Cooperative Chaos

For the umpteenth time, an Indian cooperative bank has collapsed under the weight of mismanagement and regulatory complacency. The Reserve Bank of India (RBI) has imposed severe restrictions on the Mumbai-based New India Cooperative Bank after uncovering serious governance failures and liquidity issues. The bank’s depositors, many of them small savers, face an uncertain future, with withdrawals limited to Rs. 25,000 per account. Cooperative banks, particularly in Maharashtra, have a long history of financial scandals, political interference and lax oversight.

The failure of New India Cooperative Bank follows a well-worn script. Loans were sanctioned recklessly, often without the knowledge of branch managers, turning into non-performing assets (NPAs) almost overnight. In one particularly egregious case, a Rs.18 crore loan was allegedly granted to Bollywood actress Preity Zinta and later written off without due process. Meanwhile, the bank’s audited financials showed a suspiciously growing cash reserve – Rs.122 crore in 2023 rising to Rs. 135 crore in 2024 - yet the RBI’s intervention suggests these funds may have been entirely fictitious.

Regulators did act, but only when the crisis had already boiled over. The RBI first restricted withdrawals and loan disbursals, then superseded the bank’s board and appointed an administrator. As is often the case with cooperative bank failures, the damage has already been done.

The fundamental problem lies in the structure of cooperative banks: they are often controlled by politicians, lack professional management and have weak corporate governance. They function more like personal fiefdoms than financial institutions, doling out loans to cronies with little expectation of repayment.

The recurring failures of cooperative banks demand urgent reform. Governance norms must be strengthened. RBI should have greater control, including the power to directly regulate their lending practices, board appointments and financial disclosures. The dual regulation by state governments should be abolished.

Transparency must improve. Cooperative banks should be mandated to publicly disclose their lending patterns, NPAs, and major loan sanctions. Real-time monitoring of their financials could help detect fraudulent transactions before they spiral into full-blown crises.

Strict accountability must be enforced. Bank executives who engage in financial mismanagement should face strict legal action, including asset seizures and criminal prosecution. Depositors should not bear the cost of reckless lending and outright fraud.

Finally, deposit insurance needs an overhaul. The current cap of Rs. 5 lakh covers only a fraction of deposits in failed banks. Raising this limit and ensuring faster payouts would prevent financial ruin for small savers.

If cooperative banks are to remain a viable part of India’s financial system, they must be treated like serious financial institutions. Without urgent reform, these banks will continue to collapse, taking the savings of ordinary Indians with them.