Action Summary: The Reserve Bank of India (RBI) has extended the period of Directions imposed on the bank by a further 3 months, citing “public interest.” The bank continues to operate under restricted conditions, including caps on depositor withdrawals.
1. Key Details
| Regulatory Authority | Reserve Bank of India (RBI) |
|---|---|
| Act Invoked | Section 35A read with Section 56 of the Banking Regulation Act, 1949 |
| Original Directive Date | July 03, 2025 (Effective from close of business July 04, 2025) |
| Extension Period | January 04, 2026 to April 04, 2026 (3 Months) |
| Primary Restrictions |
• Withdrawal Cap: ₹35,000 per depositor. • Ban on granting/renewing loans and advances. • Prohibition on new investments or incurring liabilities. • Ban on acceptance of fresh deposits. |
2. Root Cause Analysis (RCA)
The imposition and subsequent extension of directions under Section 35A are indicative of systemic failures within the bank. Based on the regulatory context and available data, the following root causes have been identified:
- Severe Liquidity Crunch: The bank failed to maintain adequate liquid assets to meet depositor demands, necessitating the RBI to impose a ₹35,000 withdrawal cap to prevent a run on the bank.
- Erosion of Net Worth: Reports indicate a drastic deterioration in the bank’s financial health, with net worth plummeting significantly (reportedly to negative ₹50 crore by 2025) due to accumulated losses and high Non-Performing Assets (NPAs).
- Governance Failure: The bank witnessed internal management instability, including the suspension and subsequent reappointment of the Managing Director, and allegations of conspiracy among shareholders. This lack of cohesive leadership hindered timely decision-making.
- Inadequate Corrective Action: Despite prior engagements by the RBI and placement under the Supervisory Action Framework (SAF), the bank’s management failed to demonstrate “concrete efforts” to resolve supervisory concerns or improve the financial position.
3. Preventive Controls & Mitigation
To prevent recurrence of such regulatory interventions, the following control framework is recommended:
- Liquidity Coverage Ratio (LCR) Monitoring: Implement daily monitoring of LCR to ensure the bank holds sufficient High-Quality Liquid Assets (HQLA) to survive a 30-day stress scenario.
- Professionalization of Management: Adhere strictly to RBI’s “Fit and Proper” criteria for the appointment of Directors and CEOs. Ensure clear separation between the Board (oversight) and Management (execution) to prevent conflict of interest.
- Credit Risk Management: Halt high-risk lending immediately. Implement a robust Loan Origination System (LOS) with strict underwriting standards and initiate an aggressive recovery drive for bad loans.
- Capital Augmentation Plan: Develop a concrete roadmap for capital infusion, either through existing shareholders, conversion of deposits to equity (if permitted), or merger with a stronger entity.
- Compliance with SAF Triggers: Establish an internal compliance cell to track performance against RBI’s Supervisory Action Framework triggers (NPA ratios, CRAR, Profitability) and initiate auto-correction measures before regulatory breach.
4. Lessons Learnt
- Governance is Key to Survival: For Co-operative banks, the quality of governance is as critical as financial metrics. Internal tussles and lack of professional management invariably lead to regulatory clamps.
- Early Warning Signals (EWS): Ignorance of early liquidity stress signs leads to severe restrictions. Banks must act on EWS immediately rather than waiting for the regulator to step in.
- Depositor Confidence is Fragile: Once restrictions are imposed, restoring public trust is arduous. Transparency and constant communication with stakeholders during the “normal” course of business are vital to building a reputation buffer.