Categories: Banking

How much safe is your Co-Operative Bank?

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.

BasuNivesh

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View Comments

Rohit Kumar says:

January 25, 2020 at 2:23 PM

State cooperative banks are the bank of State Govt of particular State?
- Basavaraj Tonagatti says:
  
  January 26, 2020 at 9:20 AM
  
  Dear Rohit,
  Yes, REGISTERED but does not mean State Government will take responsibility in case of DEFAULT.
Suhas says:

January 13, 2020 at 6:43 AM

Exactly happened today to guru Raghavendra Sahakara cooperative bank the RBI imposed a limit and they made so tight rules because of NPA

One question how long we need to wait to get our money back now rule is more then 35000 we can't withdraw
- Basavaraj Tonagatti says:
  
  January 13, 2020 at 6:44 AM
  
  Dear Suhas,
  It is hard to say as it depends on how the proceedings continue.
Nilakshi says:

March 27, 2019 at 12:50 AM

I think your article contains few true points but most of the points are invalid or false.. Because the state cooperative banks are there in which keeping deposit is safe and Rbi has exercised same crar norms on these banks unlike other nationalised banks. So better gain proper knowledge on this cooperative banking section before writing such articles as cooperative banks are playing vital role in development of rural and Agriculture areas of all parts of India.
- Basavaraj Tonagatti says:
  
  March 27, 2019 at 9:28 AM
  
  Dear Nilakshi,
  Thanks for your views :) Now, coming back to state run co-operative banks. Let me know the NPAs numbers. Let us compare those values with other Nationalized or Private Banks, then let us take a call. What do you say?
K Singh says:

December 18, 2017 at 2:44 PM

Hello Mr. Basu

First of all that you for your opinions for all type of financial queries. i would like to know your view about Adarsh Credit Cooperative Society (Multi state). Is it safe to invest in fix deposits offer by them ?
- Basavaraj Tonagatti says:
  
  December 18, 2017 at 3:04 PM
  
  Singh-I usually avoid Co-Operative Banks. The reason is, it is hard to find their real financial health and many times such banks run by local political parties or section of society.
sanjay says:

February 7, 2017 at 2:34 PM

Hello, Need to know more about Guru Raghavendra Sahakara bank as they are providing good returns on FD. Please find the company details in the below link - http://www.raghavendrabank.com/news.php
- Basavaraj Tonagatti says:
  
  February 7, 2017 at 3:44 PM
  
  Sanjay-Higher RETURN means HIGHER RISK.
Vinod says:

November 23, 2016 at 5:02 PM

Why does the rib pose restrictions on Dist cocoperative banks in Kerala which has a valid rib license and ifs code etc vinod
- Basavaraj Tonagatti says:
  
  November 23, 2016 at 7:52 PM
  
  Vinod-What restrictions you want? They are already in place.
varun says:

September 27, 2016 at 1:43 PM

does a job in cooperative banks gives us a job security or i mean to say is these banks come under government.
- Basavaraj Tonagatti says:
  
  September 27, 2016 at 1:52 PM
  
  Varun-I am not an expert in this matter of job security of Co-Operative Banks. Hence, I can't comment.
Basavaraj n m says:

September 14, 2016 at 5:00 PM

For a salaried person how many security and witness i have to give sir under co operative bank
- Basavaraj Tonagatti says:
  
  September 14, 2016 at 8:13 PM
  
  Basavaraj-That better you ask with your bank.
Ramesh says:

July 31, 2016 at 4:14 PM

Mr. Basavaraj. Thank you for the informative article. Can you please comment on the financial status of Sri Guru Raghavendra Sahakara Bank Niyamitha. In your opinion can you rate the best cooperative banks in Bangalore which offer safety with reasonably good returns
- Basavaraj Tonagatti says:
  
  July 31, 2016 at 6:07 PM
  
  Ramesh-Without knowing much about bank financials, it is hard for me to comment.
Sanjeev says:

April 15, 2016 at 11:39 PM

I have a huge sum of money in PMC bank as FDs from 2010 n had not faced any problems with the Bank . Should I continue with it?
- Basavaraj Tonagatti says:
  
  April 16, 2016 at 5:56 PM
  
  Sanjeev-If you are comfortable with financial status of bank, then continue.