Thiruvananthapuram, Kerala: The Kerala government has assessed the financial condition of cooperative banks and societies facing a crisis in the state.

As many as 441 cooperative banks are reportedly facing difficulties in fully returning deposits. The government is considering a mega bailout package to financially strengthen these banks while protecting depositors. A draft framework for the package has been prepared.

The financial irregularities at the Karuvannur Cooperative Bank and the crisis that followed have affected the credibility of the cooperative sector. Similar problems of banks and societies being unable to return deposits have emerged in several districts. Until now, the Cooperative Department had not undertaken a comprehensive assessment of the financial health of primary cooperative banks. Instead, interventions were largely limited to treating the problems as isolated incidents.

During the previous government’s tenure in Idukki, and soon after the UDF government assumed office, a suicide was reported in Vadakara following difficulties in recovering deposits.

A cooperative bank's own funds comprise its share capital and the reserve fund set aside from profits. When profits disappear and losses exceed the bank's own funds, the institution begins to experience deposit erosion. The greater the losses beyond its own funds, the more money has to be drawn from deposits. This can eventually leave the bank unable to fully repay depositors.

The Cooperative Registrar has also issued a circular directing cooperative societies not to use depositors' money to pay employees' salaries.

The government’s position is that if financial irregularities or nepotism have occurred, steps must be taken to recover the losses from those responsible. Measures to address other issues are also likely to be included in the bailout package.

There are differences of opinion over providing fresh financial assistance to banks where the same management committees responsible for the failures continue to remain in charge. The Cooperative Department has not yet taken a decision on the demand that such management committees should first be replaced before financial assistance is provided.

The government is expected to announce the package after a decision is taken on the issue of replacing the management committees.