Why is RBI Cancelling Co-Operative Bank Licences? Check How it Impacts Its Investors

Reserve Bank of India is again in action, canceling the license of yet another co-operative bank. The decision was made on the basis of the bank’s deteriorating financial condition. 

This is RBI’s seventh decision to cancel the license of any bank since the start of this year. Till now, the following banks have gotten their license canceled:

• Sumerpur Mercantile Urban co-operative Bank Limited, 
• Jai Prakash Narayan Nagari Sahakari Bank Ltd, 
• Shree Mahalaxmi Mercantile Co-operative Bank Ltd, 
• Hiriyur Urban Co-operative Bank Ltd
• Mumbai’s City Co-operative Bank 
• Purvanchal Co-operative Bank
• Banaras Mercantile Co-operative Bank

Recent Decision of RBI

RBI is again in the news, but not for any of its announcements but for cancelling the license of banks. The latest cancelling of the license is of Banaras Mercantile Co-operative Bank. 

As per the RBI’s official statement, “Banaras Mercantile Co-operative Bank ceases to carry on banking business, with effect from the close of business on July 4, 2024.” In addition, the appointment of a liquidator and the start of the winding-up procedure have been requested from the Uttar Pradesh Registrar of co-operative Societies and Commissioner for Cooperation.

The RBI revoked the licenses of Purvanchal Co-operative Bank in Ghazipur, Uttar Pradesh, and City Co-operative Bank in Mumbai in June for similar reasons of insufficient balance and earning potential. 

What Happens to the Depositors?

Following the license cancellation, the Cooperative Commissioner and Registrar of Cooperative Societies of Uttar Pradesh have been instructed to close the bank and appoint a liquidator.

• According to RBI, based on the bank's data, 99.98 percent of the depositors will receive their full deposit amounts from the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Upon liquidation, each depositor will be eligible to receive up to Rs 5 lakh in deposit insurance claims from the DICGC.
• The RBI highlighted that the cooperative bank lacks sufficient capital and earning prospects, making its continuation not in the best interest of its depositors.

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Why is RBI Cancelling Licences?

The co-operative banks were not profitable and lacked sufficient capital. They were unable to ensure that all depositors would receive their money back, and continuing with them would be against the public interest. For this reason, in order to save public funds, the RBI chose to cancel its license.

The main reason for revoking licences of these banks can be summarised in two points:

• The banks lacked sufficient capital and opportunities for profit. They disregarded the 1949 Banking Regulation Act's requirements.
• It would not have been possible for the banks to fully compensate their depositors given their dire financial situation.

What is Banking Regulation 1949

The Banking Regulation Act serves as a single, unified entity that regulates commercial and cooperative banks in every state, including Jammu and Kashmir.

The primary aim of the Banking Regulation Act is to oversee the operations of commercial and cooperative banks that function within India. It gives the Reserve Bank of India (RBI) the authority to oversee licenced banks, manage capital gains, and impose shareholding rules.

What is a Co-operative Bank?

A cooperative bank is a financial institution that is owned and operated by its members. These banks are typically formed by individuals who come together to provide financial services to each other, particularly in rural and underserved areas.

In some cases, the owners of these banks are the main customer base of these banks. Hence, the owners are the main clients of these banks. 

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