The current turmoil at New India Cooperative Bank has sent shock waves through India’s banking community, especially affecting many rural and semi-urban depositors who rely on cooperative banks. In recent developments, the Reserve Bank of India (RBI) has stepped in with strict measures aimed at stabilizing the bank’s operations. These actions have raised serious questions about governance and financial management in many such institutions.
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What Really Happened – ‘The New India Cooperative Bank’ Crisis?
The crisis began when the RBI imposed stringent restrictions on New India Cooperative Bank, a well-known institution headquartered in Mumbai. The regulator did not allow depositors to withdraw money without obtaining prior approval. In addition, the bank was stopped from issuing new loans, making investments, disbursing payments, or accepting fresh deposits, unless specific conditions were met. With around 1.3 lakh accounts holding a total of roughly Rs. 2,436 crore, these sudden restrictions have undoubtedly caused major inconvenience for account holders.
During a routine inspection, authorities discovered a staggering Rs. 122 crore missing from two bank branches. This loss led the economic offences wing of the Maharashtra police to arrest one of the bank’s employees, who is suspected of embezzling this huge sum over a period from 2020 to 2025. The RBI’s inspection report pointed out severe issues with the bank’s governance, noting that the way the institution was run left it vulnerable to such financial irregularities.
In response to these findings, the RBI decided to supersede the bank’s board for a period of 12 months. To manage the crisis and oversee the bank’s operations during this time, Shreekant, a former chief general manager of the State Bank of India, was appointed as the administrator. This step reflects the seriousness with which the RBI is treating the situation, especially considering that similar actions were taken five years ago when another bank was declared insolvent and its operations were suspended.
Understanding the Failures of Cooperative Banks
The troubles at New India Cooperative Bank are not an isolated incident. History shows that many cooperative banks in India have run into serious problems. Examples include the Madhavpura Mercantile Cooperative Bank in 2012 and the Punjab and Maharashtra Cooperative Bank (PMC Bank) in 2019. In the case of PMC Bank, for instance, a large sum of money was lent to just one borrower, and fake accounts were created to support that lending. These incidents clearly point to poor management practices and inadequate corporate governance.
Experts have repeatedly argued that the main reasons behind these failures are mismanagement, political meddling, unreliable accounting practices, and sometimes even fraud. Many cooperative banks operate under conditions that make them prone to risks not typically seen in larger commercial banks. For instance, the lure of offering higher returns on deposits often comes with hidden risks, as these banks sometimes add a premium for default risk. This means that while they may appear attractive because of high interest rates, they also carry a higher chance of financial instability.
How Past Bank Failures Were Managed
Looking back at previous instances of bank failures in India provides some insights into how regulators have managed such crises. In the cases of the Centurion Bank of Punjab and Global Trust Bank, authorities merged the failing institutions with more stable banks, HDFC Bank and Oriental Bank of Commerce, respectively. When Yes Bank came under stress, the RBI worked with several major banks such as the State Bank of India, HDFC Bank, Kotak Mahindra Bank, and IDFC First Bank to inject much-needed capital into the troubled lender. This infusion of funds helped restore confidence and allowed Yes Bank to continue its operations.
However, not every bank could find a quick fix. With PMC Bank, for example, the regulator struggled to attract a buyer. An attempt by the Maharashtra government to merge it with the Maharashtra State Cooperative Bank fell through, ultimately leading the RBI to arrange a takeover by a consortium that included a non-bank lender, Centrum Financial Services, and the fintech firm BharatPe. These varied responses show that while some banks can be rescued through mergers and capital infusions, others require more drastic measures such as a complete takeover by new management.
The Impact on Depositors
For many depositors, the consequences of these regulatory actions are deeply personal. With a total of Rs. 2,436 crore in deposits as of March 31, 2024, a significant number of customers now face a six-month freeze on their funds. This means that withdrawals from savings or current accounts, as well as recurring or fixed deposits, are not possible until further notice. For people who depend on these funds for everyday expenses like paying bills or meeting monthly loan instalments, the situation is particularly challenging.
This withdrawal freeze has forced many account holders to find alternative sources for their financial needs, adding to the stress and uncertainty during this crisis. The broader impact on the local communities that rely on the bank cannot be understated, as these restrictions disrupt not only personal finances but also the economic activities in the areas where the bank operates.
Government Plans to Support Depositors
In an effort to ease the hardship faced by depositors, the government has introduced a safety net through regulatory changes that allow individuals to access up to Rs. 5 lakh in deposit insurance. This insurance is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), and depositors can claim this amount even before the bank undergoes liquidation. According to the RBI’s notification, depositors need to submit their claims by March 30, 2025, along with valid identity proof, a declaration of willingness, and details of an alternative bank account. Once submitted, the DICGC is expected to process these payments by May 14, 2025.
However, for deposits that exceed the Rs. 5 lakh limit, the situation remains less certain. Although depositors are unlikely to lose their entire savings, they should be prepared for a reduction or “haircut” on the excess amount. Additionally, depositors can offset any outstanding loan amounts against their total deposits. Financial experts advise that, in the meantime, those affected should consider moving any linked payments to a different savings account to minimize further disruptions.
The Role of the DICGC
The DICGC plays a crucial role in safeguarding the money of bank customers. It provides insurance for bank deposits by collecting premiums from banks. The current insurance cover is set at Rs. 5 lakh for all insured banks, including cooperative institutions. This insurance is intended to protect depositors in the event of a bank’s failure or liquidation.
In the 2023-24 financial year alone, the DICGC processed claims worth Rs. 1,432 crore from 27 cooperative banks that were placed under liquidation or similar directions. During that period, the corporation collected Rs. 23,879 crore in premium payments, and it also imposed penalties on several cooperative banks for failing to meet regulatory standards. Notably, the premium rates have increased significantly over the years, from just 0.05 paise per Rs. 100 of assessable deposits in 1962 to 12 paise per Rs. 100 in April 2020.
Risks and Considerations for Depositors
When choosing where to deposit their money, customers should take note of the differences between scheduled commercial banks and cooperative banks. While cooperative banks often promise higher returns on deposits, these benefits come with increased risks. The higher interest rates usually include an extra premium to compensate for the chance of default. With many options available, such as public sector banks, private banks, and small finance banks, depositors should consider cooperative banks mainly in areas where other banking facilities are not available.
In addition, there are some simple yet crucial checks that customers can perform before trusting a cooperative bank with their money. For instance, one should look into the bank’s profitability records and the percentage of bad loans it has incurred. In the case of New India Cooperative Bank, losses of Rs. 22.78 crore in 2023-24 and Rs. 30.74 crore in 2022-23 were clear warning signs. It is also wise to avoid very small banks with limited branches, check for any previous RBI warnings or directions, and always consider spreading your deposits or funds across multiple banks to reduce risk.
A Call for Stronger Regulatory Oversight
The crisis at New India Cooperative Bank has once again highlighted the fragility of India’s cooperative banking sector. This sector, which serves millions of Indians in rural and semi-urban regions, plays a critical role in financial inclusion. Yet, recurring issues such as poor governance, political interference, and outdated technological practices continue to undermine its stability.
In response to these challenges, the RBI has already taken steps to tighten oversight, especially after the major fraud at Punjab and Maharashtra Cooperative Bank in 2019. New regulations now include a four-tier supervisory framework that directly engages with the boards of urban and multi-state cooperative banks. Moreover, efforts are underway to address the risks associated with information technology and cybersecurity in these institutions.
Despite these initiatives, many cooperative banks still struggle to meet the required norms, particularly when it comes to maintaining adequate cash reserves. For instance, while top-tier cooperative banks are expected to keep at least 9 percent of their outstanding loans in reserve, those in lower tiers must set aside 12 percent, a rule that many banks have found difficult to follow.
Final Thoughts
In conclusion, the crisis at New India Cooperative Bank underscores a broader challenge facing India’s cooperative banking network. The repeated failures, poor management practices, and susceptibility to political influence point to the urgent need for stronger regulatory oversight and improved operational practices. While the government’s steps to protect depositors, such as the deposit insurance provided by the DICGC, offer some relief, the long-term solution lies in modernizing these banks and ensuring that they adhere to sound financial practices.
With consolidated assets amounting to trillions of rupees, India’s cooperative banks are a vital part of the nation’s financial backbone. For the millions who trust these institutions with their life savings, ensuring the banks’ stability is not just a matter of economics, it is also about maintaining public confidence in the entire financial system. As authorities work to resolve the current crisis, both regulators and customers must remain vigilant. By taking precautionary measures and advocating for improved governance, the hope is that such financial crises can be minimized in the future, protecting the hard-earned money of countless Indians.
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