The anatomy of a co op bank scam

Thrissur: In the quaint town of Thrissur, Kerala, where the rustle of paddy leaves and the scent of spices hang in the air, the Karuvannur Service Cooperative Bank stood as a symbol of trust and financial stability. Until recently, that is. Little did its unsuspecting depositors know that within the walls of this revered institution, a sinister plot was unravelling, revealing a scam that would send shockwaves through the town and expose the vulnerabilities of the cooperative banking system.

Sailakshmi, a middle aged woman with dreams of having a small printing press for her Gulf returnee husband, was one of those depositors. In 2016, Sailakshmi found herself rejected by nationalized banks when she sought a loan. She turned to the Karuvannur Bank. With a century old legacy, the cooperative bank was a friendly haven for the financially marginalized.

The bank, however, denied Sailakshmi the loan but kept her property documents and did not return them even after she made repeated requests. Sailakshmi’s nightmare began in 2018, when she received a notice claiming she owed 50 lakh to the very bank that turned her away. It was a clerical error, officials of the bank claimed.

However, the truth emerged when she got a copy of the property’s encumbrance certificate, which establishes if the title is free, from the local village office. Sailakshmi discovered her property had been leveraged for illicit loans, siphoning off 3 crore to unknown entities. And so began her five year odyssey for justice, grappling with threats, scepticism, and societal apathy.

Between 2019 and 2021, Sailakshmi found herself to be a lone voice in a sea of disbelief. Nobody believed her story, with her own relatives saying it was impossible. She held a press conference in 2019, only to find journalists asking if she took them for idiots. No case was recorded at the police station and the cops even warned her not to complain about the bank again.

She searched the internet for higher authorities and visited the regional assistant registrar, who oversees cooperative banks in the district. But an officer there told her not to slander Karuvannur “because it’s the best bank in the district". Sailakshmi also knocked on the doors of the cooperative bank vigilance wing, but officials there said they couldn’t act without a police case.

She then contacted the state police vigilance unit, which said it couldn’t act without an FIR. Finally, she complained to the state’s Registrar of Cooperative Societies, which oversees cooperatives, in 2019. The Department of Cooperation came out with a damning report in 2020, which confirmed most of the allegations made by several complainants, including Sailakshmi and M.V.

Suresh, a unit extension manager at the bank, who became a whistleblower. But the report did not lead to concrete punitive actions. Suresh was dismissed from service in August 2020 as part of a disciplinary action by the bank. In 2021, the loan scam was reported in regional newspapers, leading to massive protests in Thrissur.

The Crime Branch, which falls under the state government, launched an investigation under sections 406 (criminal breach of trust), 420 (cheating), 409 (criminal breach of trust by a banker), 465 (forgery), 34 (crime done by several persons with a common intention) of the Indian Penal Code. But the probe moved at a snail’s pace.

The Enforcement Directorate (ED) finally opened an investigation in 2021 under the Prevention of Money Laundering Act. The central agency, responsible for enforcing economic laws and fighting economic crime in India, carried out raids and attached the assets of some of the accused in 2022. “Karuvannur is not simply a bank," said Suresh, the whistleblower.

“Most cooperative institutions in the country also act as a financial and societal outreach organ of a political party. Karuvannur, for decades now, has been controlled by members of the communist parties. Putting up a fight against the party is a risky business," he said. He was a staunch supporter of the Communist Party of India (CPM) until the bank’s murky dealings drove him away.

He discreetly notified investigators. While Suresh lost his job, he found political protection—he is now a leader in the Bharatiya Janata Party (BJP), which is looking to get a foothold in Kerala. Sailakshmi agrees that challenging a huge institution is difficult. Her life revolved around travel for courtroom appearances, which prevented her from working.

She had to pledge her gold to fund the case. “Many people cautioned me about the bank’s communist party ties. Some said they will kill you," said Sailakshmi. “One day, when it was heavily raining, I was coming home on my scooter. A brown Innova hit my scooter’s grip and drove away. This may be paranoia, but I fear going out alone." Several people offered to settle the matter, she said.

But she declined. “I received a call while in the Kerala High Court. The caller asked me to settle. He stated this matter involves black money and requested me to wait until they could turn it into white money to settle. I said I don’t care if your money is white, black, red, or rose. I want my property back," said Sailakshmi.

The bank and E.P. Jayarajan, convenor of the Left Democratic Front (LDF), the ruling coalition in Kerala, didn’t respond to questions from Mint. Local CPM leaders didn’t respond either. Web of deceit The ED’s chargesheet, filed in November last year, ran into more than 10,000 pages. At the heart of the scandal was Satheesh Kumar, a realtor with no banking background but allegedly the mastermind behind illegal loans worth 100 crore across 14 cooperative banks, according to the ED chargesheet.

His modus operandi, revealed through victim testimonies, showcased a pattern of preying on vulnerable individuals seeking financial assistance. Overall, the ED pegs the scam at 343 crore. According to Anil Akkara, a politician from the Indian National Congress party in Thrissur, one of the people who exposed the scam, people would queue for hours in front of Kumar’s house to have him take over their bad debts for a commission.

Akkara claimed Kumar used illicit loans and black money from ruling party politicians to fund his operation. Kumar is currently in the ED’s custody. Mint could not immediately get a comment from his lawyer. Nursing assistant Sindhu A.C., one of Kumar’s victims, explained his modus operandi. Sindhu borrowed 18 lakh from Thrissur District Cooperative Bank in 2014.

She intended to build a medical student hostel with that money. But after a tragic accident, she remained bedridden for two years. After losing her job, she worried about defaulting on the debt. This was when her family met Kumar, through a friend. In two weeks, Kumar claimed to have paid 25.5 lakh to close her loan.

He demanded the family open another loan at a different branch of the same bank the next month to cover his commission. This branch disbursed the loan in cash over the counter. Kumar, who had shown up with two bodyguards, snatched the money even before the family could count it. To their surprise, the family later learned that their new loan was for 35 lakh.

When they complained to Kumar that they could not repay such a huge loan, he said he would arrange a buyer for a piece of land she owned. Later, the family also learned that Kumar had paid a much smaller amount than he claimed to close the earlier loan, according to Sindhu. “The loan dues have crossed 70 lakh and the bank has initiated recovery procedures.

We have no clue what to do," she said when this writer met her last month. Akkara claims Kumar is behind some 150 similar problematic loans. The scam’s repercussions extend beyond political and financial ruin. Depositors, once confident in the cooperative bank’s embrace, found themselves scrambling to salvage what remained.

Sasi Kolangad, a differently abled man, died after being denied his deposits for emergency hospital expenses. Philomina, an elderly woman, succumbed to deteriorating health as her funds were locked in the bank. The tragic tale of T. M. Mukundan, a local politician, who committed suicide because of a fraudulent loan, also echoed the human cost of the betrayal.

In 2022, the Registrar of Cooperative Societies limited withdrawals from the scam hit bank to 10,000 in four months, which hit depositors, particularly those whose retirement savings were with these banks. In October 2023, the withdrawal limits were partially loosened, allowing savings account holders to withdraw up to 50,000 and fixed deposit holders to withdraw up to 1 lakh.

Same old story The Karuvannur scam has once again brought to the fore the fragile balance between trust and betrayal in cooperative banking. But why do cooperative bank scams seem immune to the law until it is too late? When Punjab and Maharashtra Co operative Bank (PMC) folded in 2019, it was feared that around a million people would lose their money; it sparked a heated debate about cooperative bank regulation.

Unity Small Finance Bank took over PMC in 2022 and offered a one time settlement option against all future payables for customers who maintained deposits worth up to 15 lakh. Several more scams have been unearthed since. The Guru Raghavendra Cooperative Bank’s management allegedly stole 2,500 crore in Karnataka—the state government turned that case over to the Central Bureau of Investigation (CBI) in December 2023.

The Maharashtra State Cooperative (MSC) Bank allegedly committed 25,000 crore in irregularities at the urging of its leadership and politicians, and in December, a Special Court summoned 11 corporators, ex MLAs, and ministers. The banks have denied any wrongdoing. According to the Reserve Bank of India (RBI), India had 1,502 urban co operative banks as of March 2023.

Historically, these banks have been strong in Gujarat, Maharashtra, Kerala, Karnataka, Andhra Pradesh and Tamil Nadu, where cooperative societies and banking in general have been active for a long time. Cooperative banks are particularly popular in Kerala. For instance, Kerala Bank, an entity created by the merger of 13 district co operative banks in the state, has a deposit base of 69,271.70 crore and a network of 995 branches.

Cooperative banks impact people’s lives in a huge manner, said M.S. Sriram, a professor at IIM Bengaluru, who has studied the sector extensively. Not only do they play an important role in banking the unbanked, but because of their decentralized nature, a lot of positive value is also created in customizing products to neighbourhoods.

Even the names of some banks demonstrate this, Sriram noted. “Bengaluru has a hotel workers cooperative bank, mostly for workers of small eating joints. Andhra Pradesh has an Andhra Bank Employees Cooperative Bank, whose depositors are mostly bank employees of Andhra Bank." Why do they fail? The recipe is sometimes baked into the design itself, said Sriram.

Traditional banks typically prevent board members from borrowing from the same bank. But cooperative banks are owned by their users, who are also borrowers. This unique structure raises potential conflicts, he said. Regulatory challenges are compounded by the small size, scattered nature and the lack of a unified brand and policy for cooperative banks, he added.

Sriram said that regulatory oversight of smaller institutions may not match the level required for effective financial monitoring. Additionally, he underscored the quality of software used by cooperative banks, emphasizing that due to budget constraints, they often opt for less sophisticated systems, leaving them vulnerable to oversight lapses and potential scams.

Regulatory action by the RBI is causing regular delicensing and the shrinkage or compulsory amalgamation of a lot of cooperatives, he said. But is this enough? He thinks the establishment of a cooperative federation may be a solution. “Let the federation have an audit, and also negotiate for common, standardized software, standardized bookkeeping systems, and so on," he said.

“If the data is linked to a central database, using artificial intelligence and pattern recognition, you could actually do remote supervision as well." Trusted too much Before the scandal, the Karuvannur Cooperative Bank stood as a beacon of success in Kerala’s cooperative sector. However, its deposits plummeted from 402 crore in 2019 to 282 crore in 2022, the latest year for which the data is available.

Many people avoided making deposits fearing the bank’s collapse. Depositors not just in Thrissur, one of India’s most banked cities, but across Kerala are thronging to cooperative banks to withdraw their deposits and relocate them to nationalized banks for safety, say bankers. According to the State Level Bankers’ Committee, an apex inter institutional forum of banks, cooperatives and public sector banks’ deposits fell marginally, by 1.02%, year on year to 69,271 crore in 2023, while private sector and small finance banks recorded double digit growth.

Peelipose Thomas, a CPM supporter, former planning board member and a cooperative banking veteran, said that while he believes the BJP is using the ED to undermine Kerala’s cooperative system, “the incident has shaken many people’s trust in cooperative banks". The cooperative credit structure of Kerala did not grow by mobilizing huge deposits but through small contributions, Thomas said.

“During 1975 76, there was a mass movement for mobilization of cooperative deposits. Back then, the practice was to mobilize small deposits of 1,000, 5,000, maximum 10,000. It is through such mobilization, conducted on a door to door basis by public activists, regardless of political affiliation, that the cooperative credit structure in Kerala grew to what it is today," he said.

These banks have a unique selling point, he added. “It is a banking system dependent on trust. In Kerala, in the event of a death or major illness, you can visit your neighbourhood cooperative bank chairman for a 35,000 50,000 loan. No application form is needed; it can be done tomorrow. No lender other than a cooperative bank can be relied on like this," Thomas said.

“The BJP wants to reduce the LDF’s political power in the state by weakening cooperative societies. Unfortunately, they are highlighting the right concerns. In Karuvannur’s case, the negligence of the bank’s leadership, and the absence of effective regulation, is very evident," he added.

After the scam broke, a damning report by the Registrar of Cooperative Banks in 2022, pointing to corruption and malpractices within the bank, came to light. However, the report was ignored by the cooperative department, which is run by the state government. The ED probe then exposed a labyrinthine web of illegal loans, black money transactions, and political connivance, leading to four arrests.

The scam involves influential figures such as private financiers and real estate players, besides local political leaders. ED officials refused to speak to Mint for this story, but a section of the chargesheet says: “On the instructions of certain persons, who were district level leaders and committee members of certain political party and governed the bank, loans were disbursed by the bank manager through the agent in cash to non member benamis by mortgaging properties of poor members without their knowledge and laundered to the benefit of the accused." In December, former bank officials Biju M.

Karim and Sunil Kumar T. R. expressed their willingness to turn approvers, shedding light on the political nexus that shielded the perpetrators. The ED implicated the local CPM leadership in the scam, sparking a political maelstrom. For the opposition, which has been aiming to diminish the political influence of the LDF in the state, the scam has become a big issue ahead of the Lok Sabha polls in 2024.

In a bid to restore confidence, the state government urged cooperative societies to temporarily deposit funds in the beleaguered Karuvannur Bank. Efforts to devise a revival package for cooperative banks are also underway. While her efforts have exposed the seamy underbelly of the Karuvannur cooperative bank, Sailakshmi is yet to regain possession of her property documents.

The ED took a trove of files from the bank’s office to pursue its investigation, including her papers. Sailakshmi filed an appeal in the court to have her files released but it was rejected as the ED argued that the case is ongoing. And so, her ordeal continues, as do the travails of others done in by the scamsters..