The mess called cooperative banks

“Should I shift my money to a nationalised bank?” This question, coming from our domestic help, put me in a tight spot. After all, it was on my encouragement that she had opened a bank account with a cooperative bank in 2016. That time, I had explained to her that she is building a track record of her earnings which will be useful for her to get a home loan in the future.

The advice had been taken all too well. She stopped contributing to the “Bisi” (a locally run chit fund scheme) and her entire life savings running into a few lakh were now in a cooperative bank. I had not really paid too much attention to the specific bank with which she chose to open her bank account. I also had no clue that her savings ran into a few lakh. Fortunately for me, she had not opened her account in the now-troubled Punjab and Maharashtra Cooperative Bank (PMC Bank). Thankfully, her cooperative bank is doing well.

On asking, why she had opened the account in that cooperative bank, she said one of her other clients worked there. Besides making life easier while opening the account, the cooperative bank was also open in the evening, making it convenient for her to update her passbook and make a withdrawal. She also said that the staff at the branch treated her well, which was important to her. The interest paid by any bank cannot compete with the kind of interest she was earning with her investments in the “Bisi” scheme. So, it wasn’t really about higher interest income for her.  

I asked her to shift her banking and deposits immediately with a nationalised bank. Yes, there would be higher charges, but safety trumps cost at such times.

The PMC Bank episode has forced even a person like me to hesitate before recommending to people to shift to banks. The question is, what should be done if the government and the regulator want people to adopt and embrace digital banking vis-à-vis cash transactions.

First, there should be an immediate triggering of the insurance (deposit insurance under the Deposit Insurance and Credit Guarantee Corporation) pay-out on the imposition of sanctions on any bank. Making the pay-out only after the bank is liquidated (which in the Indian context takes years) is useless for the purpose of reassuring depositors about the safety of their money. Two, insurance limits need to be raised to reasonable levels like Rs 10 lakh. In addition, cooperative banks with fuzzy accountability should not be allowed to accept deposits for more than the maximum limit covered by insurance.

Lastly, either the cooperative banks or their depositors should be required to compulsorily buy commercially priced deposit insurance if the deposits are above the maximum amount covered by the statutory insurance limit. In fact, the price charged by the DICGC for this excess insurance would be the clearest signal on how safe a bank is. 

While the regulator sorts out the PMC mess, quick action on these points will enable millions of depositors to have faith in the banking system. It will also enable me to tell my domestic help not to worry because the regulator has got her back on this one.

The writer is a Sebi-registered investment advisor

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