RBI cancels license of another bank- This will be the 7th Bank in 2024– Have you ever wondered why the Reserve Bank of India (RBI) cancels the licenses of some banks? Especially cooperative banks? Let us know in detail. RBI is key in ensuring the banking sector’s stability and credibility; understanding its functions can help us see the bigger picture.
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RBI Penalizes Banaras Mercantile Co-operative Bank Ltd., Varanasi
The Reserve Bank of India (RBI) has imposed a monetary penalty of ₹1,50,000 (Rupees One Lakh Fifty Thousand only) on Banaras Mercantile Co-operative Bank Ltd., Varanasi, Uttar Pradesh under the provisions of Section 46(4) read with Section 47A(1)(c) of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies).
Reasons for Penalty
The penalty was imposed for the bank’s violation of the following RBI instructions and guidelines:
- Supervisory Instructions issued under Section 36(1) of the Banking Regulation Act, 1949 (AACS)
- Prudential Norms on Inter-bank Gross Exposure and Counter Party Limit
- Know Your Customer (KYC) guidelines
RBI’s Process
RBI issued a show cause notice to Banaras Mercantile Co-operative Bank. The bank submitted a written reply. After examining the facts of the case, the bank’s reply and a personal hearing, RBI concluded that the violation was confirmed and a penalty was appropriate.
RBI Cancels License of Another Bank: Details
| Date | Event |
|---|---|
| July 4, 2024 | RBI cancelled the license of Banaras Mercantile Co-operative Bank. This marks the seventh cooperative bank license cancellation in 2024. |
Reason for License Cancellation
The cooperative banks whose licenses have been cancelled lacked sufficient capital and were not generating adequate earnings. Consequently, they were unable to guarantee the repayment of depositors’ funds.
RBI’s Increased Scrutiny
The Reserve Bank of India (RBI) has intensified its scrutiny of cooperative banks. This has led to fines for some banks and license cancellations for others.
Examples of Other Affected Banks in 2024
Cooperative Banks with Canceled Licenses in 2024
This year has seen a series of license cancellations:
| Sl No. | Bank Name | Location |
|---|---|---|
| 1 | City Co-operative Bank | Mumbai |
| 2 | Purvanchal Cooperative Bank | Ghazipur, Uttar Pradesh |
| 3 | Sumerpur Mercantile Urban Co-operative Bank Limited | Sumerpur |
| 4 | Jai Prakash Narayan Nagari Sahakari Bank Limited | |
| 5 | Shri Mahalaxmi Mercantile Co-operative Bank Limited | |
| 6 | Hiriyur Urban Co-operative Bank Limited | Hiriyur |
| 7 | Banaras Mercantile Co-operative Bank | Varanasi |
Each of these banks faced similar issues—poor financial health, insufficient capital, and inability to guarantee depositor payments.
Deposit Protection
According to data from Banaras Mercantile Co-operative Bank, 99.98% of depositors are eligible to receive their full deposit amount from the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Supervision of Cooperative Banks
- Registration: Cooperative banks in India are registered under the State Cooperative Societies Act.
- Regulation: They are regulated by the RBI under the Banking Regulation Act, 1949, and the Banking Laws (Cooperative Societies) Act, 1955.
- Supervision: RBI has supervised cooperative banks since 1966.
Why Does RBI Cancel Licenses?
RBI cancels the licenses of cooperative banks that:
- Lack of sufficient capital.
- Fail to generate adequate earnings.
- Cannot guarantee the repayment of depositors’ funds.
Allowing such banks to continue operations poses a risk of financial loss, prompting the RBI to revoke their licenses to protect depositors’ money.
What Are Cooperative Banks?
Cooperative banks are financial institutions established on a cooperative basis and their members are both the owners and customers of the bank. They work to provide financial services to their members, especially in rural areas. Unlike commercial banks, cooperative banks focus more on providing affordable loans and services to small-scale industries, agriculture, and local communities.
RBI’s Role in Regulating Banks
Established in 1935, the RBI is India’s central banking institution, which controls the issuance and supply of the Indian rupee. One of its key responsibilities is to regulate and supervise the banking sector, ensuring that banks operate in a healthy and safe manner. This includes setting banking regulations, conducting audits, and taking action against banks that fail to adhere to standards.
Recent Actions by RBI
Recently, the RBI has tightened its grip on cooperative banks, highlighting their financial instability and lack of adequate capital. This year alone, the licenses of several cooperative banks have been cancelled. Why? Simply put, these banks were not earning enough to meet their liabilities, putting depositors’ money at risk.
Banaras Mercantile Co-operative Bank Case
On July 4, 2024, RBI cancelled the license of Banaras Mercantile Co-operative Bank. This Varanasi-based bank was struggling with poor financial condition. According to data, 99.98% of its depositors are expected to get their entire deposits through the Deposit Insurance and Credit Guarantee Corporation (DICGC). The main reason for cancellation? The bank’s inability to ensure the return of depositors’ money due to insufficient capital and poor income.
Financial Health of Cooperative Banks
Many cooperative banks face similar problems. They often lack the capital needed to meet their liabilities and struggle to maintain profitability. Unlike commercial banks, which have more diversified revenue streams and better access to capital markets, cooperative banks are more vulnerable to financial instability.
FAQ
Why does RBI cancel bank licenses?
RBI cancels the license of banks mainly to protect the depositors’ money when the banks fail to maintain adequate capital and financial health thereby posing a threat to the depositors’ money.
What happens to depositors when a bank’s license is cancelled?
Depositors are usually protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which insures deposits up to a certain limit, ensuring that they get their money back.
RBI decides to take action against which bank?
RBI monitors banks’ financial health, capital adequacy and compliance with regulations. If a bank consistently fails to meet these standards and poses a risk to depositors, RBI can cancel its license.
Are cooperative banks riskier than commercial banks?
Cooperative banks can be risky due to their limited access to capital markets and dependence on local communities for funds. They often face financial instability and profitability issues.
