On February 14, 2025, while the world celebrated love and
overpriced chocolates, the Reserve Bank of India (RBI) decided to play cupid
with financial discipline and shot an arrow straight through the heart of New
India Co-operative Bank. The regulator superseded the bank’s board, citing
"fund misappropriation" and concerns over the safety of depositor
funds. Predictably, panic ensued. Depositors found themselves locked out of
their own money, the bank was barred from issuing fresh loans, and a new
administrator was appointed to untangle the mess.
If this sounds familiar, that’s because it is. Co-operative
banks in India have an uncanny ability to self-destruct with remarkable
efficiency. The demise of New India Co-operative Bank follows the well-trodden
path of other cooperative banking failures, proving yet again that these
institutions function as personal ATMs for their managers—until the RBI shows up,
that is.
A Brief History of How We Got Here
New India Co-operative Bank was never meant to collapse in a
heap of regulatory violations and depositor angst. Once upon a time, it was a
promising co-operative bank, positioning itself as a saviour of the common
depositor while attempting to navigate the complexities of modern banking. But
like most cooperative banks, its biggest strength—being run by members for
members—also became its Achilles’ heel.
Regulatory oversight in the cooperative banking sector has always
been lax. Unlike commercial banks, which answer directly to the RBI and follow
stringent financial norms, co-operative banks operate in a strange limbo
between RBI regulations and state government supervision. This dual control is
a recipe for disaster, as it allows mismanagement to thrive under political
patronage and weakens accountability.
New India Co-operative Bank’s shareholders had even approved
a resolution in early 2020 to convert into a Small Finance Bank (SFB), hoping
to bring themselves under tighter RBI scrutiny and improve operational
efficiency. Clearly, that never materialized.
The Usual Suspects: Fund Misuse, Regulatory Violations,
and Unrealistic Lending Practices
RBI’s crackdown came after mounting concerns over fund
misappropriation and financial instability. As of March 31, 2024, the bank held
deposits worth Rs. 24.36 billion and advances of Rs. 11.75 billion. But
somewhere along the way, a significant chunk of these funds stopped being about
banking and became about bankrolling bad loans, political connections, and
possibly the good life for those at the helm.
If past cooperative bank failures are anything to go by, the
modus operandi isn’t difficult to guess:
·
Loans disbursed to dubious entities, often with
little to no collateral.
·
Political interference leading to reckless
lending.
·
Financial irregularities, creative accounting,
and a general disregard for regulatory norms.
·
Donations and expenditures far exceeding
permissible limits—so much so that the RBI had already fined the bank Rs. 1.5 million
in January 2024 for breaching donation ceilings.
By the time the RBI decided to act, the situation had
spiraled beyond repair. A former Chief General Manager of the State Bank of
India has now been appointed as the administrator, with a Committee of Advisors
in place to bring some semblance of order to the chaos.
The Forgotten Depositor: The Biggest Victim in This Mess
If there’s one thing RBI actions don’t immediately solve,
it’s the fate of depositors. The first thing that happens when a bank is put
under restrictions is that withdrawals get frozen or severely restricted. That
means lakhs of people—many of them middle-class savers—suddenly find themselves
cut off from their own money.
Fortunately, deposits up to Rs. 5 lakh are insured under the
Deposit Insurance and Credit Guarantee Corporation (DICGC). This covers a
majority of the bank’s depositors, but for those with larger savings, it’s a
waiting game. They will have to hope for a resolution that doesn’t take
years—though history suggests otherwise. PMC Bank depositors waited for nearly
five years before the bank was merged with Unity Small Finance Bank in 2022,
and even then, not everyone got their money back.
The Larger Cooperative Bank Problem
New India Co-operative Bank’s downfall is not an isolated
case but a symptom of a much larger malaise in the cooperative banking system.
The sector has seen a steady stream of failures, and each time, the script is
eerily similar:
·
Over-leveraging: Lending far beyond
means, often without sound risk assessment.
·
Political meddling: Cooperative banks are
often used as cash cows for politicians and their cronies.
·
Lack of professionalism: Banking is a
specialized business, yet cooperative banks are often run by individuals with
more political acumen than financial expertise.
·
Regulatory gaps: RBI oversight is
limited, and state governments—who also have a say in how these banks
function—are often slow to act.
Despite repeated warnings, reforms in the sector have been
sluggish at best. In 2020, the Banking Regulation (Amendment) Act brought
cooperative banks under greater RBI control, but implementation has been
inconsistent. Political pressure and resistance from vested interests have
ensured that cooperative banks remain a risky proposition.
What Happens Next?
For New India Co-operative Bank, the options are limited.
The RBI can:
1. Find
a buyer: A stronger bank may acquire New India Co-operative Bank, much like
how Punjab & Maharashtra Co-operative Bank was merged with Unity Small
Finance Bank.
2. Liquidate
the bank: If no suitable buyer is found, the bank could be wound up, with
depositors receiving their insured amounts and the remaining assets being
liquidated over time.
3. Rehabilitate
the bank: If the administrator and advisors manage to clean up operations,
the bank may survive in a much-restricted form.
Given past trends, an outright revival is unlikely. Mergers
and liquidation remain the most probable outcomes.
Lessons for Depositors
The collapse of New India Co-operative Bank serves as yet
another reminder of why banking with co-operative banks is a high-risk
endeavor. If you must bank with them, keep these principles in mind:
·
Never keep more than Rs. 5 lakh in any one
cooperative bank (since that’s the insured limit).
·
Watch for warning signs—frequent leadership
changes, sudden regulatory penalties, or delayed withdrawals.
·
Diversify your banking portfolio across
stronger, well-regulated banks.
Final Thoughts
The co-operative banking sector in India continues to be a
financial Wild West, with occasional interventions from the RBI serving as law
enforcement. The collapse of New India Co-operative Bank will, like previous
failures, dominate headlines for a while before fading into the
background—until the next cooperative bank implodes. Meanwhile, depositors, as
always, will be left wondering why their hard-earned money keeps getting caught
in these messes.
The RBI’s action is necessary but not sufficient. Until
systemic reforms eliminate political interference and enhance accountability in
cooperative banking, we’re doomed to see this story play out again and again.
After all, in India, financial history doesn’t just repeat itself—it rhymes, with a cruel sense of irony.
