Why RBI Is Imposing Cash Withdrawal Restrictions On Co-Operative Banks

The Reserve Bank of India on Tuesday imposed restrictions on withdrawal of cash for customers of Karnataka-based Sri Mallikarjuna Pattana Sahakari Bank Niyamita and Maharashtra-based Nashik Zilla Girna Sahakari Bank in wake of their deteriorating financial positions.

The restrictions on Sri Mallikarjuna Pattana Sahakari Bank Niyamita, Maski (Karnataka) and Nashik Zilla Girna Sahakari Bank, Nashik (Maharashtra) will remain in force for six months, as per two statements issued by the central bank.

In the case of Nashik Zilla Girna Sahakari Bank, the RBI said 99.87 per cent of the depositors are fully covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance scheme. While in case of Sri Mallikarjuna Pattana Sahakari Bank Niyamitaare 99.53 per cent of the depositors of the bank are covered under DICGC insurance scheme.

"Considering the bank's present liquidity position, no amount from the total balance across all savings bank or current accounts or any other account of a depositor, may be allowed to be withdrawn, but are allowed to set off loans against deposits...," the RBI said in regards to the Karnataka-based bank.

In wake of the restrictions, the two banks cannot, without prior approval of the RBI grant or renew any loans, make any investment, incur any liability, including borrowal of funds and acceptance of fresh deposits.

In 2019, the RBI had imposed cash withdrawal restrictions on customers of Punjab & Maharashtra Co-operative Bank (PMC) Bank after financial irregularities surfaced at the bank. Bank had heavily lent to the troubled realty company HDIL and also violated the RBI rules for 5–6 years. Of the overall loan book of Rs 8,300 crore, PMC Bank loans to HDIL stood at Rs 6,226 crore, about 73 per cent of total loans of the bank.

In January 2022, the RBI had approved PMC Bank's merger with Utility Small Finance Bank protecting it from liquidation and bringing relief to all stakeholders.

"The amalgamation will come into force with effect from the date of the notification of the scheme i.e. January 25, 2022. All the branches of the PMC Bank will function as branches of Unity Small Finance Bank Ltd. with effect from this date," read the then circular of the Reserve Bank of India.

Why Are Co-Operative Banks Under RBI Lens?

Last week, the central bank imposed monetary penalty on three co-operative banks for deficiencies in regulatory compliance. The central bank imposed Rs 50 lakh penalty on The Nasik Merchant's Co-operative Bank for non-compliance with the directions issued by RBI on ‘Placement of deposits with other banks’ and ‘Interest Rate on Deposits’. 

The action was based on deficiency in regulatory compliance and was not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers, RBI said while imposing penalties on these banks.

RBI also imposed a monetary penalty of Rs 37.50 lakh on The Maharashtra State Co-operative Bank, Mumbai for non-compliance with the directions issued by NABARD on ‘Frauds - Guidelines for Classification, Reporting and Monitoring’.

Regulating Co-Operative Banks

Earlier this week, the RBI said it has decided to adopt a simple four-tiered regulatory framework for Urban Co-operative Banks (UCBs) based on size of deposits, with an aim to strengthen their financial soundness.

An expert committee, headed by former RBI deputy governor N S Vishwanathan, had made a host of recommendations for strengthening the UCBs.

The committee had recommended a four-tiered regulatory framework based on size of deposits of the banks and their area of operations, among other suggestions.

The differentiated regulatory approach was mainly recommended for key parameters such as net worth, Capital to Risk-weighted Assets Ratio (CRAR), branch expansion and exposure limits. Membership to an Umbrella Organisation also formed a vital part of the recommendations.

The RBI has accepted several suggestions of the committee.

"It has been decided to adopt a simple four-tiered regulatory framework with differentiated regulatory prescriptions aimed at strengthening the financial soundness of the existing UCBs," as per RBI's Revised Regulatory Framework for UCBs.

Specifically, a minimum net worth of Rs 2 crore for Tier 1 UCBs operating in single district and Rs 5 crore for all other UCBs (of all tiers) has been stipulated.

This, the RBI said, is expected to strengthen the financial resilience of the banks and enhance their ability to fund their growth.

As per the data reported by UCBs as on March 31, 2021, most of the banks already comply with the requirement.

The UCBs which do not meet the requirement will be provided a glide path of five years with intermediate milestones to facilitate smooth transition to the revised norms.

The RBI further said the minimum CRAR requirement for Tier 1 banks is retained at the present prescription of 9 per cent under current capital adequacy framework based on Basel I.

For Tier 2, Tier 3 and Tier 4 UCBs, while retaining the current capital adequacy framework, it has been decided to revise the minimum CRAR to 12 per cent so as to strengthen their capital structure, the central bank said.

The RBI also decided to introduce automatic route for branch expansion for UCBs which meet certain norms, in order to boost growth opportunities in the sector.