Banking Central | Another co-op bank bites the dust, it's the same story all over again

Depositors outside a New India Co-operative Bank branch after the RBI superseded its board over governance concerns.

The Reserve Bank of India (RBI) on February 14 superseded the board of Mumbai-based New India Co-operative Bank over “material concerns emanating from poor governance standards observed in the bank”. The episode is a stark reminder of the chronic governance failures plaguing India's co-operative banking sector. The banking regulator’s intervention may have averted a larger catastrophe but the systemic rot runs deep.

The RBI appointed Shreekant, a former chief general manager of the State Bank of India (SBI), as the “administrator” to manage the affected lender's affairs. He will be assisted by a “committee of advisers” whose members are Ravindra Sapra, a former general manager with SBI, and chartered accountant Abhijeet Deshmukh.

The goings-on at New India Co-operative Bank are a symptom of a larger industry issue. Here is the broader picture:

How is the health of the co-operative banking in India?

The numbers tell a paradoxical tale. According to NABARD’s latest report, gross non-performing assets (NPAs) have seen a marginal improvement. In FY23, state cooperative banks’ NPAs eased to 5.4 percent and district cooperative banks to 9.6 percent. Co-operative bank industry data comes with a lag of a year.

Profitability metrics have improved, too, and capital adequacy ratios have inched upward. On paper, things look better but the spate of bank failures tell a different picture.

In the past four years, the RBI has cancelled permits of around 43 co-operative banks, with about 15 cancellations in 2024 alone. The distress caused by these shutdowns has been immense, with thousands of depositors left stranded.

While deposit insurance of up to Rs 5 lakh provides some relief, those with larger deposits face an uncertain, often endless, wait to reclaim their savings.

What is the fix?

Governance remains the biggest issue. Co-operative banks, rooted in a community-driven model, often fall prey to political interference, weak oversight, and outdated operational practices. Board appointments are frequently based on political affiliations rather than financial expertise. This compromises decision-making, fosters cronyism, and leaves these institutions vulnerable to mismanagement and fraud.

Take New India Co-operative Bank. Alleged fund misappropriation of Rs 122 crore by top officials has exposed glaring lapses in internal controls.

The RBI’s decision to appoint an administrator and bar the bank from accepting deposits or issuing loans underscores the gravity of the situation.

The solution, however, is not to write off co-operative banks. These institutions remain vital for grassroots-level financial inclusion, especially in rural and semi-urban India. The way forward is structural reforms.

Leadership must be professionalised, with expertise, and not political connections, as the criteria for picking board members.

Supervision should be strengthened with real-time monitoring mechanisms that leverage technology to pre-empt crises. Governance norms need a complete overhaul, with the RBI enforcing stricter standards and ensuring real consequences for lapses.

Finally, there is also the need to enhance public awareness, educating depositors about potential risks and the limitations of deposit insurance.

Over the past few years, we have seen many co-operative banks, including the PMC Bank and Kerala-based Karuvannur Bank, go under. All of them have one common thread — poor governance that paved the way for political corruption.

Without urgent, systemic reforms, co-operative banks risk becoming symbols of shattered trust rather than pillars of financial inclusion. The question remains: how many more failures before we act decisively? The New India Co-operative Bank debacle is another wake-up call.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)