Yet another co-operative bank fails

 RBI should permit NICB customers to withdraw partially

Reserve Bank of India (RBI) superseded the board of directors of New India Co-operative Bank Ltd., Mumbai (NICB) for a period of twelve months, under powers conferred to it as per section 35A of the Banking Regulation Act . An administrator is appointed and NICB is prevented from disbursing or agreeing to disburse any payment, whether in discharge of its liability or otherwise. The regulator also clearly specified NICB to not to allow withdrawal of any amount from savings, current or any type of deposit, except set off of loans against deposits. In a welcome move, RBI also advised that eligible depositors, insured under DICGC scheme up to Rs.5 lacs of their total deposits in the bank, can place their willingness declaration with DICGC and approach bank officials for completing the formalities. DICGC on its part, displayed in its website, that the eligible depositors of NICB can prefer their claims, along with their written consent,  on or before 30th March 2025. It indicated that the claims will be settled on 14th May 2025. 

Need for part payment to eligible depositors in between: While the assurance that the eligible depositors need not panic and DICGC will settle their claim on a stipulated date is appreciated, the regulator should have permitted the eligible depositors to withdraw small amounts for their immediate needs. As per reports, the bank had 1.3 lac depositors and a business level of  Rs.3611 cr. (deposits Rs.2436 cr. and advances Rs.1175 cr.), as at end of March 2024. Even, if the liquidity was the reason to suspend the operations immediately (as stated by RBI), the needs of the depositors, especially the individual and senior citizens cannot be overlooked. NICB must have eligible SLR securities on hand much more than the ratio stipulated by RBI. RBI should find ways to permit partial withdrawals, say up to a maximum of Rs.50,000 to the needy customers, with a stipulation that the withdrawals made after 13th February 2025 will be adjusted against their claims to be settled by DICGC on 14th May 2025. This should be done immediately, as there will be pressing medical and day to day routine needs for the depositors, whose monies are locked up.

Risk based premium should not be delayed: Strong banks and sovereign guaranteed banks are paying higher premium and thereby subsidising the weaker banks, especially the co-operative banks. The deposit insurance fund (DIF) available with DICGC to cover the insured deposits (of Rs.96.74 lac cr.) with the SCBs as on 30th Sep 24 is just 2.11% of the total insured deposits. Hence risk based premium, on the basis of ratings assigned considering various risk parameters of each bank, shall be introduced immediately. The lower the rating, the higher should be the premium. The rating serves as a caution to the depositors to understand the risks involved in placing monies over and above the amount insured by DICGC. It will also make the banks to discipline their credit portfolio and enhance audit trails in operations. 

Is the regulator complacent?: In the last four years, Yes Bank was reconstructed with the public sector banks taking the lead in equity infusion and change of board/management. LVB( a south based private bank) and PMC (co-operative bank) were given to DBS Bank and Unity Small Finance Bank on liberal conditions. In the process of settlement, while the tier-I bond holders in Yes Bank suffered, as their claims were written off, in the case of LVB,  equity share holders, Tier-I and Tier II bond holders saw their claim value treated as 'nil'. While the depositors of Yes Bank and LVB were protected, the claims of the depositors, above the DICGC cover, were differentiated in the case of PMC Bank*. How the claims of equity share holders, bond holders and depositors holding balances of more than Rs.5 lacs in NICB will be treated may unfold, once the administrator submits his report.  Whenever a bank's operations are suspended/stopped by RBI using the BR act, one question that comes up for debate is "Why the regulator has not acted in time and pressed the 'stop' button after a protracted delay?” The same question is valid this time also.

Regards

V.Viswanathan
CGM Retired
State Bank Group

16th February 2025

* *(In the case of South Indian Cooperative Bank (SICB), which was merged with Saraswat Bank, the depositors, who held money in excess of Rs.1 lac had a haircut of 35% (DICGC cover at that time was Rs.1 lac))

V.


Is 

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