3 Things To Remember Before Opting For A Co-Operative Bank

The Reserve Bank of India (RBI) on Monday imposed penalties on eight co-operative (co-op) banks for deficiencies in their regulatory compliances. It has fined the following banks: Associate Co-operative Bank (Surat), Varachha Co-operative Bank (Surat), Mogaveera Co-operative Bank (Mumbai), Vasai Janata Sahakari Bank (Palghar), Rajkot Peoples Co-operative Bank (Rajkot), Bhadradri Co-operative Urban Bank, Hyderabad, Jammu Central Co-operative Bank (Jammu) and Jodhpur Nagrik Sahakari Bank (Jodhpur).  

Scheduled co-op banks have come under the supervision of the RBI after the amendments to the Banking Regulation Act. The RBI had also introduced limits on exposure, mandating reporting of large exposures to the Central Repository of Information on Large Credits (CRILC), with a view to improve the governance of co-operative banks. The recent penalties are in line with non-compliance with some of these norms. 

The RBI has imposed a penalty of Rs 4 lakh on Associate Co-operative Bank for contravention of directions on 'loans and advances’ and non-compliance with the Master Directions on 'Know Your Customer (KYC)'. It has also imposed a fine of Rs 2 lakh on the Mogaveera Co-operative Bank for non-compliance related to KYC norms. The Varaccha Co-operative Bank has been fined Rs 1 lakh for contravention of certain norms of the Depositor Education and Awareness Fund Scheme, 2014. Rs 2 lakh monetary penalty has been imposed on Vasai Janata Sahakari Bank for non-compliance with the directions issued by the central bank on ‘Exposure Norms and Statutory/Other Restrictions-UCBs’ (Urban Cooperative Banks).  

Moreover, RBI has imposed a penalty of Rs 1 lakh on Rajkot Peoples Co-operative Bank for contravention of directions on loans and advances to directors, relatives, and firms/concerns in which they are interested. It has fined Bhadradri Co-operative Urban Bank with Rs 2 lakh for non-compliance with directions issued on ‘Exposure Norms and Statutory/Other Restrictions-UCBs’ and ‘Management of Advances- UCBs’. It has also imposed penalty of Rs 1 lakh on The Jammu Central Co-operative Bank and the Jodhpur Nagrik Sahakari Bank for contravention of certain norms.  

“The penalties are based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the banks with their respective customers,” RBI said in a press release.  

Should You Keep Your Money In Co-Op Banks?  

It is essential to remember that practically no bank in India has collapsed since 1960. Even in case of stressed co-operative banks as well as private banks, there is still light at the end of the tunnel in the form of mergers. “The RBI has constantly reiterated that it will not let any bank collapse, and customers’ interest has always been a priority,” says Adhil Shetty, CEO, BankBazaar.com. 

Apart from this, bank deposits are insured up to Rs 5 lakh. “Funds from each bank would be insured separately. So, in the event of a collapse, your deposits of up to Rs 5 lakh would be covered in each case,” adds Shetty. 

Therefore, while it is not risky to keep a part of your savings in a co-operative bank, you can choose to restrict the amount to not more than Rs 5 lakh (“including the interest,” says Shetty). “Also ensure that the bank is covered to the full extent by the DICGC (Deposit Insurance and Credit Guarantee Corporation),” says Shetty. 

How To Choose A Co-Op Bank?  

There are a few checks that you can run to ensure that the bank you are placing your funds with, is solvent.  

First, check your bank’s overall rating by rating agencies such as Crisil, Icra and CARE.  

Second, most bank websites disclose financial statements. Look for the minimum capital adequacy ratio (CAR). “RBI rules say that banks must maintain a CAR of 9 per cent. A high CAR indicates the bank is safe. Ditto for the current and savings account (CASA) ratio. The higher the CASA ratio, the better it is for the bank. There is no acceptable limit for non-performing assets (NPAs) but if your bank’s NPAs exceed 8-10 per cent, it is a cue to change to a better managed bank,” adds Shetty.  

Third, pay attention to the goings-on at your bank. Has it been in the news lately? If so, why? Has it been profitable in the recent quarters? If not, what were the reasons for and the extent of its losses? How is its share price performing? How does it compare to peer banks? What is its corporate governance like? These will give you a clear picture of the situation at the bank.