Bhagwat Karad, minister of state for finance, informed Parliament on July 26 that 27 small cooperative banks had been liquidated and 42 smaller cooperative banks had been closed as a result of mergers during the past five years.

A total of 10 cooperative banks were liquidated in FY22, doubling the number from a year earlier, and seven of those were in Maharashtra, including Shivajirao Bhosale Sahakari Bank, Independence Cooperative Bank, and Mantha Urban Cooperative Bank.

During FY20, the highest number of bank closures occurred due to mergers; 13 District Central Cooperative Banks (DCCBs) in Kerala were deregistered after merging with Kerala State Cooperative Bank in FY20; 18 cooperative banks were closed because of mergers in FY20.

During a discussion on safeguards for depositors’ money, the minister pointed out that DICGC, a wholly owned subsidiary of the Reserve Bank of India, insures customers' bank deposits up to Rs 5 lakh in case of liquidation.

“Accordingly, if a bank fails/gets liquidated, the DICGC is liable to pay to each depositor through the liquidator, an amount of deposit up to Rs 5 lakh as insurance cover, for both principal and interest amount held by the depositor in the same right and same capacity at all the branches of a bank taken together,” he mentioned.

According to experts, cooperative banks remain under high stress due to declining asset and equity returns, net interest margin metrics, and dwindling net interest margins. According to the RBI's Financial Stability Report released in June, stress tests were conducted to assess credit risk, interest risk, and liquidity risk among a select group of urban cooperative banks (UCBs) based on their financial reports as of March 2022.

Despite the baseline scenario, a few UCBs failed on four of the five risk parameters, and credit default risk was greater than the credit concentration risk in all three scenarios. According to the RBI, shocks to trading books and banking books had a minimal impact, while liquidity shocks affected a higher number of UCBs.

As of March 31, 2020, 94 percent of the banking sector entities were UCBs, but their combined deposits and advances in the banking sector accounted for 3.24 percent of the total.

Aniket Dani, director at CRISIL Ratings said, “There are many lender groups – NBFCs, affordable home loan-focused HFCs, MFIs, SFBs, private and public banks – focusing on PSL (priority sector loans) as their book size increases year after year. Fintech firms are also focusing on the segment targeted by UCBs”

Sonam Chandwani, managing partner at KS Legal and Associates, said, “Due to changes in the existing Banking Regulations Act coupled with the rise in the ratio of NPAs (non-performing assets) and a fall in investments, the liquidation of UCBs appears to be more relevant than ever”

The RBI cannot scrutinise UCBs' accounts and exposures as thoroughly as it does other fully regulated lenders due to dual regulation - they are supervised by both the state registrar of societies and the RBI.

As was evident during the fraud at Punjab and Maharashtra Cooperative Bank, where depositors struggled to withdraw their basic life savings for extended periods of time, this leaves room for complacency.

Sanjay Agarwal, senior director at CARE Ratings added “The RBI had regulatory oversight on the banking activities of UCBs and DCCBs and its powers were limited to some extent, which impacted its ability to take timely action in case of irregularities”

Partner at SNG, Amit Aggarwal, accused many UCB management officials of unethical behaviour adding, “of late, UCBs have been seen to engage in such transactions were for personal benefit of one or more senior management members, lending is done to entities that are not eligible or entitled for those loans”