How safe is your money in co-operative banks?

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Four co-operative banks have been penalised Rs 44 lakh by the Reserve Bank of India for flouting various norms. The banks are The Tamil Nadu State Apex Co-operative Bank (Rs 16 lakh), Bombay Mercantile Co-operative Bank (Rs 13 lakh), Janata Sahakari Bank (Rs 13 lakh) and Baran Nagrik Sahkari Bank (Rs 2 lakh). This is not the first instance of co-operative banks being penalised for flouting norms. Several banks have also had their licence cancelled.

State of co-op banks

So, how safe is your money deposited in a co-operative bank? The financial health of the country’s cooperative banks is not very good. The RBI is taking steps to improve the financial condition of these banks. The licences of banks that do not have enough capital and earning potential,  are being cancelled.  RBI  has been imposing penalties on those banks that are not able to fully comply with its rules and regulations.

RBI data shows that at the end of March 2021, there were a total of 98,042 cooperative banks in the country. These included 96,508 rural cooperative banks and 1534 urban cooperative banks. scope of business of urban co-operative banks i.e. UCBs was very huge, but due to all kinds of flaws, now very little scope of business is left.

At the end of 2004, there were 1,926 urban co-operative banks in the country. This came down to 1,534 at the end of March 2021. This means cooperative banks are constantly closing down.

So, the question is why is the financial health of cooperative banks deteriorating? Who prefers to deposit money in these banks? And most importantly, how safe is their money? Suresh Kumar Bansal, a former banker, says that cooperative banks have the participation of local people. They take advantage of personal contacts. The staff of cooperative banks set up in rural areas and small towns get more in touch with the local people. These banks offer higher interest as compared to commercial banks. Because of this, a large number of people prefer to deposit money in cooperative banks.

Bansal says that on behalf of the RBI, the Deposit Insurance Credit Guarantee Corporation guarantees a payment of Five lakh rupees to an account holder of a bank. If a bank collapses, you will not get more than five lakh rupees. To avoid this situation, do not deposit your entire money in the same bank. If you have large amount, then some money should be deposited in the cooperative bank and some with other bank. This will reduce the risk of your deposit.

Impact of bank collapse on customers

Rbi has clarified that  penalty imposed on banks will not affect customers. There is no need to panic. However, if the license of a bank is cancelled, then the account holders can be affected. DICGC provides insurance cover of up to Rs 5 lakh. If the bank collapses or the licence is cancelled, then each account holder will be paid a deposit of up to Rs 5 lakh. During 2021-22, DICGC has paid more than  Rs 8,516 crore rupees to  12.94 lakh depositors. This amount was released to the account holders of banks shut down in different parts of the country or banks whose licenses have been cancelled. Obviously, if there is more than Rs 5 lakh deposited in a bank, then the amount above Rs 5 lakh will not be paid if the bank collapses.