The New India Cooperative Bank debacle has once again raised serious questions over the regulatory supervision of this sector where crores of Indians in rural and semi-urban areas park their hard-earned money. While suspending the board of the Mumbai-based cooperative bank last week, the RBI noted some sharp concerns emanating from poor governance. Consequently, the regulator has not only barred the bank from not disbursing any loan without its approval, but has also directed it to not allow any withdrawal from the savings, current or any other type of account held by any depositor for the next six months. The economic offences wing of Maharashtra police has arrested one of the employees for embezzling a staggering ₹122 crore from the bank between 2020 and 2025. The bank has around 1.3 lakh accounts whose deposits add up to ₹2,436 crore.
This is one of the major crises in the cooperative banking space since financial irregularities at the Punjab and Maharashtra Cooperative Bank came to light in 2019. That fraud led to the RBI taking urban and multi-state cooperative banks (UCBs) directly under its wings and tightening the regulations governing them. The central bank introduced a four-tier regulatory framework and engaged directly with these banks’ boards of directors. Efforts are also being made to address the IT and cybersecurity risks that UCBs face. However, things have not improved as much as they ought to have. Tier 1 UCBs are required to maintain minimum cash reserves of 9 percent of their outstanding loans, while those in tiers 2-4 need to set aside 12 percent. However, according to the RBI, quite a few cooperative banks have been found to be not maintaining the required cash reserves.
Poor governance and political intervention remain the main challenges at many of these banks. Despite efforts, UCBs have also fallen behind the curve as far as adoption of technology is concerned. India has a large cooperative banking network that boasted of consolidated assets of `23 lakh crore on March 31, 2023. They play an important role in financial inclusion and need better regulatory oversight, so that the crores who depend on them do not lose their money in the banks and their trust in the system.