kiran, a real estate player, who allegedly received 51 loans worth ₹24.56 crore illegally by remortgaging property pledged by other people without their knowledge in the Karuvannur bank. According to the ED, 90 borrowers owe illegal loans worth ₹343 crore to the Karuvannur bank.

Former Congress MLA Anil Akkara, who is helping victims with lawyers and other legalities, alleges that Satheesh Kumar has taken at least 150 bad loans from 14 cooperative banks in the district. “In the name of loan takeover, he was robbing the poor customers of the cooperative banks,” he says.

Karuvannur scam

Started as an agricultural society in 1921 at Porathissery village, Karuvannur Service Cooperative Bank has been led by the Communist Party of India (Marxist) for the last four decades.

The bank, which was once among the most profitable cooperative banks in the district, now has a depositor base of 23,648 people and a deposit of ₹282 crore, down from about ₹500 crore before the scam. Its current loan outgo is ₹514 crore.

The embezzlement at the bank came into light between 2017 and 2018 when many people, who had taken loans from the bank by pledging property, started receiving notices that warned of revenue recovery if they failed to pay the outstanding dues. But most of them were prompt in payment of loans. They registered complaints with the bank and the police. The subsequent investigation revealed the fraud, which had no parallel in the cooperative sector.

A team of auditors found misappropriation of ₹300 crore in the bank. The bank’s software had been tampered with to approve loans without collateral documents. Interest rates of deposits were manipulated. Documents and transactions were forged with fake signatures to deceive depositors and authorities. There were many benami transactions. Remortgaging of properties, without the knowledge of the owners, was rampant.

The scam was blown to multiple proportions in July 2021 with the suicide of T.M. Mukundan, 63, former grama panchayat member of Porathissery. He was asked to repay a loan of ₹50 lakh by the bank, which he had never taken. It is alleged that somebody had remortgaged his property, which was pledged at the bank for a small amount. The threat of revenue recovery forced him to take the extreme step, says the family.

The Crime Branch took over the investigation from the local police in July, 2021. This is still under progress.

After the ED started investigation under the Prevention of Money Laundering Act into the scam, it found ₹200 crore worth of benami properties and highlighted mismanagement of the bank’s functioning.

Troubles started mounting for the CPI(M) when the ED conducted raids on the residence and office of A.C. Moideen, an MLA, former minister, and an influential leader of the party. The ED alleged that benami loans had been disbursed at Karuvannur bank at the behest of Moideen. It also questioned vice president of Kerala Bank M.K. Kannan and arrested Wadakkanchery municipal councillor P.R. Aravindakshan, often seen in public with Moideen. C.K. Jilse, former senior accountant of the bank, was also arrested.

The ED raids extended to two other major banks in Thrissur district: Ayyanthole Service Cooperative Bank and Thrissur Service Cooperative Bank. Rubber Cooperative Ltd (Rubco) Managing Director Haridasan Nambiar and Register of the Cooperative Societies T.V. Subhash were among those who were summoned by the ED.

Credibility hit

The multi-crore loan embezzlement at the Karuvannur Service Cooperative Bank has opened a Pandora’s box in the cooperative sector, the most vibrant people-driven movement in Kerala.

The cooperative sector, the backbone of the rural economy, has played a significant role in the financial stability of people. With its flexibility in providing financial support — whether for agriculture, business, or education — and appealing interest rates for deposits (1-2% higher than RBI-regulated banks), cooperative societies acted as the banks next door for Keralites.

But baffled by scams and controversies, the State’s cooperative sector at present suffers a major trust deficit. The sense of uncertainty has prompted many customers to shift their loyalty to other banks. Depositors feel cheated due to severe restrictions imposed on cash withdrawal.

Customers in a quandary

Sasi Kolangad, 53, of Theleppally allegedly had a deposit of ₹14 lakh in Karuvannur Service Cooperative Bank. Differently-abled Kolangad deposited the money he got after selling his family property seven years ago to make his future safe, says his sister Mini Raju. He suffered a brain haemorrhage on the night of August 22. He was rushed to a private hospital in Thrissur where he underwent an emergency surgery. The hospital bills crossed ₹5 lakh. Raju ran to the Karuvannur bank to withdraw money, but was given only ₹50,000.

“They said there was no money in the bank. After submitting repeated requests along with hospital bills, the bank gave a total of ₹1.90 lakh in many instalments. Unable to bear the shooting hospital expenses, we shifted my brother to a palliative care hospital,” she says. Kolangad died there on September 30. He was one of the many victims of the scam.

Another was Philomina, 70, wife of Devassy of Karalam, who died on July 28, 2022 without getting money from the bank for proper treatment. Devassy, who worked in Mumbai, and Philomina, a retired government nurse, deposited ₹30 lakh, their life savings, in the Karuvannur bank. Despite several requests, the bank did not release money when Philomina fell ill, Devassy alleged. He staged a protest in front of the bank with Philomina’s body. He still believes if the bank had dispersed money on time, his wife would have survived.

Trouble for CPI(M)

Even as the cooperative sector struggles to get out of the financial conundrum triggered by the Karuvannur scam, the ED is tightening its noose over the CPI(M), which leads governing bodies of majority of cooperative societies in the State. The agency’s statement that the parliamentary committee of the CPI(M) in Thrissur has maintained a separate minutes for the loans sanctioned from the Karuvannur bank has put the party in a tricky situation. The ED alleged that illegal loans were sanctioned on the directive of high-profile leaders of the CPI(M).

Many former governing body members of the bank allege they have been made scapegoats. V.K. Sugathan, a security guard by profession and a  Communist Party of India member, lives in a rented house. But the former governing board member of the Karuvannur bank had to pay ₹10.5 crore as per an order to recover ₹125 crore from the board members.

“We have been made scapegoats to protect top leaders in the scam,” he says. Sugathan stresses that no loan above the amount of ₹5 lakh was passed with his knowledge. The Crime Branch arrested him and sent him to jail for 77 days.

The CPI(M) alleges this is all the Centre’s political ploy to ruin the credibility of the State’s cooperative sector. Chief Minister Pinarayi Vijayan, who blamed the ED for magnifying the Karuvannur scam to destabilise the cooperative sector, pledged to protect each penny of the depositors.

“By spreading rumours about exaggerated losses and creating a smokescreen of uncertainty, the ED is trying to wean the depositors away from cooperative banks. It is an attempt to shatter the credibility of the sector in Kerala,” the Chief Minister alleged. Moideen says the ED is on an election campaign for the Bharatiya Janata Party ahead of the Lok Sabha poll.

The State government also suspects the Centre’s move to pave the way for the multi-State cooperatives into the State. In an effort to minimise the damage, the government has announced a relief package of ₹50 crore for Karuvannur. “The cooperative banking sector in the State has a share of 40% in the banking business with a base of over ₹2.5 lakh crore. The Centre is eyeing this business,” Minister for Cooperation V.N. Vasavan says.

However, the CPI(M) found their leaders differ in their opinions on the way the party handled the scam. Senior leader and former Minister G. Sudhakaran, who put the Left Democratic Front government on the defensive, criticised the party and the government for the way it handled the scam.

Former Finance Minister T.M. Thomas Isaac in his recent statement said the current episode of events was an opportunity to clean up the banking sector.

A lack of a proper auditing mechanism and absence of transparency in functioning of cooperatives, controlled by local politicians, have been alleged as major reasons for the crisis. More than the loan arrears and threat of investors to withdraw deposits, the cooperative sector is struggling to regain the people’s trust.

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