“The more things change, the more they stay the same.” French writer Jean-Baptiste Alphonse Karr’s observation couldn’t be more apt for India’s urban co-operative bank (UCB) sector, given the frequency with which many of the players have found themselves in a spot, including frauds, over the past 25 years or so, and the hardship caused to depositors and borrowers.

While tarring all UCBs with the same brush may be not be fair, as there are many financially sound and well-managed entities among them, the black sheep nevertheless end up harming the reputation of the entire sector.

With a ₹122-crore scam (as per current estimates) coming to light at the Mumbai-based New India Cooperative Bank (NICB), the Reserve Bank of India (RBI) has its work cut out.

To rescue customers with savings beyond the deposit insurance ceiling of ₹5 lakh, the RBI may have to find a white knight, like it did in 2021 for the fraud-hit Punjab and Maharashtra Cooperative (PMC) Bank. However, the scale of the PMC Bank scam, at ₹6,250 crore, was much bigger.

In a first-of-its-kind rescue act for a UCB, the RBI granted approval to Centrum Financial Services Ltd to set up a small finance bank (SFB) — later called Unity SFB — on the express condition that it would take over PMC Bank.

Large depositors of PMC Bank will get back their money piecemeal over 10 years.

It remains to be seen whether the regulator will repeat this rescue model in the case of NICB or come up with some other unconventional solution — such as asking the newly floated umbrella body for UCBs, the National Urban Co-operative Finance and Development Corporation, to temporarily provide liquidity support to put the bank back on its feet.

While NICB’s small depositors (up to ₹5 lakh) will get back their money by mid-May, provided they lodge their claim with the Deposit Insurance and Credit Guarantee Corporation (DICGC) by March 30, the large depositors have a longer wait.

Absence of vigilance

That ₹122 crore was embezzled with impunity from two Mumbai branches of NICB, over a period of six years, signals a complete lack of vigilance, both internal — staff, compliance and risk management, and internal audit; and external — statutory auditors.

During a snap inspection of NICB, a central bank team uncovered a shortfall in cash at the two branches, apart from other irregularities. This prompted the RBI to place the bank under directions on February 13 (initially disallowing deposit withdrawal, but later allowing withdrawal up to ₹25,000 per depositor), followed by supersession of the bank’s board and the appointment of an administrator.

The Economic Offences Wing of Mumbai Police is investigating the role of NICB’s former head of accounts and the CEO in the scam. It is examining why the spouse of a former director relocated overseas.

Dynastic control

Satish K Marathe, Director, Central Board of RBI, recently underscored the need to address the issue of dynastic control in UCBs to protect depositors’ interest. 

“RBI is like a soldier on the front line. Internal lapses and wrongdoings are always first noticed by staff, management, auditors and the board. NICB’s board seems to be dysfunctional. Shareholders need to be vigilant,” he said.

Industry body’s view

Jyotindra Mehta, Director, National Federation of Urban Cooperative Banks and Credit Societies Ltd (NAFCUB), stated that the organisation wants to put together a revival plan for NICB but has no information on its financial status.

NAFCUB is an apex body that promotes the urban cooperative credit movement and protects the interests of the sector.

Mehta emphasised that the prospects for the bank’s revival will be brighter if a plan is worked out before the depositor insurance claims are paid by DICGC in mid-May. He argued that nearly 90 per cent of the depositors are eligible for the insurance claim, and once they take away their money, a prospective saviour — including an SFB or NBFC — may not find it attractive to take over the bank.

As of March-end 2024, NICB, which reported a net loss in the last two financial years — ₹23 crore (FY24) and ₹31 crore (FY23) — had deposits and advances aggregating ₹2,436 crore (₹2,406 crore at March-end 2023) and ₹1,175 crore (₹1,330 crore) respectively. Investments stood at ₹1,265 crore (₹1,026 crore).

Term deposits constituted 68 per cent, followed by savings (28 per cent) and current (4 per cent).

At March-end 2024, gross non-performing assets and the capital to risk-weighted assets ratio stood at 7.96 per cent (7.5 per cent a year ago) and 9.06 per cent (7.83 per cent) respectively.

BR Act

Cooperative bank officials say the 2020 amendment to the Banking Regulation (BR) Act gives the RBI enough powers to straighten errant UCBs. Therefore, the PMC Bank scam came as a surprise to many. 

The amended BR Act aims to protect depositors and improve governance at cooperative banks, while enabling improved access to capital. Further, amendment to Section 45 enables the RBI to reconstruct or amalgamate a bank, with or without a moratorium, with government approval.

Early action (even based on anonymous letters from employees or customers) can go a long way in preserving depositors’ trust, bankers said.

The late George Fernandes, a firebrand trade unionist, veteran Parliamentarian and Cabinet minister, would turn in his grave if he knew that the bank he founded on socialist principles in 1968 — originally named Bombay Labour Co operative Bank Ltd and renamed NICB in 1977 — is hit by a big fraud.

NICB depositors are hopeful that the RBI, with its reputation as a lender of last resort, would act in their interest.

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Published on March 2, 2025