The Reserve Bank of India (RBI) recently revoked the license of Mumbai-based CKP Co-operative Bank. The decision was triggered by the bank’s unsustainable and highly adverse financial position, making it unable to compensate its current and prospective depositors.
The CKP Co-operative Bank failed to meet the regulatory requirement of maintaining a minimum capital adequacy ratio of 9% and reserves. Consequently, the RBI has tasked the Registrar of Co-operative Societies, Maharashtra, to initiate winding up operations for the CKP Co-operative Bank and appoint a liquidator.
Following the liquidation, all the bank’s depositors will be entitled to a maximum of Rs 5 lakh from the Deposit Insurance and Credit Guarantee Corporation.
In September of the previous year, the RBI imposed restrictions on Punjab and Maharashtra Co-operative (PMC) Bank, barring it from conducting any business for six months due to the discovery of major irregularities in its operations.
Understanding Capital Adequacy Ratio (CAR)
Capital Adequacy Ratio (CAR) is defined as the ratio of a bank’s capital against its risk-weighted assets and current liabilities, thus providing a measure of its financial strength. It’s also known as Capital-to-Risk Weighted Asset Ratio (CRAR), which central banks implement to prevent commercial banks from obtaining excessive leverage and subsequently becoming insolvent.
Basel III norms require a capital to risk-weighted assets ratio of 8%. However, as per RBI norms, Indian scheduled commercial banks must maintain a CAR of 9%.
About Deposit Insurance and Credit Guarantee Corporation (DICGC)
The DICGC was established in 1978 following the merger of the Deposit Insurance Corporation (DIC) and the Credit Guarantee Corporation of India Ltd. (CGCI), under the Deposit Insurance and Credit Guarantee Corporation Act, 1961. The DICGC acts as a deposit insurance and credit guarantee for banks in India. It charges 10 paise per ₹100 of deposits held by a bank.
The last revision to the deposit insurance cover was made in February 2020, raising it from ₹ 1 lakh since 1993, to ₹5 lakh. However, this protection cover is among the lowest globally.
Characteristics of Co-operative Banking
A Co-operative bank is distinct from commercial banks and belongs to its members, who are simultaneously the owners and customers of their bank. These banks are registered under the States Cooperative Societies Act and regulated by both the Registrar of Co-operative Societies and the Reserve Bank of India (RBI).
Co-operative Banks have unique characteristics including: they are owned by customers, have democratically elected boards, generally allocate a significant part of yearly profits to reserves and significantly contribute to the financial inclusion of unbanked rural areas.
There is a distinction between Urban and Rural co-operative banks based on their operational region.
Understanding the Difference between UCBs and Commercial Banks
Unlike commercial banks, Urban Cooperative Banks (UCBs) are only partially regulated by the RBI. Their banking operations are regulated by the RBI, which establishes their capital adequacy, risk control, and lending norms. However, their management and resolution in the event of distress are regulated by the Registrar of Co-operative Societies either under State or Central government.
In a UCB, borrowers can also double up as shareholders, unlike commercial banks where there is a clear distinction between shareholders and borrowers.