The Reserve Bank of India (RBI) cancelled the licence of Madhavpura Mercantile Cooperative Bank (MMCB), bringing to an end its controversy-ridden 18-year operation as a multi-state cooperative bank.

In 2001, the bank faced a run on deposits following its alleged exposure to stock broker Ketan Parekh, who had suffered huge losses in share trades. The bank had lent around Rs. 1,200 crore to Parekh and some of his associates. Losses widened and its net worth eroded sharply as borrowers refused to pay back money, causing bad loans to surge.

According to RBI directive, the bank ceased to function with effect from 4 June, and a liquidator is to be appointed. On 5 June, newspapers reported that RBI had cancelled Madhavpura’s bank licence, citing B.K.R. Maruti, chief executive officer of the bank.

As of 31 March 2011, the cooperative bank had a negative net worth of Rs.s.1,316.5 crore and gross non-performing assets of 99.99%. Gross advances stood at around Rs. 1,126.59 crore and accumulated losses at Rs. 1,357.41 crore.

Madhavpura has public deposits of around R

s.

 The bank, which started operations in 1994, was holding Rs. 800 crore of inter-bank deposits from a large number of urban cooperative banks in Gujarat and from other banks, which posed a systemic risk for the state’s co-operative banks, RBI said.

Efforts to revive the bank late last year, including a possible merger with another commercial bank, didn’t succeed.

Due to Madhavpura’s deteriorating business situation, RBI restricted its operations in 2001 and asked the Central Registrar of Co-operative Societies (CRCS) to take it over. Following this, CRCS superseded the lender’s board and appointed an administrator in March 2001.

“We tried our best to revive the bank,” Maruti said. “After the RBI directive, now we will wait for the central registrar’s directive. The board has to take a call on future actions.”

Madhavpura was in the news first in 1999-2000 when it allegedly resorted to indiscriminate lending, particularly to stock broking firms, violating norms.

According to Madhavpura lawyer Ajit Singh Jadeja, there are a few pending cases in a lower court in Ahmedabad between the bank and Parekh, including Parekh’s request for permission to go abroad for personal reasons.

The bank is also one of the parties in a case filed by the Central Bureau of Investigation, he said. These cases are likely to come up in court later this month.

Madhavpura went under in 2001 after lending money to Parekh. This had a cascading effect on at least 150 other banks that had kept deposits with Madhavpura.