Recently, a cash embezzlement of Rs122/- crore was reported in Mumbai’s New India Cooperative Bank, due to which this bank is currently facing a severe liquidity crisis. Thereafter, the Reserve Bank of India immediately banned withdrawals from the bank to handle the situation, due to which customers are facing difficulties in withdrawing their money. In such an environment, there is a state of fear and doubt in the minds of customers regarding safety of their money. A few years ago, owing to the scam in Punjab and Maharashtra Co-operative Bank (PMC), Yes Bank and Lakshmi Vilas Bank, customers also had to face huge difficulties in withdrawing their money.
Incidents of irregularities and bankruptcy in cooperative banks have now become common, which is reducing the trust of small investors in the banking system. Therefore, to keep their trust intact, the central government is considering increasing the existing insurance cover of Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation Act (DICGC).
At present, the banking industry is facing the problem of scarcity of deposits. In such a situation, if investors lose faith in the banking system, then banks will face more difficulties in raising deposits. It is worth mentioning that only when bank deposits increase at a cheaper rate, banks will be able to give loans to the needy and businessmen, corporates etc., because investment in business can be done only when there is availability of capital and economic activities can increase when investment increases.
DICGC is an institution owned by the Reserve Bank of India that provides insurance cover on bank deposits. The premium for the insurance cover is paid by the banks to DICGC on behalf of the customer. All commercial banks including branches of foreign banks, local area banks and regional rural banks operating in India are insured by DICGC. In case of registration of banks, DICGC shares the details of insurance with them so that customers can be given proper information about the insurance.
At present, DICGC pays insurance amount of up to Rs 5 lakh to the customers in case of bank collapse or bankruptcy. Customers are paid their deposited money within 90 days of the bank collapsing or closing. The affected bank has to give the details of the account holders to DICGC within 45 days. After that, it returns the money to the account holders in the remaining 45 days.
If a depositor has 10 lakh rupees deposited in a bank and the bank collapses, then the depositor will be paid only the insured amount of 5 lakh rupees and the customer’s 5 lakh rupees will be lost. Investors fear such a provision. Therefore, it is believed that if the insurance amount is increased, investors will not hesitate to deposit money up to the insured amount in banks and this will also increase the credibility of banks.
The formation and functioning of a cooperative bank is based on cooperation. Most countries in the world have cooperative banks, which take deposits and give loans. The main purpose of their establishment is to provide banking facilities in agricultural and rural areas and to realize the concept of financial inclusion. Generally, their branches are limited to one state, but there are also exceptions to this.
There are 4 types of cooperative banks in India, first, primary cooperative credit societies, second, central or district cooperative bank, third, state cooperative bank and fourth, land development bank. Cooperative bank is the apex institution of cooperative credit organization. Just as the central bank situated in the district controls the credit societies, in the same way, the state cooperative bank organizes all the central banks spread across the state. In this way, this bank is the apex institution of agricultural cooperative institutions spread across the state.
A major reason for irregularities or scams in cooperative banks is believed to be the dual control system of the Reserve Bank and the Registrar of Cooperatives. Cooperative banks are established according to the State Cooperative Societies Act. They are registered with the “Registrar of Cooperative Societies”, which are regulated partially by the State Government and the Reserve Bank of India. There is no interference of the Central Government in the functioning of this bank. The task of monitoring such banks is mainly done by the State Government, whose directors are leaders of the ruling party. The role of the Reserve Bank as a regulator in this matter is limited.
So far, the Reserve Bank has taken control of 27 cooperative banks due to scams or irregularities in operations. According to the Reserve Bank of India’s report on the trend and progress of banking in India, the number of urban cooperative banks has decreased from 1,926 to 1,472 in the last 2 decades. Thus, from the financial year 2004-05 till now, 156 urban cooperative banks have been merged, out of which 6 urban cooperative banks have been merged in 2023. In the past years, the Reserve Bank of India has given licenses to many urban cooperative banks, which has increased their number. Although they have also been merged later, but their number is less.
A big reason behind the general public keeping money in cooperative banks is that they offer higher interest on bank deposits. Due to this, investors get greedy. New India Cooperative Bank and PMC Bank were also giving higher interest on deposits, which was more than many other cooperative banks. Due to this greed, fake and Ponzi companies are also doing business worth billions of rupees in the country.
However, the Indian banking system is still strong and stable. It would be wrong to consider the entire banking system flawed based on the scam in New India Cooperative Bank or PMC or any other bank. This is also true, but the monitoring system in the country is very weak in the context of cooperative banks, which needs to be strengthened. Also, there is a need to increase the insurance cover to ensure that the account holders’ deposits in banks are safe. Therefore, the government and the Reserve Bank of India need to take further action in the matter to give concrete shape to the corrective measures at the earliest.
Satish Singh is a senior columnist, economics expert and Head, Learning & Development Department and Assistant General Manager at State Bank of India, Ahmedabad Circle, GIFT City, Gandhinagar, Gujrat.
