The Reserve Bank of India (RBI) has been taking regular action against weak cooperative banks, alongside its recent measures against Paytm Payments Bank. These actions primarily focus on weak capital ratios and poor corporate governance standards within the banks. The RBI has imposed monetary penalties on 20 cooperative banks in 2024 and cancelled the licences of three banks, namely Shree Mahalaxmi Mercantile Co-operative Bank, Hiriyur Urban Co-operative Bank, and Jai Prakash Narayan Nagari Sahakari Bank.
Reasons for Penalties:
The monetary penalties imposed by the RBI range from Rs 25,000 to Rs 3 lakh and are primarily a result of various violations and non-compliance. The reasons cited by the RBI include failure to pay interest on balance amounts in deceased individual depositors’ savings accounts, violation of Know Your Customer (KYC) norms, entering into one-time settlements without prior permission from the RBI, and other violations of banking norms.
Challenges Faced by Cooperative Banks:
Cooperative banks operate at the lower end of the banking pyramid, serving semi-urban and rural areas. These banks have played a crucial role in extending banking services to villages and semi-rural areas. However, the industry faces challenges such as dual regulation, weak finances, and interference by local politicians in administrative affairs.
Increased Scrutiny after the PMC Bank Crisis:
The RBI intensified its scrutiny of cooperative banks following the collapse of Punjab and Maharashtra Cooperative (PMC) Bank in 2019. The RBI issued directions to PMC Bank and later superseded its board. Subsequently, the RBI cancelled the licences of 40 cooperative banks and imposed monetary penalties 514 times. In the years that followed, penalties were imposed, licences were cancelled, and the RBI continued to monitor the sector closely.
RBI Data and Measures:
As of January 18, 2023, India had 351 district cooperative banks with a cumulative loan book of Rs 3.3 lakh crore and deposits of Rs 4.12 lakh crore. The gross non-performing assets (GNPA) of these banks stood at 11%, and accumulated losses amounted to Rs 7,753 crore. Additionally, around 39 banks had capital adequacy below the mandated 9%. In the June 2023 Monetary Policy Committee (MPC) meeting, the RBI announced guidelines on compromise settlements and technical write-offs for cooperative banks. The RBI also extended deadlines for meeting priority sector lending (PSL) targets.
Expert Views:
Industry experts suggest that the RBI’s recent measures reflect a closer examination of cooperative banks, which have significant influence in rural areas. Experts anticipate additional measures from the RBI in the future. The regulatory actions taken by the RBI aim to address governance and regulatory issues within cooperative banks, highlighting the need for improvements in these areas.
Conclusion:
The RBI’s regulatory actions on cooperative banks, including monetary penalties and licence cancellations, underline the importance of strong capital ratios and corporate governance standards. These actions serve to address violations and non-compliance within the sector. Cooperative banks play a crucial role in rural areas, and their stability and compliance with regulations are essential for the overall health of the banking system.
