Mumbai-based Sarvodaya Cooperative Bank licence cancelled; what next?

The Reserve Bank of India (RBI) on Tuesday cancelled the licence of Mumbai-based Sarvodaya Cooperative Bank, citing violations in certain provisions of the Banking Regulation Act. The licence of the cooperative lender stands cancelled with immediate effect, according to the banking regulator.

In accordance with the RBI order, the lender will be barred from conducting banking operations beyond the close of business hours on May 12. With the RBI action, Sarvodaya Cooperative Bank stands prohibited from conducting the banking business, including:

• Acceptance of deposits
• Repayment of deposits

The central bank has recommended to shut the cooperative lender and to appoint a liquidator for it.

The regulator cited insufficient capital and inadequate earnings potential at the cooperative lender behind the action.

Noting that continuing its operations will be against the interests of depositors, the RBI stated that the lender is incapable of repaying depositors in full.

"Public interest would be adversely affected if the bank is allowed to carry on its banking business any further," said the RBI.

What happens to account holders now?

With the RBI action in force, after the close of business hours on Tuesday, the cooperative bank will cease to allow its customers to operate their accounts, restricting withdrawals and deposits.

The RBI noted, citing data submitted by the bank, that about 98.36 per cent of the depositors were entitled to receive full amount of their deposits from DICGC. As of March 31, DICGC has already paid Rs 26.72 crore of the total insured deposits.

Currently, deposits up to Rs 5 lakh are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI.

The main function of DICGC is to protect bank depositors against bank failure by providing insurance up to 5 lakh per depositor per bank -- including principal and interest.

What happens when RBI restricts withdrawals and deposits at a commercial bank?

A commercial bank has to immediately stop all its banking activities immediately when the RBI -- the country's banking regulator -- cancels its banking licence under Section 22(4) of the Banking Regulation Act. The restrictions include deposits, loans and other banking transactions.

Section 22 of the Act governs banking licences and applies them to cooperative banks (when read with Section 56). Section 56 overriding certain conflicting state co-operative laws.

Together, these rules enable the RBI to issue and cancel licences for cooperative banks.

In addition to serving as the country's central bank, the RBI also acts as the national banking regulator. One of its primary respnsobilities include protecting depositors' money and maintaining confidence in the financial system.

The RBI issues a public notice while cancelling a commercial bank's licence, clearly stating the reasons behind the action. Typically, weak finances, low capital, rule violations or concerns over depositors’ interests prompt RBI officials to cancel a bank's licence.

The action against Sarvodaya comes roughly a fortnight after the regulator revoked the banking licence of Paytm Payments Bank, effective April 24. With that, the payments bank was barred from carrying out any banking business. The RBI cited serious regulatory concerns and repeated non-compliance with licensing conditions behind that decision.