In today’s world, Scams and Banks seem interrelated. However, this is not always true. Whenever there’s a scam happening in the country, there’s a bank involved, though not in the process, either as a victim or as a connecting party to the victim.
In India, people consider banks a safe place for their hard-earned money, expensive jewelry, and other valuables. But what if one day you visit the bank and you witness a heavy crowd standing outside, the bank has been shut down and there’s a notice that says “Bank is closed forever”? Sounds scary right?
Case Study
One such terrifying incident occurred with thousands of customers of the New India Cooperative Bank in Mumbai, where the Manager and the builder of the bank committed a scam of Rs. 122 crores.
Reserve Bank of India froze the bank deposits for 6 months as a quick action to safeguard future losses and misuse of funds. A similar incident occurred where an old man didn’t have the money to buy medicines because the RBI froze the funds of a particular bank. Now the question arising in the mind of common people is “Is our money even safe in Banks?” “Are cooperative banks safe?”
New India Co-operative Bank
This bank was established in 1968 as Bombay Labour Cooperative Bank. The name was later changed to New India Cooperative Bank Ltd. This bank has 30 branches in total, most of which are in Mumbai itself and a few in Surat and Pune.
If we look into the financial positions of the bank, we generally expect a good amount of profit with such banks. However, that is not the case with this one. New India Cooperative Bank suffered a loss of Rs. 30.75 crore in the Financial Year 2023 and Rs. 22.78 crore in the Financial Year 2024. In March 2024, the bank provided a loan of Rs. 1175 crore and has deposits of Rs. 2436 crore. Bank losses were an alarming sign before a mishap.
The bank was primarily focusing on providing loans for the real estate sector. In the financial year 2024, the real estate sector exposure of the bank was Rs. 418.34 crores, which is always 35.6% of the bank’s loan which was only 11.4% in the financial year 2020.
Moving on to the main metrics of any bank, that is Loan default. To understand the loan default we need to check the Gross NPA. The bank’s gross NPA ratio in March 2024 was 7.96%, which was slightly lower in FY23 which was 7.5%, and 6.4% in FY22, which itself is a danger sign.
What restrictions did RBI impose on the bank?
RBI imposed 3 restrictions,
- The Bank cannot issue new loans
- The bank cannot issue except new deposits
- Customers won’t be allowed to make any withdrawals.
Additionally, no asset or property of the bank can be sold without the approval of RBI. The RBI has superseded the bank’s board and appointed an administrator who will manage the bank’s operation. These restrictions will be continued for the next 6 months as of now.
RBI takes such actions only when the Financial stability and liquidity of any Bank are getting weaker and weaker.
What is the reason behind such scams of co-operative banks?
One of the primary reasons behind such scams is the process of hiring. Such banks hire the candidates without following any proper process or checklist.
Banks can follow a proper checklist before hiring any employee,
- Educational background
- Work experience
- Connect with the previous company manager
- CV claims
This process can be tedious and lengthy if done manually, and therefore banks can use the website Odoo to make it quick and easy.
During the investigation, RBI came to know about the scam of Rs. 122 crores, and the general manager of the bank Mr. Hitesh Mehta was arrested and sent to Police custody on this basis.
While RBI was conducting the audit of this Bank, a few things came to the limelight,
- The head office at their Prabhadevi branch committed fraud of Rs. 112 crore.
- Additionally, Rs 10 crore was missing from the Goregaon branch safe.
Hitesh Mehta also confessed that he was siphoning cash during the COVID.
What is Cash siphoning?
It means taking money dishonestly from an organisation or other source, and using it for a purpose for which it is not intended.
The second person to get arrested was Dharmesh Poun, a developer who allegedly received Rs. 70 crore of the embezzled funds.
After the RBI’s restrictions, no money can be withdrawn from the bank for the next 6 months – neither from a savings account, a current account, nor from an ATM.
However, as per Deposit Insurance And Credit Guarantee Corporation (DICGC), every depositor will receive insurance of a maximum of Rs. 5 Lakh.
Whenever RBI puts any bank under All-Inclusive Directions (AID), the depositors receive the insurance money within the next 90 days only when the Bank provides the list of all the depositors to the DICGC within 45 days. However if the bank delays in providing the list, the further process of receiving money can be a little tricky and time-consuming.
What is Deposit Insurance And Credit Guarantee Corporation (DICGC)?
It is an insurance company that takes premiums from the bank. They provide insurance of 10 Paise for every hundred rupees deposit. They provide insurance in the event the bank is shut down. The maximum insurance per depositor is Rs. 5 Lakh.
According to the data, DICGC had provided insurance worth Rs. 5762.7 crores as of 31 March 2021. The number had increased to Rs. 10800 crores by March 2022.
97% of this amount was given to depositors of cooperative banks. 27 cooperative banks have failed in the past five years, and 42 cooperative banks have gone for merger. 10 cooperative banks closed in FY 2022 in India, out of which 7 of them were from Maharashtra.
Why are co-operative banks failing?
Cooperative banks are run by cooperative societies. Depositors are the customers of the bank and they are the shareholders as well.
However, the process of RBI regulating any government and private bans is different from that of a cooperative bank. Cooperative banks are not strictly regulated by RBI which is a major drawback.
One of the most common reasons for scams and fraud in cooperative banks is financial fraud done by the board. Many of the cooperative banks are run by politicians. A few private banks have been incorporated with the sole purpose of fraud.
People from small rural towns and poor people from big cities are the major victims of such fraud.
What are the solutions to stay safe from such scams?
- Opt for top government banks such as SBI, Bank of Baroda, Punjab National Bank etc.
- The next option can be trusted, Private banks such as HDFC or ICICI Bank
- Make a habit of checking gross NPA on websites such as Screener. in or Tijori finance
- Try to avoid banks with a gross NPA of more than 5 at any time. Do not deposit at such banks.
- Try to avoid cooperative banks if possible, at all costs.