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Explained: RBI has ordered Pune’s Rupee Cooperative Bank to shut down; what happens to depositors now?

The Reserve Bank of India has cancelled the banking licence of Pune-based Rupee Cooperative Bank, and directed the Registrar of Cooperative Societies to liquidate it. What does it mean for its 5 lakh depositors?

A branch of Rupee Cooperative Bank in Pune's Shivajinagar. (Express Photo: Oshwin Kadhao)

Late on Wednesday (August 10) evening, the Reserve Bank of India (RBI) announced it had cancelled the banking licence of the beleaguered Pune-based Rupee Cooperative Bank, and directed the Registrar of Cooperative Societies to liquidate the bank. What does it mean for the over 5 lakh depositors in the bank?

What is a banking licence?

Financial institutions wishing to carry out banking operations such as accepting deposits or lending have to obtain a licence from India’s central bank. The RBI issues the licence under the Banking Regulation Act of 1949 after carrying out a series of checks about the financial suitability of the applicant institution.

Parameters like capital adequacy ratio (CAR) — the ratio of a bank’s available capital to its risk weighted credit exposure — and loan to deposit ratio (LDR) — the ratio of a bank’s total loans to total deposits in the same period — are checked before the licence is granted. The 1949 Act in particular stresses on adequate capital and protection of the public interest before the licence is granted.

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No company other than one that has been issued a banking licence is allowed to use the word bank in its name while doing business. RBI, which issues the licence, has the power to cancel it as well, in case the bank fails to satisfy laid-down conditions. This could mean an increase in bad debts — and if the RBI feels a bank does not have enough capital to cover its exposure and pay its depositors, its licence can be suspended or cancelled.

Why did RBI cancel the licence of Rupee Cooperative Bank?

The RBI audits banks every year, and can take action if it notes an increase in bad debts or other suspicious activities in their books. In its press release issued on August 10, the RBI gave the reasons for the cancellation of the bank’s licence:

“ * The bank does not have adequate capital and earning prospects. As such, it does not comply with the provisions of Section 11(1) and Section 22 (3) (d) read with Section 56 of the Banking Regulation Act, 1949;

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* The bank has failed to comply with the requirements of Sections 22(3) (a), 22 (3) (b), 22(3)(c), 22(3) (d) and 22(3)(e) read with Section 56 of the Banking Regulation Act, 1949;

* The continuance of the bank is prejudicial to the interests of its depositors;

* The bank with its present financial position would be unable to pay its present depositors in full; and

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* Public interest would be adversely affected if the bank is allowed to carry on its banking business any further.”

Section 22 of the Act deals with “licensing of banking companies”, section 11 is about “requirement as to minimum paid-up capital and reserves”, and section 56 is about the applicability of the Act to cooperative societies, subject to modifications.

Was cancellation of the licence the only option left for RBI?

RBI had issued notice to Rupee Cooperative Bank in 2013, and issued directions under the Banking Regulation Act before cancelling its licence. All banking activities like withdrawal were suspended, the then board of directors was superseded, and senior officials from the cooperative department and veteran cooperative banker Vidyadhar Anaskar were put in charge. Sudhir Pandit was subsequently appointed administrator.

Pandit took a number of steps to revive the bank, including filing of criminal cases against defaulting directors, employees, and seizing of their properties. The RBI extended the licence of the bank every three months as these steps were being taken.

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The administrator also tried to merge the bank with a financially stable bank. But the bad debts scared away most suitors. The Maharashtra State Cooperative (MSC) Bank had expressed interest, but the merger was not cleared by the RBI.

What will happen to the depositors’ money in Rupee Cooperative Bank?

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The limiting of withdrawals by RBI had made things difficult for depositors, especially because cooperative banks are preferred by those from the lower income group. The big question before the over 5.5 lakh depositors now is about the fate of their money.

The RBI has said that depositors with Rs 5 lakh or less in the bank (in the form of any financial instrument like fixed deposits or savings accounts, etc.), would get back all of their money through the Deposit Insurance and Credit Guarantee Corporation (DICGC).

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According to the RBI, “more than 99% of the depositors are entitled to receive full amount of their deposits from DICGC”, and “as on May 18, 2022, DICGC has already paid ?700.44 crore of the total insured deposits under the provisions of…the DICGC Act, 1961 based on the willingness received from the concerned depositors of the bank”.

Those who have larger deposits in the bank will not get back their money beyond Rs 5 lakh. In this group are about 4,600 depositors with a total Rs 340 crore in deposits in the bank. These people stand to suffer major losses.

The RBI has appointed the commissioner of the cooperative as the liquidator who would carry out the process of liquidation of the bank. Once the depositors are paid, the liquidator will sell the assets of the bank to recover as much of the bad debt as possible.

First published on: 11-08-2022 at 02:27:01 pm
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