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February 22, 2021

RBI imposes Rs 1000 withdrawal limit on Deccan Urban Cooperative Bank

by CA Jessica Nagaonkar in RBI

RBI imposes Rs 1000 withdrawal limit on Deccan Urban Cooperative Bank

The Reserve Bank of India (RBI), also known as the Apex Bank of India was established as India’s central bank to regulate the issue of banknotes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage and to formulate a modern monetary policy framework to meet the challenge of an increasingly complex economy. The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth.

In June 2020, cooperative banks were brought under the regulatory framework of the RBI by amending the seven-decade old Banking Regulation Act through a presidential decree. An amendment in the Banking Regulation Act enabled mergers and restructuring of banks in public interest, without having to order a moratorium, which not only limited withdrawals by depositors, but also disrupted the bank’s lending operations. Besides, cooperative banks were allowed to raise money via public issue and private placement, of equity or preference shares as well as unsecured debentures, with the central’s bank’s nod.

The new Ordinance enabled the RBI to get “control over management” of co-operative banks registered with a state government, too, apart from multi-state co-operative banks. RBI has imposed a withdrawal cap of Rs 1,000 on customers of Deccan Urban Cooperative Bank and barred the Karnataka-based lender from granting fresh loans or accepting deposits.

What would be the effect of the withdrawal cap?

  • The lender has also been asked not to make fresh investments or incur any liability without its prior permission.
  • The bank cannot undertake any fresh business, including giving new loans and taking fresh deposits.
  • The directions will remain in force for six months from the close of business on February 19 and are subject to review.
  • RBI has also asked the lender to desist from disbursing any payment whether in discharge of its liabilities or otherwise, or dispose of any of its assets except as notified in the RBI direction.
  • Considering the bank’s present liquidity position, a sum not exceeding Rs 1,000 only of the total balance across all savings bank or current accounts or any other account of a depositor may be allowed to be withdrawn.
  • Bank customers can set off their loans against deposits subject to conditions.

Coverage by DICGC to depositors

  • The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of RBI, provides insurance cover up to Rs 5 lakh on bank deposits.
  • Therefore, 99.58% of the depositors are fully covered by the DICGC insurance scheme, said the RBI.

The RBI said it issued the directions to bank’s chief executive officer. It further said putting the bank under restrictions should not be construed as cancellation of its banking licence. The bank will continue to undertake banking business with restrictions till its financial position improves.

The RBI has been cracking down on weak cooperative banks over the past few years. In 2020, the RBI cancelled permits of three cooperative banks and imposed restrictions on several other banks. The cooperative banks are facing severe challenges which have restricted their ability to ensure smooth flow of credit, limited ability to mobilize resources, low level of recovery, high transaction of cost, administered rate of interest structure for a long time.

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