1. Key Details of RBI Action
| Entity Name | Shree Mahalaxmi Urban Co-operative Credit Bank Ltd., Gokak (Karnataka) |
| Regulatory Provision | Section 35A read with Section 56 of the Banking Regulation Act, 1949 |
| Original Directive Date | September 26, 2024 |
| Latest Action (Extension) | Extension of Directive for 3 months (Dec 23, 2025 Press Release) |
| Current Validity | December 27, 2025 to March 27, 2026 (Subject to Review) |
2. Root Cause Analysis (RCA)
The imposition and subsequent extension of directions stem from severe financial deterioration triggered by internal governance failures.
- Massive Financial Irregularities: Investigations revealed financial irregularities estimated at approximately ₹74 Crore. Reports indicate that 14 employees, including the bank manager, were booked for sanctioning loans to themselves and associates without intent to repay.
- Insider Collusion: The core issue was a breakdown in internal checks, where staff members allegedly acted in connivance to bypass loan sanctioning protocols, leading to a surge in Non-Performing Assets (NPAs).
- Liquidity Crisis: The inability to recover these fraudulent loans precipitated a severe liquidity crunch, rendering the bank unable to meet its obligations to depositors, necessitating RBI’s intervention to freeze operations and cap withdrawals.
- Governance Deficit: The scale of the irregularity implies a failure of the Board of Directors and the Credit Committee to exercise due diligence or monitor exposure limits effectively.
3. Preventive Controls & Mitigation
Automated Credit Guardrails
Implement Core Banking Solution (CBS) locks that prevent staff from sanctioning loans to employee IDs or linked accounts without external regional approval.
Concurrent Audit Strengthening
Move from periodic to real-time concurrent audits focusing specifically on “Insider Lending” and “high-value exposures” to detect anomalies immediately.
Whistleblower Mechanism
Establish a direct, anonymous reporting line to the Board or external auditor for junior staff to report coercion or irregularities by management.
Staff Rotation Policy
Strict enforcement of mandatory leave and job rotation for sensitive positions (Cash, Credit, Clearing) to prevent entrenchment of fraudulent practices.
4. Lessons Learnt
- For Co-operative Banks: Trust is fragile. The reliance on a single manager or a small group without external oversight is a single point of failure. Board members must be financially literate and active in reviewing loan portfolios.
- For Depositors: While DICGC insurance (up to ₹5 Lakh) provides a safety net, depositors should diversify their holdings and scrutinize the financial health (Audit Rating) of co-operative banks before parking substantial funds.
- For Regulators: The extension of the directive suggests that recovery is slow. Prompt corrective action (PCA) frameworks need to trigger faster legal recourse to recover assets from defrauding employees to restore liquidity.