New India Co-op Bank crisis: Higher returns come with greater risk

The Reserve Bank of India (RBI) recently imposed restrictions on Mumbai-headquartered New India Cooperative Bank, barring withdrawals from all accounts without prior approval.

 

The bank was also prohibited from issuing new loans, making investments, disbursing payments, or accepting fresh deposits, except under specific conditions. During inspection, ₹122 crore cash was found missing from two of the bank’s branches.

 

Why these banks fail

 

Cooperative banks such as Madhavpura Mercantile Cooperative Bank (2012), Punjab and Maharashtra Cooperative Bank (2019), and several others have failed in the past. Experts attribute these failures to poor management. “Many cooperative banks have bad management and poor standards of corporate governance,” says Prasanna Tantri, associate professor of finance and executive director, Centre for Analytical Finance, Indian School of Business (ISB).

 

Many cooperative banks fall prey to political interference, unreliable accounting practices, loan evergreening, and frauds.

 

Tough times for depositors

 

The bank’s deposits totalled ₹2,436 crore as of March 31, 2024. A large number of depositors face a six-month withdrawal freeze. “Depositors will not be able to withdraw the amounts deposited in savings or current accounts, recurring or fixed deposits. If a depositor planned to use the deposits made in this bank to pay bills or EMIs, they will have to make those payments from alternative sources,” says Nidhi Singh, partner, IndiaLaw LLP.

 

Claim deposit insurance

 

Recent regulatory changes allow depositors to access up to ₹5 lakh of deposit insurance from the Deposit Insurance and Credit Guarantee Corporation (DICGC) even before a bank’s liquidation. According to an RBI notification, depositors must submit claims by March 30, 2025, with valid identity proof, a willingness declaration, and details of an alternative bank account. The DICGC will process payments by May 14, 2025. For deposits exceeding this amount, uncertainty remains. The actual extent of losses will become clear after the administrator and advisory committee review the bank’s accounts.

 

“Depositors with amounts above ₹5 lakh will not get away with zero losses. They won’t lose their entire deposits, but they should be prepared for a haircut,” says Tantri.

 

“Depositors may set off their outstanding loan amount against their total deposits. Further, they should redirect any payments linked to their accounts to some other savings account,” says Singh.

 

Take cognizance of risks

 

Depositors should differentiate between scheduled commercial banks and cooperative banks, as the latter carry higher risks.  “The higher returns these banks offer on deposits include a default risk premium,” says Tantri. “With ample choices among public sector, private sector, and small finance banks, co-operative banks should be considered only in unbanked areas,” says Arnav Pandya, founder of Moneyeduschool.

 

Essential checks

 

Tantri advises checking profitability and bad loan percentage before depositing money. Pandya suggests avoiding very small banks with limited branches. Singh recommends checking for any past RBI directions against the bank. Pandya also advises spreading money across two or three banks to prevent financial disruptions if one fails.

 

Deposit insurance: Ready reckoner

 

• Each depositor is insured up to ₹5 lakh, covering principal and interest, as on the date of a bank’s liquidation or licence cancellation
• The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance for all bank deposits, including savings, fixed, current, and recurring accounts
• Coverage extends to deposits in all commercial banks, including foreign bank branches operating in India, local area banks, regional rural banks, and co-operative banks that have opted for DICGC coverage
• Insured banks bear the cost of deposit insurance
• Parliament amended the DICGC Act, 1961, allowing depositors to access insurance payments even before a bank’s liquidation