Explained: Why RBI has imposed curbs on New India Co-operative Bank

The Reserve Bank of India (RBI) has placed several restrictions on Mumbai’s New India Co-operative Bank.

These measures took effect on Thursday (February 13) and will remain in place for six months, pending review.

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The central bank stated that it would assess the situation before deciding on any further steps.

According to the RBI, these restrictions were introduced due to recent material developments impacting the bank.

But what led to the RBI’s decision to impose strict restrictions? What challenges was the bank facing? How did accountholders react to the situation?

Let’s take a look:

Why RBI ordered New India Co-operative Bank to stop disbursements

The Reserve Bank of India (RBI) has issued a notice to New India Co-operative Bank Limited, imposing restrictions on issuing new loans, accepting fresh deposits, or permitting withdrawals for the next six months.

The RBI cited supervisory concerns as the reason for its decision. Depositors are unable to withdraw funds due to the bank’s liquidity issues.

The move is intended to safeguard depositors’ interests and maintain financial stability.

The RBI’s action follows what it described as “recent material developments” at the bank. While the central bank did not disclose specific details, it said that these measures were taken to protect depositors.

According to the RBI notice, “Considering the bank’s present liquidity position, the bank has been directed not to allow withdrawal of any amount from savings bank or current accounts or any other account of a depositor but is allowed to set off loans against deposits subject to the conditions stated in the RBI Directions.”

However, the RBI has granted certain exemptions to New India Co-operative Bank for essential expenses, including employee salaries, rent, and electricity bills.

Also, the central bank clarified that depositors are eligible to receive deposit insurance claims of up to Rs 5,00,000 in the same capacity and right from the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Importantly, the RBI clarified that these restrictions do not indicate the cancellation of the bank’s licence. “The bank will continue to undertake banking business subject to restrictions specified in the said Directions till its financial position improves,” it said in the notice.

The RBI further said that it will continue monitoring the bank’s financial status and take necessary actions based on future developments.

‘We have EMIs to pay’: How bank customers reacted

Customers of the bank were gripped by panic after the RBI issued the notice. Videos circulating online showed people gathering outside bank branches, seeking clarification on the situation.

The development has caused distress among the depositors, many of whom depend on their accounts for daily financial transactions. Worried about their savings, bill payments, and loan EMIs, customers rushed to the branches in a state of anxiety.

Seema Waghmare, one of the customers, told ANI, “We deposited money just yesterday, but they did not say anything… They should have told us that this was going to happen… They are saying that we will get our money within 3 months… We have EMIs to pay, we have no idea how we will do all of that.”

Another depositor, Bhanumati, expressed her frustration, saying, “The bank didn’t tell us anything… Nobody has the time to check their phone instantly… I have had an account in this bank for the last 32-35 years… I was about to open an FD (Fixed Deposit account) as well with this bank, but luckily, I didn’t get the time to do that.”

Ramesh, another account holder, told the news agency, “We have been standing in line since morning… We have been told that we will get our money after 2-3 months. Who knows if we’ll even get it back?… The bank didn’t inform us about anything… How will we trust any bank now?… I have Rs 40,000 deposited in the bank.”

A look at financial health of New India Co-op Bank

A report by CNBC TV18 said that the bank reported a loss of Rs 22.78 crore in FY24, compared to Rs 30.75 crore in FY23.

As of FY24, the bank’s advances stood at Rs 1,175 crore, while deposits were recorded at Rs 2,436 crore.

Out of the Rs 2,436 crore in deposits, Rs 671.51 crore were in savings accounts, Rs 103.21 crore in current accounts, and Rs 1,652.25 crore in term deposits.

According to India Today, the bank’s loan book declined to Rs 11.75 billion as of March 31, 2024, from Rs 13.30 billion a year earlier. However, deposits saw a slight increase, rising to Rs 24.36 billion from Rs 24.06 billion in the same period.

This is not the first instance of the RBI taking strict measures against a co-operative bank. In 2019, the regulator imposed restrictions on Punjab and Maharashtra Co-operative Bank after uncovering financial irregularities, including under-reporting of bad loans. The RBI later approved Centrum Financial Services to take over the lender.

What RBI curbs mean for depositors

• No cash withdrawals: Account holders cannot take out money from savings, current, or other accounts.

• Loans can be adjusted: The bank is allowed to adjust loans against deposits under RBI’s directives.

• Essential expenses covered: Payments for salaries, rent, and utilities will continue.

• No fresh banking activities: Issuing new loans, renewing credit, making investments, or accepting fresh deposits is prohibited without RBI’s consent.

• Deposit protection: Depositors are eligible to claim up to Rs 5 lakh from the Deposit Insurance and Credit Guarantee Corporation (DICGC).

With inputs from agencies