My grand uncle (who I remember very fondly) lived two blocks away. Most weekends, I’d drop by, and without fail he’d launch into a rant about his cooperative bank. He kept warning members at his non-profit, they need to pull out the funds “before this circus tent collapses on us.” Nobody listened. And of course, RBI came in one fine day, slapped a suspension, depositors lost part of their money, and the bank’s license was yanked before it got quietly absorbed into another co-op. Game over.
Here’s the thing: this wasn’t some one-off shocker. Co-op banks in India have always been the drama queens of banking. The plot line is usually the same. Cozy Benami loans, shady approvals, weak oversight, and in many cases the Jumbo in the room—political links.
Now – urban co-op. banks are technically under dual regulation—the RBI and the Registrar of Cooperative Societies. Sounds doubly safe, right? Au contraire. Turns out “dual regulation” in this situation ends up more like having two guards at a gate and each guard thinks the other one’s got this, and ambles away for a smoke.
Mint did a brilliant piece showing the moral hazard here. DICGC (deposit insurance) claims data over two decades says it all: commercial banks paid 13x the premium compared to co-ops. And guess what? Not a single commercial bank had failed in that time, but co-op. banks had been milking this insurance cow, like there was no tomorrow—₹72 crore had ballooned to ₹4,822 crore! Any risk manager worth their salt would be screaming to charge risk-rated premiums, like yesterday.
Co-op. banks have had a checkered past. Right from the 1992 securities scam where Mercantile Co-op was involved in issuing false securities, to the Ketan Parekh scam where MMCB funds were abused to support his speculative positions. Fast-forward to PMC Bank — management had stuffed the loan book with over 70% exposure to a single group, and cooked the books while depositors were hung out to dry. Or the New India Co-op Bank embezzlement case that opened up a pandora’s box of NPAs & fake borrowers while audit dozed off. Maharashtra State Coop Bank, J&K State Coop Bank, and so many embroiled in loan fraud.
But hey, despite the rogues’ gallery of coop banks above, not all are sloppy. Shoutout to the UP Coop Bank. A story that recently caught my eye where UPCB caught and stopped a massive fraud in time—some random had planted an outside laptop with a keylogger and hooked up to the bank’s network. It stole staff credentials, and enabled unauthorized payments via remote access. Funds frozen. Scam foiled. Great save.
Bottomline: If you have savings stashed away in a co-op bank, I wouldn’t take anything for granted. Keep close track of their financials. My grand uncle was no auditor, or CA neither —just a sharper than average Mumbaikar – who knew to gorge into the glossy pages of Annual Reports, unlike most others – BEFORE they got rolled up into bhelpuri cones. Legend.
