On September 24, 2022, the Reserve Bank of India (RBI) cancelled the license of the Maharashtra-based Laxmi Cooperative Bank on grounds that the lender does not have adequate capital and earning prospects.
Laxmi Cooperative Bank is, incidentally, the latest in line among the numerous cooperative banks to have its license cancelled by the RBI on capital adequacy issues.
Since March 2022, quite a number of cooperative banks have had their license cancelled by the RBI on the similar grounds.
On August 17, 2022, the RBI cancelled the license of Deccan Urban Co-operative Bank. A few days earlier, on August 8, it had cancelled the license of Rupee Co-operative Bank Ltd, Pune. Previously, on June 17, 2022, the RBI cancelled the license of Millath Co-operative Bank in Devangere, Karnataka. The RBI had said that the bank does not have adequate capital and earning prospects. Way back in March 2022, the RBI cancelled the license of Kanpur-based People’s Co-operative Bank on grounds that the bank does not have adequate capital and earning prospects.
Is Your Money Safe?
This brings us to the question – is your money safe in co-operative banks?
Says Adhil Shetty, founder and CEO, BankBazaar, a financial services website: “All cooperative banks also come under Deposit Insurance and Credit Guarantee Corporation (DICGC). A similar set of provisions on deposit insurance that cover scheduled commercial banks are also extended to co-operative banks.”
So, in case the bank goes into moratorium, the same protections will kick in. So, you will be able to access up to Rs 5 lakh invested with your co-operative bank.
Agrees Harish Menon, co-founder and head of investments and product research, House of Alpha, a financial planning and wealth management advisory firm: “RBI regulations have been amended to include co-operative banks under the DICGC deposit insurance norms. So, technically, the safety aspect is the same as that for commercial banks, which is a maximum of Rs 5 lakh per depositor. Hence, there is a big relief for customers, which will boost confidence of a depositor.”
Do Co-Operative Banks Make Sense As They Offer Higher Interest Rates?
According to Shetty, co-operative banks may provide a marginally higher rate of interest as an incentive to invest.
He says: “Not all co-operative banks are risky. With the amendments to the Banking Regulation Act, scheduled co-operative banks are now under the supervision of the RBI. The amendments are expected to provide better management and sound regulation of co-operative banks, and will facilitate the making of reconstruction or amalgamation schemes.”
Earlier, the RBI introduced limits on exposure, mandating reporting of large exposures to the Central Repository of Information on Large Credits (CRILC). These steps are expected to improve the governance situation that ails several co-operative banks.
However, Menon feels that cooperative bank deposits are riskier than commercial bank deposits despite the coverage under DICGC norms. The procedure for claiming deposit insurance is lengthy and cumbersome. It would be prudent to prefer total safety and peace of mind over a few basis points higher interest rates.
Do Due Diligence
It is advisable that one does due diligence before putting in his/her money in a co-operative bank.
Shetty lists all the necessary checks one should perform before putting in money in a co-operative bank.
To start with, one should check the bank’s overall rating by Crisil, ICRA and CARE. Second, most bank websites disclose financial statements. One should look for the minimum capital adequacy ratio (CAR).
RBI rules say that banks must maintain a CAR of nine per cent. A higher CAR indicates the bank is safe. The same is true for the current and savings account (CASA) ratio. The higher the CASA ratio, the better it is for the bank. There are no acceptable limits for non-performing assets (NPAs), but if the bank’s NPAs exceed eight-10 per cent, it is a cue to change to a better-managed bank.
Third, one must pay attention to the goings-on at the bank. Has it been in the news lately? If so, then for what reasons? Has it been profitable in 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 its peer banks? What is its corporate governance like?
According to Shetty these will give a clearer picture of the financial situation of the bank.
It is your hard-earned money after all. It is better to be safe than sorry.