Crisis-ridden cooperative banks continue to face RBI’s ire, 8 lose license in FY23

The banks whose permits were cancelled by the RBI in FY 2023 were Mudhol Cooperative Bank, Millath Cooperative Bank, Shri Anand Cooperative Bank, Rupee Cooperative Bank, Deccan Urban Cooperative Bank, Laxmi Cooperative Bank, Seva Vikas Cooperative Bank and Babaji Date Mahila Urban Bank.

Reasons for cancellation varied from inadequate capital to failure to comply with legal regulations under the Banking Regulation Act and lack of earning prospects in the future.

Also read: RBI cancels licences of 12 cooperative banks in 2022; will 2023 be a better year?

The regulator has been keeping a watchful eye on the cooperative banking sector for many years. In 2022, the central bank cancelled the license of 12 banks. A year before that, in 2021, RBI cancelled the license of three banks. In 2020, two cooperative banks were told to shut shop.

Monetary penalties

RBI imposed monetary penalties citing violations in several cases with the amount ranging from Rs 50,000 to Rs 5 lakh. These banks have been charged with a range of offences from not paying interest on balance amounts lying in current accounts of deceased individual depositors to violation of Know Your Customer (KYC) norms, entering One Time Settlements without prior written permission of RBI and violation of other banking norms.

Generally, before a cooperative bank is told to shut shop, the central bank gives them warnings through multiple penalties. But in cases where the regulator sees the bank has been repetitive in violating a regulation, it is given a suspension.

“When the regulator penalizes a bank, it is doing so with a motive of highlighting the issues in the operations of the bank as cooperative banks can have a large impact as they are spread across the country. serving in almost every state,” said Mudit Verma, director of the National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB).

Also read: The last frontier for financial sector reforms: Cooperative Banks

What happens after license cancellation?

Once the central bank revokes the permit, the cooperative bank has to immediately stop taking fresh business from the declared date and initiate a winding-up process including returning depositors’ money. Bank deposits under Rs 5 lakh are covered under the deposit insurance cover.

Simultaneously, the bank follows the process of communicating the details of its case to the central or state registrar, who later appoints an administrator or a liquidator to oversee the winding-up process.

A senior management executive of a cooperative bank, who did not wish to be named, explained that the banks also have to work on transferring existing advances to some other bank.

“The cooperative bank transfers the existing advances (loans) account to some other bank which then manages the account and the assets. A due diligence process is followed in this transfer of accounts by the bank which absorbs these accounts,” the executive said.

Governance issues

But why is the regulator clamping down on cooperative banks in such a big way?

Because cooperative banks tend to suffer corporate governance issues and dual regulation by RBI and the state government, the central bank has been tightening its grip on these banks. There exists a lack of clarity between the RBI and the government on who oversees them. This confusion has contributed to the present plight of the cooperative banking industry.

Also read: Over 100 RBI directives on co-operative banks so far in 2021, three licences cancelled; how deep is the mess?

Alongside dual regulation, a trust deficit with customers, most of whom belong to the middle class, is developing against cooperative banks. The trigger was the collapse of the Punjab Maharashtra Cooperative Bank (PMC) in 2019.

The performers

There are examples, too, experts said, of cooperative banks performing well.

Take the example of Saraswat Cooperative Bank.

The over-century-old institution has assets under management (AUM) of over Rs 75,000 crore, bigger than some Small Finance Banks (SFBs).

In 2021, Shivalik Mercantile Cooperative Bank became India's first urban cooperative bank (UCB) to transition to an SFB after it procured a commercial banking license from RBI.

Going ahead, cooperative banks have the opportunity to work in competition with SFBs and improve their operations.

“In India, which is an underfinanced country, the cooperative banks still have a big role to play in facilitating financial inclusion, especially in rural and semi-rural areas,” said Nandkishor Desai, a retired banker.

Verma said that if the regulator wants to bring change in the cooperative banking space, it needs to look in-depth for the answers.

“The regulator can send more manual support to help cooperative banks advance in operations and other services,” Verma said.