What is Ailing Co-
operative Banks? What is
Bank Run?
Brajesh Mohan
Educator (Banking Exams) Swipe for more
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News: New India Cooperative Bank's general manager held in
₹122 cr ‘scam’. RBI Issues Notice to Bank to hold all Financial
Transaction and Appoints Administrator.
A Mumbai court remanded Hitesh Mehta, the general manager and head of
accounts of the New India Cooperative Bank, in police custody till February
21 in a case of alleged misappropriation of funds from the bank.
The RBI has appointed Shreekant, a former CGM, SBI, as the administrator to
manage the bank’s affairs. Additionally, a committee of advisors has been
formed to assist him, the RBI said.
This is the first major action against a co-operative bank in Maharashtra after
the collapse of Punjab and Maharashtra Co-operative Bank due to large-
scale fraudulent loans.
According to the RBI, the eligible depositors would be entitled to receive
deposit insurance claim amount of their deposits up to a monetary ceiling of
Rs 5 lakh from the Deposit Insurance and Credit Guarantee Corporation
(DICGC), as applicable under the provisions of the DICGC Act, 1961.
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How the alleged fraud was unearthed?
The alleged fraud came to light earlier this week on Wednesday after a team
of the Reserve Bank of India (RBI) went for an audit of New India Cooperative
Bank’s Prabhadevi head office.
As the money in the safe was counted, the RBI team gathered all the
employees and told them that ₹112 crore in cash was missing.
They started questioning employees about the missing cash. However,
nobody could give any satisfactory answer. Later, it was found that cash
was missing from the bank’s Goregaon branch as well. In total, ₹122 crore
was missing from the bank’s safes.
Devashish Ghosh, the bank’s chief accounting officer, then started gathering
information about how the cash might have gone missing. Later in the
evening, Mehta went to meet the RBI officials and allegedly confessed to the
crime. Subsequently, a case against Mehta and his unknown associates was
registered.
The Economic Offences Wing (EOW) of Mumbai Police investigating the Rs
122 crore embezzlement has learned that the prime accused and the bank’s
general manager Hitesh Mehta was giving depositors’ money to traders as
unsecured or friendly loans during Covid period.
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RBI's Action
In light of Mehta's alleged confession, the RBI on Thursday
imposed several restrictions on the lender, including on the
withdrawal of funds by depositors, citing supervisory concerns
emanating from the recent material developments in the bank,
and to protect the interest of its depositors.
The RBI has barred account holders and depositors from
withdrawing money from the lender via bank branches or
ATMs for six months.
A day later, it superseded the cooperative bank's board for a
year and appointed an administrator (Ex-CGM -SBI) to manage
its affairs.
The RBI has directed the loss-making bank not to grant or renew
any loans and advances, make any investment, incur any
liability including borrowal of funds and acceptance of fresh
deposits, disburse or agree to disburse any payment whether in
discharge of its liabilities and obligations without prior approval
of RBI in writing.
This is the first major action against a co-operative bank in
Maharashtra after the collapse of Punjab and Maharashtra Co-
operative Bank due to large-scale fraudulent loans.
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What about Customers? What will they Do?
According to the RBI, the eligible depositors would be entitled to
receive deposit insurance claim amount of their deposits up to a
monetary ceiling of Rs 5 lakh from the Deposit Insurance and Credit
Guarantee Corporation (DICGC), as applicable under the provisions
of the DICGC Act, 1961.
It will be based on submission of willingness by the depositors
concerned and after due verification, it said.
This means a depositor who has an FD of Rs 10 lakh in the bank will
get only Rs 5 lakh as insurance claim amount from the DICGC.
Several customers expressed their frustration at this sudden move.
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Explained: What ails cooperative banks?
1. Structural & Regulatory Weaknesses ⚖️
❌ Dual Regulation – RBI regulates banking operation, but state governments
control management, leading to weak governance.
❌ Mismanagement & Lack of Accountability – Board members often approve
self-serving loans, leading to high NPAs (8.8%).
❌ Irregular Audits – Many cooperative banks do not undergo proper financial
scrutiny.
2. Political Interference & Corruption 🏛️
🔸 Political Influence – Cooperative banks operate under strong political
influence, with many board members linked to local politicians. This has led to
financial mismanagement, fraudulent lending, and money laundering.
🔸 Black Money & Unsecured Loans – Some banks have issued unsecured
loans to local financiers and real estate players, facilitating black money
transactions.
🔸 Weak Internal Controls – Lack of independent directors allows scams to
persist.
3. Shrinking Role Amid Rising Competition 🚀
📉 Microfinance Institutions (MFIs), NBFCs, FinTech platforms, and
Payment Banks are attracting more customers.
📉 Digital financial services are making traditional cooperative banking
less relevant, especially in urban areas.
Most cooperative banks still rely on outdated manual record-keeping,
which make audits ineffective and allow financial mismanagement to
continue unchecked..
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What is Bank Run?
A bank run occurs when a large number of customers simultaneously
withdraw their money from a bank because they fear the bank may fail.
This happens because banks operate on a fractional-reserve system,
keeping only a small portion of deposits as cash and lending out the
rest. While this system is generally stable, it becomes vulnerable if too
many depositors demand their money back at the same time.
The sudden demand for withdrawals can quickly drain a bank's reserves,
leading to a liquidity crisis and potential insolvency
Several factors can trigger a bank run:
Concerns about a bank's financial health: These concerns can arise from
news reports, rumors, or a loss of confidence in the banking system.
Bank fraud: Discovery of fraudulent activity can quickly erode public
trust.
The Domino Effect of a Bank Run
A bank run on one financial institution can create a contagion effect,
where panic spreads to other banks, triggering multiple bank runs. This
can destabilize the banking system, leading to a financial crisis if not
controlled in time.
This is the reason, RBI takes prompt action by limiting the Withdrawal and
other banking activities of the for a Particular period of time, this ensures
that panic withdrawals do not drain the bank’s reserves overnight.
Appoints a administrator to look after the operation and meanwhile work
on possibilities to revive through merger, acquisition by other bank etc.
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