Symptomatic treatment is never the answer. Unless the underlying cause is addressed, problems keep resurfacing and that is what is happening with India’s cooperative banking industry.
The Rs 122-crore embezzlement at New India Co-operative Bank is not an isolated incident. It is yet another example of rot that runs deep.
The Enforcement Directorate, which is probing the money laundering angle, has said Rs 45 crore was siphoned off to overseas entities linked to the bank’s former chairman. The claim echoes the collapse of erstwhile Punjab and Maharashtra Co-operative (PMC) Bank in 2019, where more than Rs 4,000 crore was misappropriated through fraudulent loans to a single borrower, HDIL.
PMC Bank was later absorbed by Unity Small Finance Bank.
India’s banking landscape is littered with similar incidents. In the Karuvannur Bank scam in Kerala, already pledged loan documents were forged to draw money again by scamsters.
There are countless cases in which members of board have been part of the crime and responsible for the collapse of co-operative banks, which typically count farmers and small depositors as their customers who the struggle to lay hands on their lives savings.
All these cases expose a toxic cocktail of lax oversight, insider collusion and a regulatory system that seems perpetually one step behind the crooks.
Cooperative banks were meant to be the financial backbone for small depositors—shopkeepers, pensioners, and salaried workers who trusted these institutions with their life savings. Instead, they’ve become playgrounds of the greedy.
In the New India case, former general manager Hitesh Mehta allegedly pilfered cash from the bank for more than six years, which neither the auditors nor the Reserve Bank of India (RBI) found out.
A look at the PMC Bank’s collapse shows that the management cooked the books for years, hiding non-performing assets (NPAs) as RBI’s inspections failed to detect the scam .
These aren’t just lapses. They’re systemic failures that shatter public trust.
There is a chilling consistency — criminals, in these cases bank staff or board members or both, operate with impunity for years, and auditors as well as the regulator fail to act in time.
Cooperative banks, often run by politically connected boards, operate with minimal accountability. Insiders — chairpersons, managers, or auditors — exploit weak internal controls to funnel funds to cronies or shell companies.
In New India, more than 2,000 suspect loans and NPAs worth Rs 400 crore are now under scrutiny, hinting at a scam far larger than the initial Rs 122 crore.
PMC’s case was even more brazen, with 44 accounts linked to HDIL accounting for 73 percent of the bank’s loan portfolio, a red flag that no one noticed or chose to ignore.
Add to this, the recent Angamaly Urban Co-operative Bank fraud, where Rs 96 crore was lost to loan fraud.
Fractured regulation
The malaise runs deep.
Why does this keep happening on repeat? For one, cooperative banks fall under a dual regulatory structure, with the RBI overseeing banking operations and state registrars handling governance. This fractured system creates loopholes that fraudsters exploit.
The RBI’s inspections, often predictable and superficial, miss the intricate webs of deceit spun by insiders.
State registrars, always under political pressure, rarely enforce strict governance. The result? Banks such as New India and PMC become fiefs of those at the top.
Depositors are left in the lurch, running around for their money. When New India’s scam broke, panicked customers queued outside branches, only to face RBI-imposed withdrawal curbs.
PMC depositors went through years of uncertainty, with some losing their life savings as the bank’s collapse dragged on without resolution.
These aren’t faceless numbers. They are families whose dreams of education, healthcare, or retirement are crushed on the repeat by the greed of a few.
Band-aid doesn’t help
The RBI’s response — restrictions or merging failed banks — is a band-aid for a gunshot wound. Tougher measures such as real-time monitoring and stricter audits, are long overdue.
As the column has been saying, cooperative banks need independent, professional boards, free from political influence, and a unified regulatory framework that plugs the gaps.
Forensic audits should be routine, not reactive, to catch fraud early. And when scams do surface, culprits — bank officials or auditors — must face swift and exemplary punishment to deter others.
The New India and PMC scandals aren’t just financial crimes; they are betrayals of India’s small depositors who deserve better than to be pawns in a rigged game.
If the government and RBI don’t act decisively and treat the underlying disease, the cooperative banking sector risks becoming a graveyard of trust, burying the savings and hopes of millions. The time for half-measures is over.
(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.)
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