RBI’s Focus on Cooperative Banks: What’s the Reason?

You might have heard in the news that concerns have arisen in cooperative banks due to issues with governance standards, leading the Reserve Bank of India (RBI) to impose penalties.

Recently, the Karnataka state government announced that the Central Bureau of Investigation will conduct an investigation into the financial irregularities occurring in three cooperative banks in Karnataka.

What’s Happening?

As you know, RBI regulates banks, and if any bank violates the rules set by RBI, it faces penalties. Remarkably, this year, penalties have been imposed on 172 banks, including 127 cooperative banks.

Now, let’s examine the trend of penalties closely.

In 2020, RBI penalised 22 cooperative banks, and the penalties increased annually. In 2021, RBI penalised 124 banks, and in 2022, the number rose to 180 cooperative banks.

You might be wondering what’s happening in cooperative banks. Before we answer that, let’s understand the concept behind cooperative banks.

How Do Cooperative Banks Operate?

Cooperative banks are owned and controlled by their members. Consider an example: people come together to fulfil the economic needs of a village or a specific community. They deposit money and resources collectively, providing banking services such as loans and savings accounts.

What’s Been Happening in Cooperative Banks?

The RBI never regulated these cooperative banks; they were observed differently and left under the supervision of the government. Exploiting this, those in control of the banks, such as directors, took advantage. People deposited money, and the staff, often relatives, started giving substantial loans to their family members. Staff members were also hired at their discretion, as they wouldn’t go against the ones who gave them jobs. This led to scams within these banks.

What’s Next?

According to Mint, recently, RBI imposed penalties on four cooperative banks – Jijamata Mahila Sahakari Bank, Shri Laxmikrupa Urban Co-operative Bank, The Konark Urban Cooperative Bank and The Chembur Nagarik Sahakari Bank – due to violations of certain RBI rules.

These penalties were imposed under the Banking Regulation Act, 1949, and were based on deficiencies in regulatory compliance. They were not intended to pronounce upon the validity of any transactions or agreements with customers.

The scale of such scams in banks where people have deposited millions is unknown. Therefore, we might see a surge in penalties in the coming times.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

*The article is for information purposes only. This is not an investment advice.

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