1. Key Details of Regulatory Action
The Reserve Bank of India (RBI) issued Directions to the bank under Section 35 A read with Section 56 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies).
- Effective Date: Close of business on December 09, 2025.
- Duration: The Directions are in force for a period of six months, subject to review.
- Primary Reason: “Supervisory concerns emanating from the recent material developments in the bank, and to protect the interests of depositors of the bank.”
- Withdrawal Limit: Depositors are restricted to withdrawing a sum not exceeding ₹35,000/- (Rupees Thirty-five Thousand only) of the total balance across all accounts.
- Operational Restrictions: The bank is prohibited from:
- Granting or renewing any loans and advances.
- Making any new investments.
- Incurring any new liabilities (including accepting fresh deposits).
- Disbursing any payments (except essential expenses like salaries, rent, and electricity bills).
- Selling, transferring, or disposing of any properties or assets.
- DICGC Coverage: Eligible depositors are entitled to receive deposit insurance claim amount up to the monetary ceiling of ₹5,00,000/- (Rupees Five Lakh only) from DICGC.
- License Status: The RBI clarified that the Directions should not be construed as a cancellation of the banking license. The bank will continue banking business with restrictions until its financial position improves.
2. Root Cause Analysis (RCA)
While the RBI release cites “supervisory concerns” and “recent material developments,” such comprehensive restrictions on a Co-operative Bank (UCB) typically stem from a failure to meet key prudential norms. The root causes are often multifaceted and fall under the following critical areas, which align with the RBI’s Supervisory Action Framework (SAF):
- Weak Asset Quality & Credit Risk Management:
This is the most common reason. It indicates high levels of Non-Performing Assets (NPAs). Loans are issued without adequate diligence, collateral, or recovery mechanisms, leading to significant losses and eroding the bank’s capital. High NPA levels (typically exceeding 6% Net NPA ratio) are a major trigger for RBI action.
- Inadequate Capital Base (Capital Adequacy):
The bank’s Capital to Risk-weighted Assets Ratio (CRAR) likely fell below the mandated threshold (e.g., below 9%). This suggests that the bank did not have enough cushion to absorb potential losses from its lending activities.
- Liquidity Mismatch and Operational Stress:
The immediate imposition of a withdrawal limit of ₹35,000/- is a direct indicator of critically low liquidity. This can be caused by funds being tied up in stressed or fraudulent assets, coupled with the inability to raise fresh deposits (which is now restricted) due to public concerns.
- Governance and Internal Control Failures:
Failures in oversight by the Board of Directors, coupled with poor internal audit and compliance systems, often allow financial irregularities or reckless lending practices to go unchecked until the situation becomes critical. This includes non-compliance with RBI directives on exposure norms and KYC/AML.
3. Suggested Preventive Controls
To prevent future supervisory intervention and ensure long-term viability, the bank must implement rigorous controls focused on governance, compliance, and financial health:
- Strengthen Credit Underwriting and Appraisal:
Implement a robust credit policy that ensures thorough due diligence, realistic valuation of collateral, and mandatory independent appraisal before sanctioning large advances. Strictly adhere to internal and regulatory exposure limits for individuals and groups.
- Enhance Board Oversight and Professionalism:
Ensure the Board of Directors possesses the required expertise (banking, finance, law) and is fully independent of management’s day-to-day operations. Establish a separate, powerful Audit Committee of the Board (ACB) to monitor compliance and internal controls regularly.
- Robust Internal Audit and Compliance Functions:
Upgrade the internal audit function with skilled personnel and mandate comprehensive, risk-based audits that focus specifically on asset quality, loan recovery, and regulatory compliance breaches (like KYC/AML norms). The compliance department must act as a first line of defense.
- Liquidity Risk Management (LRM) Framework:
Establish a dynamic LRM framework that monitors short-term and long-term cash flows, conducts stress testing, and maintains sufficient High Quality Liquid Assets (HQLA) to meet unexpected withdrawal demands far exceeding the ₹35,000 threshold imposed by RBI.
- IT Infrastructure and Reporting Integrity:
Invest in modern Core Banking Systems (CBS) and reporting tools to ensure that all internal and external regulatory reports (especially concerning NPAs and CRAR) are accurate, timely, and cannot be manipulated by internal actors. This prevents the “wrong/under-reporting” issues seen in other UCB crises.
4. Lessons Learnt for the Banking Sector
The action against Nasik Jilha Mahila Vikas Sahakari Bank Ltd. reinforces several critical lessons for all Co-operative Banks and the wider banking ecosystem:
- Compliance is Non-Negotiable: Regulatory adherence (especially regarding asset classification, provisioning, and lending norms) is paramount. Failure to comply directly jeopardizes depositors’ funds and invites severe corrective action.
- Governance Dictates Destiny: The integrity and professional competence of the Board and senior management are the single most important factors determining a UCB’s health. Politicization or lack of professional expertise on the Board is a precursor to financial distress.
- Liquidity is King: Regardless of capital position, immediate liquidity failure (the inability to meet immediate withdrawal demands) is what triggers public panic and the most restrictive actions from the regulator. Maintaining a robust liquidity buffer is essential for market confidence.
- Timely Corrective Action: Banks must view supervisory feedback not as a burden, but as a mandatory roadmap for improvement. Delaying corrective measures on asset quality or governance issues will inevitably lead to stronger, more disruptive actions like those imposed under Section 35A.