The Reserve Bank of India governor, Bimal Jalan, is slated to meet the Gujarat chief minister, Narendra Modi, on February 21 on the contentious co-operative bank issue that has rocked the state.

The meeting gains importance in light of the turmoil the co-operative banking sector is facing in Gujarat. Depositors have lost faith in the state co-operative banks since the collapse of Madhavpura Mercantile Cooperative Bank in March 2001.

This was the result of the pay order scandal triggered by stock broker Ketan Parekh, which also saw many other co-operative banks collapsing.

While Gujarat is formulating a new co-operative policy to help the co-operative banking sector survive the loss of depositors' confidence, it has sought the RBI's clearance.

Co-operative banks fall under the jurisdiction of the central bank as well as the respective state governments. It might be recalled that while the RBI wishes to get out of governing co-operative banks, the latter having been pressing for sole governance by the central bank.

According to latest reports, the state co-operative banks in Gujarat have lost Rs 1,550 crore (Rs 15 billion) as 700,000 depositors withdrew their funds since the MMCB scam broke out. This followed MMCB losing about Rs 1,200 crore (Rs 12 billion) in the scandal, which resulted in a cascading effect on many small banks that had deposits with MMCB.

Reportedly, deposits of over Rs 2,500 crore (Rs 15 billion) have been eroded in the last six months, and this slump in deposits has not been stopped. The 358 urban co-operative banks in Gujarat with 116 lakh (11.6 million) depositors and deposits of over Rs 17,791 crore (Rs 177.91 bilion) on March 31, 2001, dropped by over Rs 10,000 crore (Rs 100 billion) within one year after the MMCB scam.

The central bank closed down more than a handful of co-operative banks including Laxmi Co-operative Bank, Charotar Nagarik Co-operative Bank and General Cooperative Bank. A host of others were affected such as the Visnagar Co-operative Bank, Diamond Jubilee and Suryapur Co-operative Banks of south Gujarat.