RBI takes action against irregular banks, cancels license

• Follow

RBI has increased surveillance over cooperative banks. Licenses of those banks which do not meet the criteria, are being cancelled.

The Central Bank has shut down 7 cooperative banks from January, till date. In June 2024, City Cooperative Bank of Maharashtra and Purvanchal Cooperative Bank of Uttar Pradesh were shut down. The latest case is of Varanasi Mercantile Cooperative Bank in Uttar Pradesh. RBI shut down this bank on July 4.

What is the importance of cooperative banks? When does RBI cancel the license of a cooperative bank? How will depositors get their money if a bank closes down? Let’s understand.

Under RBI’s purview..

Providing financial services in rural areas is a significant contribution of cooperative banks, as savings and investment habits in villages have thrived through these banks. Earlier, cooperative banks worked under the State Registrar of Societies and RBI’s supervision. But due to dual regulation, their supervision wasn’t effective, which led to increasing irregularities in these banks. To address this issue, the government brought cooperative banks under RBI’s supervision in September 2020.

This brought 1540 urban cooperative banks under RBI’s oversight, ensuring the security of deposits worth more than 4.84 lakh crore rupees belonging to over 8.60 crore account holders.

Since then, RBI has been closely monitoring cooperative banks.

What happens to depositors money?

RBI is taking action against those banks that lack sufficient funds and those with no likelihood of increased earnings in future.

Varanasi Mercantile Cooperative Bank was also financially weak. It couldn’t guarantee the return of depositors’ money. Inorder to protect depositors’ interests, RBI closed this bank.

Now the question arises, what happens to depositors’ money if a bank sinks or closes down? For RBI regulated banks, deposits up to ₹5 lakh per account holder are insured. This insurance is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). It is an auxiliary unit of RBI. Depositors don’t have to pay any amount for this insurance facility.

However, the condition is that in case of bank failure, a person will only receive up to ₹5 lakh, regardless of how much higher amount they have deposited. Depositors will receive guranteed payments up to ₹5 lakh within 90 days of the bank’s failure. This way, deposits up to ₹5 lakh in a bank are secure.

According to RBI, based on the data deposited by Varanasi Mercantile, 99.88% of depositors are eligible to receive their entire amount back from DICGC. Those who had deposited more than ₹5 lakh will not get the full amount back.

Banks under RBI’s oversight, there is no risk in depositing up to ₹5 lakh. If a bank sinks, you will receive up to ₹5 lakh through insurance. To avoid major losses, do not deposit more than ₹5 lakh in any one cooperative bank as no one can predict which bank might fail.

However, there is no risk in depositing large amounts in large private and government banks.