RBI finds faults with coop societies using 'bank' tag, central bank's approval only for 61 in Kerala

The Reserve Bank of India (RBI) objected to cooperative societies using the word "bank" in their names, violating the Banking Regulation Act.
In a recent circular published in major dailies, the apex bank cautioned investors and depositors against trusting their money with such institutions in the cooperative sector.

The warning has major relevance to Kerala, where probes by the state government and other agencies unearthed fraud in 227 cooperative societies/banks in the state till 2024, according to assembly records. Between 2021 and 2024, the state government took action against 281 cooperative societies/banks for financial irregularities.

According to the Department of Cooperation, Kerala has 1,581 institutions in the sector that function as banks. The list includes apex banks (Kerala Bank, Kerala State Agri Development Bank), district cooperative banks, rural coop banks and societies, and employee credit societies.

The RBI circular notes that cooperative societies' use of banks violates Section 7 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies).

"...Some Co-operative societies accepting deposits from non-members / nominal members/associate members which tantamount to conducting banking business", violated the provisions of the BR Act, 1949, the RBI circulates states.

"...Such societies have neither been issued any licence under BR Act nor does the RBI authorise them for doing banking business."

The apex bank also noted that deposits in these institutions will not be covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which means that in case of liquidation, investors may lose all their savings. (The DICGC insures deposits up to a maximum of Rs 5 lakh.)

As per the RBI data, the central bank has approved 61 Kerala banks in the cooperative sector.

In addition to the state government's list of fraud-hit cooperative banks, the anti-money laundering agency Directorate of Enforcement (ED) has named 13 banks for fraud.

Apart from the Karuvannur Coop Bank, where the ED unearthed a scam over Rs 300 crore, the list includes  Thumboor Service Cooperative Bank, Nadackal Service Cooperative Bank, Mavelikkara Service Cooperative Bank, Moonilavu Service Cooperative Bank, Kandala Service Cooperative Bank, Perunkavilla Service Cooperative Bank, Mylapra Service Cooperative Bank, Chathannoor Service Cooperative Bank, BSNL Engineers Cooperative Bank, Koni Regional Service Cooperative Bank and Marayamuttam Service Cooperative Bank.

The state government had taken strong exception to the regulations imposed on cooperative institutions by the RBI. The government had earlier said that while issuing statement on cooperative banks, the RBI disregarded Supreme Court rulings which said that the cooperative sector is a state subject.

The Kerala government has maintained that the Deposit Guarantee Board and the Cooperative Restoration Fund would secure deposits in the cooperative banks. “Cooperative societies are our wealth. They ensure adequate liquidity. Attempts to discredit them in favour of corporates and multi-state cooperative societies are unacceptable,” State Chief Minister Pinarayi Vijayan said at a function in Kannur recently.