What will happen when you have emergency need of cash from your co-operative savings bank account and suddenly bank curtail your withdrawal or limit it to mere Rs.1,000 per day?
This is what happened recently with customers of one local co-operative bank of Bangalore. So it is very important to understand the risk involved in banking with such co-operative banks. Before proceeding further let us first understand what is co-operative bank.
Co-operative banks are small scaled banks which mainly operate in rural as well as urban areas of India to cater the banking need of social groups, small businessman or small borrowers. Co-operative banks are registered under the Co-operative Societies Act. They are regulated by RBI, Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. Basically their are two types of Co-operative banks.
1) Rural Co-operative Banks-These banks are basically formed to lend financial help to agriculture related activities. For example, farming, cattle, milk, personal finance, some small scale business and to industries.
2) Urban or Semi-Urban Co-operative Banks-These banks are basically formed to lend financial help to small scale industries, business and for home loans.
Other than above two main categories their are below mentioned categories also exists.
- Primary Urban Co-operative Banks
- Primary Agricultural Credit Societies
- District Central Co-operative Banks (DCC Banks)
- State Co-operative Banks
- Land Development Banks
Now why few feel it best to bank with Co-operative banks?
- The foremost reason is, these Co-operative banks offer higher interest rates than the other public sector or some private sector banks.
- As these banks are operated and managed by local people, it is convenient to prove your financial health than other banks.
- When you are illegible to loan from public sector banks or private banks then you have high possibility that you will get loans easily. Because their rules are not that much stringent.
- Banking may be comfortable and bit easy than other banking formats.
What are the risks involved?
- As usual return on your deposits are high means risk is also high from such banks.
- To give you high returns option for such Co-operative banks are to lend their money at higher interest rate. Who will take such high interest loans? Obviously borrowers whose financial track record is not good or other banks rejecting their loans.
- Your deposits are insured to the tune of Rs.1,00,000 only. To know more about this feature read “Bank FDs-Is your Bank have Deposit Insurance and Credit Guarantee (DICGC)?”. Apart from this Govt will not help you by the bailouts like what happened during the time of UTI, IFCI or Indian Bank.
- As these co-operative banks usually managed by local directors, it is high probability that they may use these banks for any political or caste based gains. I saw one bank in my home town whose president belongs to one particular political party. Staff members too belong to that particular party and always they encash this advantage to their political motives. Like lending to their political workers or snatching borrowers to their political party.
- Now about the case of withdrawal limit which I mentioned in first few lines of this post, reason for such limit is as per RBI guidelines!!!. RBI will put forth such limits when any such co-operative bank’s NPA (non performing assets or in simple words bad loans) crosses more than 50% of it’s advances. To rehabilitate and infuse more funds to bank, usually RBI restrict such withdrawal limits. If after such rehabilitation will not work for 2 years too then bank may either liquidated or merged with any of the strong nationalized bank.
- DICGC will come into picture when their is bank liquidate issue. During this period depositor need to submit relevant documents to prove their deposit. If assets are worth to pay all depositors then it will be get paid else proportionate to bank’s asset will be distributed among depositors.
- But time frame to get bank your money in case of liquidation is lengthy so you need to wait and watch for action.
Considering few positive and more negative points, it is very difficult for common man to understand the health of such co-operative banks. Hence it is always prudent to avoid your banking activity for the gain of few rupees.