The Reserve Bank of India (RBI) imposed monetary penalties on five Co-operative Banks on September 25, 2025, for deficiencies in regulatory compliance based on their financial position as of March 31, 2024.
| Bank Name | State | Penalty Amount | Primary Reason for Penalty |
| Beed District Central Co-operative Bank Ltd. | Maharashtra | ₹2.25 Lakh | Failure to transfer unclaimed funds to DEA Fund, non-submission of credit information to all four CICs, and failure to undertake Customer Due Diligence (CDD/KYC). |
| Kamaraj Co-operative Town Bank Ltd. | Tamil Nadu | ₹1 Lakh | Non-adherence to directions under the Supervisory Action Framework (SAF). |
| The Panchsheel Mercantile Co-operative Bank Ltd. | Gujarat | ₹1 Lakh | Non-compliance with directions on Customer Protection – Limiting Liability in Unauthorised Electronic Banking Transactions. |
| The Sultan’s Battery Co-operative Urban Bank Limited | Kerala | ₹1 Lakh | Non-compliance with directions on Loans and advances to directors, their relatives, and firms/concerns in which they are interested. |
| The Nilambur Co-operative Urban Bank Limited | Kerala | ₹50,000/− | Non-compliance with directions on Co-operative Banks Interest Rate on Deposits (specifically offering higher rates on NRE deposits than corresponding domestic term deposits). |
1. Beed District Central Co-operative Bank Ltd., Maharashtra
Key Details and Charge Sustained
The bank received a penalty of ₹2.25 Lakh.
The sustained charges were:
- Failed to transfer eligible unclaimed amounts to the Depositor Education and Awareness (DEA) Fund within the prescribed time.
- Failed to submit credit information of its customers to all the four Credit Information Companies (CICs).
- Failed to undertake requisite Customer Due Diligence (CDD) procedure while establishing account-based relationships in certain accounts (KYC failure).
Root Cause Analysis (RCA)
- DEA Fund Non-Compliance: The likely root cause is a failure in the automated tracking and operational process for identifying and transferring deposits that have been unclaimed for 10 years or more, including accrued interest, to the DEA Fund. This indicates a systemic breakdown in compliance monitoring and reporting.
- CICs Non-Submission: The bank likely did not have the required robust software/IT systems or established the necessary API/reporting links to submit customer credit information to all four CICs, as mandated by the RBI to maintain a comprehensive national credit database.
- KYC/CDD Failure: The failure to undertake requisite CDD/KYC procedures suggests a lack of rigor in the account opening process (front-office compliance) or inadequate training of staff regarding the mandatory requirements for identifying and verifying customers’ identities and addresses, increasing the risk of money laundering and financial crime.
Preventive Controls
- Automated DEA Fund Reporting: Implement an automated, monthly review and transfer process in the Core Banking System (CBS) to identify all inoperative accounts/unclaimed amounts that have crossed the 10−year limit and automatically initiate the transfer to the DEA Fund via RBI’s e-Kuber system in the last 5 working days of the month, as per regulations.
- CICs Integration and Audit: Establish full, secure, and tested electronic connectivity with all four mandated CICs for timely and complete submission of credit information of all borrowers. Conduct a monthly internal audit on the data submission logs to ensure 100% coverage and accuracy.
- Strict KYC Protocol Enforcement: Implement a “maker-checker” control (dual verification) for every new account opening to ensure all mandatory KYC/CDD documentation is collected and verified before the account is activated. Conduct mandatory quarterly training for front-line staff and compliance officers on the updated KYC/Anti-Money Laundering (AML) guidelines.
RBI Press Release
2. Kamaraj Co-operative Town Bank Ltd., Tamil Nadu
Key Details and Charge Sustained
The bank received a penalty of ₹1 Lakh for non-compliance with specific directions issued by the RBI under the Supervisory Action Framework (SAF).
The sustained charges (non-adherence to SAF directions) were:
- Not reduced single borrower exposure limit for fresh loans by 50% of the applicable regulatory limit.
- Sanctioned and disbursed fresh loans/advances not backed by collateral security of term deposits, NSCs, KVPs, or insurance policies.
- Expanded the size of the balance sheet.
- Expanded the size of deposits.
Root Cause Analysis (RCA)
The SAF is imposed when a bank breaches specified financial thresholds, such as high Net Non-Performing Assets (NPAs), accumulated losses, or low Capital to Risk-weighted Assets Ratio (CRAR). The directions restrict the bank’s operations to prevent further financial deterioration.
- Credit/Lending Violations: The root cause is a failure of the credit sanctioning team and the Board of Directors to strictly adhere to the exposure and collateral restrictions mandated under SAF to conserve capital and reduce risk. The bank’s management likely prioritized business growth over regulatory stability requirements.
- Balance Sheet/Deposit Expansion: This reflects a systemic failure to implement the prohibitions on growth imposed by the RBI to manage and stabilize the bank’s financial position. The management either lacked commitment to the SAF or lacked internal controls to enforce the restrictions on deposit mobilization and balance sheet expansion.
Preventive Controls
- Mandatory SAF Compliance Check: Integrate a hard stop in the Loan Management System (LMS) to automatically reject any fresh loan proposal exceeding the reduced SAF-mandated exposure limit or any loan not secured by the specified risk-free collateral (Term Deposits, NSCs, etc.).
- Board and Senior Management Oversight: The Board must conduct monthly reviews of the bank’s financial statements and a comparison against the SAF-imposed restrictions on balance sheet and deposit size. Any attempted breach must be flagged and corrected immediately, ensuring adherence to the SAF’s objective of financial stabilization.
RBI Press Release
3. The Panchsheel Mercantile Co-operative Bank Ltd., Gujarat
Key Details and Charge Sustained
The bank received a penalty of ₹1 Lakh.
The sustained charge was:
- Failed to enable its customers to instantly respond by “Reply” to the SMS alerts to notify an objection towards unauthorized electronic banking transactions.
Root Cause Analysis (RCA)
The RBI directions aim to limit customer liability in unauthorized electronic transactions, and timely reporting is crucial for this.
- The bank’s SMS alert system/IT infrastructure was likely configured only for one-way communication (sending alerts) and lacked the two-way functional capability to receive and process a “Reply” (e.g., “STOP” or “DISPUTE”) from the customer as an instant, time-stamped notification of an unauthorized transaction.
- This failure in an essential control mechanism increases the potential loss for the customer and the bank, as delayed reporting prevents immediate blocking of the account or card.
Preventive Controls
- Two-Way Communication System: Immediately upgrade the SMS alert system to a fully functional two-way system that can securely receive, log, and process customer ‘reply’ messages for reporting unauthorized transactions 24×7. The system must record the exact time and date of the customer’s response for liability assessment.
- Automated Action: The receipt of such a reply must trigger an immediate, automated system action to temporarily block further electronic transactions and simultaneously send an alert to the bank’s fraud monitoring team for manual follow-up, thereby fulfilling the core purpose of customer protection.
RBI Press Release
4. The Sultan’s Battery Co-operative Urban Bank Limited, Kerala
Key Details and Charge Sustained
The bank received a penalty of ₹1 Lakh.
The sustained charge was:
- The bank had sanctioned director related loans.
Root Cause Analysis (RCA)
RBI regulations for Urban Co-operative Banks (UCBs) generally prohibit the granting of loans or advances to their own directors, their relatives, or to firms/concerns in which they are interested, except for specific, small-value personal loans or loans secured by certain risk-free collateral.
- The root cause is a serious governance failure and breach of statutory prohibition (Section 20 of the BR Act) by the bank’s Board of Directors and the sanctioning authority.
- This suggests an active circumvention of rules for the benefit of related parties (insider lending), which poses a high risk to the bank’s financial health due to potential conflicts of interest and non-recovery, as the loans were ‘sanctioned’ in violation of the prescribed directions.
Preventive Controls
- Zero-Tolerance Policy and Board Declaration: The Board must adopt a zero-tolerance policy towards director-related loans, explicitly reinforcing the statutory prohibition. A mandatory quarterly declaration must be obtained from all directors, including relatives and associated firms, confirming they have not availed any prohibited loans, with stiff penalties for non-compliance.
- Audit and Reporting: The bank’s internal and statutory auditors must be instructed to specially check 100% of new loans for any relationship linkage to directors or their relatives (using CIN/PAN and other identification data) and report any contravention to the Board and the RBI immediately.
RBI Press Release
5. The Nilambur Co-operative Urban Bank Limited, Kerala
Key Details and Charge Sustained
The bank received a penalty of ₹50,000/−.
The sustained charge was:
- The bank had offered higher interest rates on Non-Resident (External) rupee deposits (NRE deposits) than those on corresponding domestic term deposits.
Root Cause Analysis (RCA)
RBI directions for co-operative banks mandate that the interest rates offered on NRE deposits shall not be higher than the interest rates offered on comparable domestic term deposits to ensure fair practice and regulatory alignment.
- The root cause is likely a lack of adherence to or incorrect interpretation of the RBI Master Circular on Interest Rate on Deposits, possibly stemming from pressure to mobilize foreign currency remittances/deposits (NRE deposits).
- This suggests a compliance failure in product pricing and policy implementation where the Treasury/Deposit management team did not align the NRE interest rate with the domestic term deposit rate structure, leading to the contravention.
Preventive Controls
- Automated Rate Control: Implement a systematic control in the CBS that automatically links the interest rate of all NRE term deposits to the interest rate of corresponding domestic term deposits, ensuring the NRE rate can never exceed the domestic rate for the same tenure.
- Dual Verification of Rate Sheets: The Chief Executive Officer (CEO) or a designated senior official, and the Compliance Officer, must jointly sign off on the final domestic and NRE interest rate sheets before they are made effective, with a specific check confirming compliance with the NRE vs. Domestic rate cap direction.
RBI Press Release
Lessons Learned for Co-operative Banks
These penalties highlight systemic compliance weaknesses common in the co-operative banking sector. The key lessons are:
- Prioritize Regulatory Compliance over Growth: The most severe penalties arise from compromising core regulations like the SAF or prohibitions on related-party lending (director-related loans). Banks must recognize that financial stability and regulatory adherence are non-negotiable preconditions for growth.
- Invest in Robust IT Infrastructure: Failures related to the DEA Fund, reporting to CICs, and instantaneous response to electronic transaction alerts all point to inadequate technology or a lack of functionality. Banks must invest in modern, compliant Core Banking Systems (CBS) and communication platforms to automate compliance checks and mandated reporting.
- Strengthen Internal Governance and Controls: The repeated lapse in KYC/CDD procedures and prohibited lending indicates that the bank’s internal control and governance structures are weak. The Board and senior management must establish a culture of compliance and conduct independent, rigorous internal audits to identify and fix these lapses before the RBI inspection.
- Ensure Timely Customer Protection: The failure to enable customers to immediately notify fraud (via “Reply” SMS) demonstrates a lapse in the critical mandate of customer protection. Banks must ensure all customer-facing systems (alerts, complaint mechanisms, etc.) function 24×7 and adhere to prescribed timelines and formats for dispute reporting and resolution.
- Regular Compliance Training: The contraventions often stem from a lack of awareness or outdated knowledge of rules, such as those governing interest rates on NRE deposits. Mandatory, periodic, and comprehensive training for all staff, especially in operations, compliance, credit, and treasury, is essential to keep up with the evolving RBI directions.