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Have a savings account in a co-operative bank? Better have a back-up

In May, thousands of account holders were hit after the Reserve Bank of India (RBI) imposed financial restrictions on Shivajirao Bhosale Sahakari Bank Ltd., Pune.

Now, savings and current account holders can only withdraw Rs 1,000 at a time, and the regulator has restricted acceptance of new loans, restructuring of debt accounts, as well as accepting new accounts. This will continue until the bank’s financial position improves.

Another similar case was when the central bank imposed restrictions on Mumbai-headquartered Kapol Co-operative Bank in March 2017. Since April 2017, Kapol bank’s depositors are also facing restrictions on accessing their money –now one withdrawal of Rs 3,000 in six months is allowed by the RBI.

The restrictions extended to granting or renewing loans and advances, making investments, incurring liability including borrow of funds and acceptance of fresh deposits, as notified by the RBI in the circular dated March 30, 2017.

This decision too was taken by the regulator due to the bank’s poor financial health and has impacted 2.5 lakh customers of the bank.

Don’t panic

The first thing to remember as a depositor is to not panic in case the regulator imposes a restriction on withdrawals from your account with a co-operative bank.

A retail banker, requesting anonymity said, “Deposits with your bank come with a safety net, which is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), under the RBI. The DICGC offers insurance cover up to Rs 1 lakh on the deposits you make and also guarantees credit.” All commercial, foreign, co-operative and rural-regional banks regulated by RBI are covered under this.

For instance, if you hold a deposit of Rs 40,000 with neighbourhood co-operative bank you will only get Rs 40,000 under DICGC. This Rs 1 lakh includes both the principal as well as interest amount. So, if you deposited Rs 95,000 in fixed deposit and earn Rs 2,000 as interest, you will be able to recover Rs 97,000 and not Rs 1 lakh from the bank. In other words, not just your savings and current account bank balance, but also your fixed and recurring deposits are covered by DICGC.

However, if you hold Rs 1.5 lakh, you will still get only Rs 1 lakh, in case your co-operative bank financials deteriorate and the regulator imposes restrictions on withdrawal. The amount will be paid by DICGC to you within two months from the date of liquidation of the bank.

After the above instances of co-operative banks operation’s being hit by poor financial conditions, here, are the three important factors to look for while opening an account or if you already hold an account with a co-operative bank.

Banking with a cooperative bank or a cooperative credit society?

To start with, in case you are planning to open a bank account ascertain whether the financial institution in your neighbourhood, where you intend to have an account, is a co-operative bank or a co-operative credit society.

Harshil Morjaria a Mumbai-based certified financial planner of ValueCurve Financial Solutions, said, “This is important since the rules and regulations for both are different. RBI regulates co-operative banks and state governments regulate credit societies.”

Further, with co-operative banks, you are covered under DICGC in case it goes bankrupt; which is not the case with credit societies. It is, therefore, better to bank with a co-operative bank instead of co-operative credit society, in case you decide to operate an account.

Know banking practices

“Many co-operative banks are controlled by politicians and not by well-versed chief executive officers. You need to stress on due diligence and banking practices of the co-operative bank,” says Joydeep Sen, Independent Financial Advisor of wiseinvestor.in.

Typically, a well-managed bank has an elaborate process for sanctioning loans, asks for the necessary documents, and evaluates applicants as thoroughly as it can before it disburses the loans, says Sen.

“Banks that are liberal at giving loans – like co-operative banks, stand the risk of facing defaults. While it is not easy to study your bank’s processes before opening an account, these days it is easier to get to know the quality and health of banks while scanning the newspapers to get an idea,” he adds.

One should not be lured to a co-operative bank because it is disbursing loans at lower interest rates speedily, or offering higher interest rates on fixed deposits, or not insisting on PAN number while opening an account. Remember the age-old saying: If it’s too good to be true, it is probably too good to be true.

Cross verify bank details on RBI website

There are instances where financial institutions operating in small cities or rural areas partly change their name to sound or look similar to a popular bank. Sen says, “In this status quo, you need to check the name of the bank on RBI, their registered corporate (head office) address, and figure out whether you are dealing with an RBI regulatory bank or some local body running a financial institution with operations similar to that of bank, by tweaking a name.”

Alternative options 

In case you reside in small towns (typically referred to as tier III, tier IV, tier V cities) in India, look for other banking options. Pradeep Kumar Jain, Director at PMPK wealth advisors from Ranchi, suggests, “Bank with a public sector undertaking (PSU), private sector bank or a post office which has good reach in small cities. At least one of these financial institutions will have a presence with their branch in your town.”

Lastly, if someone has to open an account with a non-scheduled urban co-operative bank or co-operative bank, visit the RBI website and check for the bank’s name and head office address, and verify these details with a bank branch in your city before making a decision.