Key Details of RBI Actions
The RBI issued Directions to The Baghat Urban Co-operative Bank Ltd., Solan, on October 06, 2025, using its powers under Section 35 A read with Section 56 of the Banking Regulation Act, 1949.
The Directions came into effect from the close of business on October 08, 2025, and are set to remain in force for a period of six months, subject to review.
Restrictions Imposed:
The bank is prohibited from performing several banking functions without the RBI’s prior written approval:
- Granting or renewing any loans and advances.
- Making any investment.
- Incurring any liability, which includes borrowing funds and accepting fresh deposits.
- Disbursing or agreeing to disburse any payment.
- Entering into any compromise or arrangement.
- Selling, transferring, or otherwise disposing of any of its properties or assets.
- However, the bank may incur necessary expenditure for essential items such as employee salaries, rent, and electricity bills, as specified in the Directions.
Withdrawal Limit for Depositors:
- Due to the bank’s current liquidity position, depositors are only permitted to withdraw a sum not exceeding ₹10,000/- (Rupees Ten Thousand only) from the total balance across their savings, current, or any other account.
- The bank is allowed to set off loans against deposits, subject to the conditions laid out in the RBI Directions.
Deposit Insurance:
- Eligible depositors are entitled to receive a deposit insurance claim amount up to a monetary ceiling of ₹5,00,000/- (Rupees Five Lakh only) from the Deposit Insurance and Credit Guarantee Corporation (DICGC), provided they submit their willingness and after due verification.
- The issuance of these Directions should not be interpreted as a cancellation of the banking license by the RBI. The bank will continue to operate, subject to the imposed restrictions, until its financial position improves.
Root Cause Analysis (RCA)
The RBI’s Press Release attributes the need for these Directions to failures in the bank’s operations and governance:
- Failure to Address Supervisory Concerns: Despite recent engagement with the bank’s Board and Senior Management for improvement in its functioning, the bank showed a lack of concrete efforts to address supervisory concerns.
- Protection of Depositors: The action was necessitated to protect the interest of the depositors of the bank.
- Liquidity Position: The specific restriction on withdrawals was imposed due to the bank’s current liquidity position.
The root cause points to weak governance and management inaction in resolving deep-seated supervisory issues, which led to a precarious liquidity situation, endangering depositors’ funds.
Preventive Controls
To prevent a recurrence of such severe regulatory intervention and financial deterioration, Urban Co-operative Banks (UCBs) should implement the following strong preventive measures:
- Effective Risk Management: Establish rigorous processes for credit risk management, focusing on asset quality, recovery of bad loans, and avoiding excessive concentration of risk.
- Prudent Liquidity Management: Maintain robust liquidity buffers well in excess of statutory minimums to absorb unforeseen withdrawals and meet all financial obligations in a timely manner.
- Strong Governance Framework: Ensure the Board and Senior Management are competent, independent, and highly responsive to regulatory and supervisory feedback. This includes establishing an effective internal audit and compliance function.
- Capital Preservation and Augmentation: Proactively maintain a healthy Capital to Risk-Weighted Assets Ratio (CRAR) to provide a safety net against losses and support business stability.
- Timely Remediation of Deficiencies: Treat every supervisory finding as a critical item, implementing corrective and preventive actions immediately and effectively to avoid escalation.
Lessons Learned
The RBI’s intervention offers critical lessons for the entire cooperative banking sector:
- Depositors’ Interest is Paramount: Regulatory action is primarily driven by the need for the protection of depositors’ funds. Any bank jeopardizing this interest will face strict intervention.
- Inaction is Not an Option: A significant takeaway is that delay or failure to take concrete steps to fix supervisory issues, even after formal and informal engagement with the RBI, will lead to punitive restrictions.
- Governance Determines Viability: Poor management, lack of control, and a failure to implement necessary improvements directly impact a bank’s liquidity and solvency, ultimately threatening its viability.
- Restrictions Are for Revival: The Directions are a tool to halt further deterioration and provide a window for the bank to improve its financial position. The RBI continues to monitor the bank’s position and may modify the Directions based on the bank’s progress.
- Deposit Insurance Safety Net: The action reinforces the assurance provided by the DICGC, which ensures that eligible depositors will be protected up to ₹5 Lakh, mitigating panic in the system.