Thiruvananthapuram: More than Rs 1,582 crore worth of financial irregularities have been unearthed in Kerala’s co-operative banking sector between 2015 and 2025, govt data shows. The findings expose deep governance failures in an institutional network that handles the savings and credit needs of millions.At the centre of this crisis is the Karuvannur Service Co-operative Bank, where irregularities worth Rs 125.83 crore were detected, a scandal that triggered statewide outrage and intensified demands for deeper scrutiny of the co-operative sector. The Karuvannur episode, involving inflated collateral values, dubious loans and internal collusion, became a tipping point that forced the govt to address long-suspected structural weaknesses in co-operative lending and oversight.In response, the govt appointed a high-level committee to examine the irregularities and recommend systemic safeguards. The panel’s report presents a bleak picture of how procedural lapses, lack of professional expertise and regulatory complacency enabled large-scale fraud, not just in Karuvannur, but potentially across the co-operative credit system. The committee flagged serious failures in loan processing, particularly in collateral valuation and appraisal, which allowed vested interests to siphon off funds by inflating property values. Warning that similar frauds could recur elsewhere, it recommended mandatory inclusion of professional directors in all loan-issuing co-operatives under Section 28(1G) of the Co-operative Societies Act.For loans exceeding Rs 10 lakh, the panel proposed a stricter regime, including mandatory project reports, construction plans and cost estimates where applicable. Such proposals should be examined by a committee comprising professional directors and the bank secretary, with loan disbursal linked to verified project milestones through binding circulars issued by the registrar.Property valuation emerged as a major concern. To curb inflated assessments, the committee recommended a state-level panel of qualified valuers, with collateral for loans above Rs 10 lakh accepted only on the basis of certificates issued by empanelled professionals.Audit practices also came under criticism. While audits are conducted regularly, weak follow-up has reduced their effectiveness. The report called for deficiencies to be clearly recorded, reviewed by managing committees and rectified through compliance reports, with taluk-level assistant registrars made responsible for enforcement.The committee also highlighted irregularities in Monthly Deposit Scheme (MDS) transactions due to the absence of uniform rules, recommending standardised conditions and accounting practices. It further warned about possible manipulation of digital records and called for uniform software across primary societies, stronger security protocols and mandatory staff rotation every two years from sensitive posts.“When deficiencies flagged by auditors are not acted upon at the right stage, irregularities often reach a point where recovery becomes impossible,” an official from the office of the registrar of co-operative societies said.The committee also highlighted irregularities in monthly deposit scheme transactions due to the absence of uniform rules, recommending standardised conditions and accounting practices. It further warned about possible manipulation of digital records and called for uniform software across primary societies, stronger security protocols and mandatory staff rotation every two years from sensitive posts.The report also noted that the Kerala Co-operative Risk Fund Scheme, 2008, provides no compensation to depositors affected by fraud or financial irregularities, leaving victims of scandals like Karuvannur without any safety net.The broader vulnerability of the sector is evident. Kerala has 15,808 co-operatives, of which 12,645 report an annual turnover below Rs 5 crore. Only three have turnovers above Rs 1,000 crore, while just 19 fall in the Rs 500–1,000 crore range, leaving a vast base of financially fragile institutions.As of March 31, 2023, 3,466 co-operatives were dormant and 645 were under liquidation—outcomes the study says could often have been avoided with timely intervention. Between 2008 and Sept 2024, only 713 complaints were handled by the co-operative vigilance wing, an average of 44 cases a year, a figure officials say is disproportionately low for a sector of this size and financial scale.
