This is not a Valentine Day gift that depositors of New India Cooperative Bank (NICB), founded by the late firebrand socialist leader and later defence minister, George Fernandes, had expected. On 14th February, they found themselves rushing to withdraw their money on learning that the Reserve Bank of India (RBI) had dismissed the Bank’s board and imposed strict operational restrictions. These included a ban on granting loans, making investments or disbursing funds of any kind.
Soon after, it emerged that a massive Rs122-crore fraud had gone undetected at NICB—right under the nose of RBI. However, the impact on depositors is minimal; 90% of NICB’s 130,000 depositors hold less than Rs5 lakh and will be fully compensated under deposit insurance. RBI has also assured swift disbursement of money within 90 days and may allow special withdrawals for medical emergencies or weddings.
This will ensure that NICB quickly fades out of public discourse—without necessary scrutiny or accountability. No real investigation into RBI’s lapses is likely, nor will there be any examination of whether whistle-blower warnings by former employees were ignored.
The last major cooperative bank collapse under RBI’s watch was Punjab and Maharashtra Cooperative (PMC) Bank in 2020, just before the COVID pandemic. Following public outrage, the government acted quickly to increase deposit insurance, long frozen at Rs1 lakh, to Rs5 lakh. For the first time, it also implemented a ‘bail-in’ of sorts by large depositors. This means that, although PMC Bank was merged with Unity Small Finance Bank in 2022, and not liquidated, large depositors will get their money back in instalments over a three- to 10-year period, during which the deposits will earn a meagre interest of 2.75%. (PMC merger details).
More importantly, this is the time when the government cut through political pressure to end to the dual regulatory structure governing cooperative banks, in September 2020, through the Banking Regulation (Amendment) Act, 2020. It brought all urban and multi-state cooperative banks under the direct, single-point supervision of RBI, ending joint supervision with the registrar of cooperative societies. The move was expected to enhance supervision and end regulatory ambiguities. A string of penal actions against cooperative banks in the past four years, indeed, suggested that cooperative bank failures were now a thing of the past.
So why did the Rs122 crore fraud at NICB go unnoticed? How did RBI inspectors, despite direct oversight, miss a massive embezzlement of Rs122 crore (relative to the size of the 28-branch bank) by Hitesh Mehta, NICB’s general manager and head of accounts? Investigations that followed his arrest allegedly reveal that Mr Mehta often carried large sums of cash out of the Bank in his backpack and that he had diverted Rs70 crore to a real estate developer Dharmesh Paun, who was also arrested by the economic offences wing (EOW) of the Mumbai police. This raises critical questions about why RBI failed to detect fraud and lax internal controls during annual audits and inspections of a small bank. (More on the scam)
Whistle-blowers claim that NICB had abnormally high cash balances and dwindling reserves since 2021. Despite the Bank reporting losses in FY23-24 (Rs23 crore) and FY22-23 (Rs31 crore), RBI did not enhance scrutiny, take note of suspicious realty loans, staff turmoil or high cash balances at the Bank (read report).
Shockingly, ex-NICB employees had reportedly warned RBI as early as in January 2020 about fraudulent loan write-offs and requested a forensic audit. If true, this raises serious accountability concerns for RBI. The regulator had already found PMC Bank acting like the personal piggy bank of the Wadhawan family of Housing Development and Infrastructure Ltd (HDIL); so, dodgy realty loans ought to have rang alarm bells and triggered an immediate and a detailed forensic audit.
Convenient Distraction
Rather than reviewing its inspection failures, RBI and the government seem to have found an easy way to deflect attention. A Reuters report quotes Union financial services secretary, M Nagaraju, saying that another hike in deposit insurance is ‘under active consideration’ by the government.
While such a hike is feasible, it would mean that the Deposit Insurance and Credit Guarantee Corporation (DICGC)—funded mainly by premium paid by public sector banks (PSBs)—would continue to cover cooperative bank failures. This shields bank depositors but also protects inefficient regulators from the consequences of their actions.
In October 2019, (PMC Bank Scam: Opportunity To Fix Flawed Deposit Insurance), I wrote that we had a flawed deposit insurance system that badly needs correction. DICGC collects hefty premiums, but payouts are meagre. It also retains debt recovered during the liquidation process. In response to a Lok Sabha question of 2022, the government said that DICGC settled claims of Rs4,055 crore on account of 35 banks that had been placed under a moratorium by RBI. Every one of these was a cooperative bank.
Currently, DICGC holds a massive Rs1,98,753 crore corpus—63% from bank premiums and 37% from interest earnings. For example, in 2023-24, DICGC settled claims for six liquidated cooperative banks and 21 banks under all-inclusive directions (AID). The total payout was just around Rs1,300 crore.
With such a large reserve, doubling the insurance limit to Rs10 lakh is easily possible. But even this won’t satisfy depositors who have been demanding a 100% deposit guarantee, without realising that it gives a free pass to bank-scamsters and dubious supervision.
On the other hand, bank unions, led by the All India Bank Employees Union (AIBEA), have long argued that PSBs—the biggest contributor to DICGC’s fat funds—should be exempted from contribution, since they are never liquidated. This is a flawed argument, since the nation and the exchequer has paid a huge price to cover up their bad lending practices in the form of repeated bank capitalisation.
What is clear is the policy of robbing Peter to pay Paul cannot continue. The real solution is not just higher deposit insurance but greater accountability. A bank failure in a tightly regulated environment ought to be treated like a plane crash and must lead to a mandatory investigation that covers RBI inspectors as well. This should be a formal and transparent process that includes a forensic investigation under the joint parliamentary committee for finance.
In the absence of such a process, RBI’s reaction to every crisis will be to focus on self-preservation rather than meaningful reform. This defensive posturing includes piecemeal appeasement like deposit insurance hikes or faster disbursement of insurance proceeds.
Former RBI governor, Shaktikanta Das, who spearheaded post-PMC Bank reforms, is now additional principal secretary to the prime minister. He is uniquely positioned to push for real change—ensuring banking oversight isn’t just about damage control, but about preventing failures in the first place.
Until then, depositors will continue to suffer and every new crisis will follow the same cycle—fraud, failure and a belated patchwork fix.
Comments
madhusudan.adki.adrpa1690c
2 weeks ago
Thank you for the clear explanation. Could you please shed some light on whether Risk-Based Premiums for banks are a viable solution? Additionally, is differential Deposit Insurance coverage beneficial for depositors? How does increasing Deposit Insurance coverage relate to the moral hazard of banks?
Dear Madam,
1) We appreciate Ms. Sucheta Dalal for writing regards the banking crisis and the way of solving them by RBI.
2) The most of the public in India also in worldwide, watching these, various bank mergers happening from the year 1970 to till year 2025.
3) Come to the conclusion that “ we are NOT IN A NEED OF or DON’T WANT TO HAVE THIS RBI –RESERVE BANK OF INDIA – IS TO BE A ‘REGULATOR FOR BANKS’ in India. RBI is acting without any ‘ public interest’ thereon considering only their very own ‘ personnel interest’
4) Practically, we noticed, RBI is in a crucial manner, against the public , even without following very simple rights laid down in the ‘ constitution of India’, following while to solve the issues arising in some banks. Even though, more, best other ways are wide open to solve the same crisis with much of public interest.
5) Viz, (A) Yes bank crisis ( B) LVB – Lakshmi Vilas bank ( This bank was started in year 1926 – a bank of 96 year old with more than 600 branches in India) amalgamated in year 2020 with DBS bank ( This is a foreign Singapore bank, newly came to India has few branches only) (C) while doing the merger, RBI- intentionally, arbitrarily made, the shares and Bond holders money in LVB,( the whole entire life savings of the Indian citizens) were made to ZERO – fully written off – therein donated / given to the foreign bank- DBS bank. Even without any of the information to the innocent, shares and bond holders of LVB
6) A detailed investigation is to be ordered to CBI or NIA to investigate the probe of hidden things, happened in the back doors, of RBI and the concerned personnel involved, while this amalgamation of LVB with DBS bank.
7) In India, normally, while the two banks are merged the assets and liabilities of one bank are to be carried over to the other bank , without any loss to the public those are believed in the banking system in India, invested their hard earned life savings only in banks. But in the above this is not at all followed. Wherein the huge, entire ‘assets’ of LVB, were only carried over by the transferee bank.
RBI made many faults in above mergers. Etc., etc. faults repeatedly done by RBI.
8) As such we request, TO ARRANGE some resolution to pass in the Parliament to change OR REMOVE THE RBI AS A REGULATOR OF BANKS, to save the public in future . Thus no more RBI is required.
9) This Government is now changing many un wanted laws , or not needed regulations against the public etc by passing the approvals from ministry and Parliament.
Herein, We the public are expecting this removal of RBI, ( Urgently) and insert if needed some other suitable authorities, thereon, later please.
Thank you n kind regards
prabakaran K
Happy to observe that the author has been tirelessly and vigorously pursuing and fighting as a watchdog to secure the financial system in general and the banking system in particular in public interest to safeguard the stakeholders heavy stake in them as depositors and otherwise . Failures in banks and frauds in banks unfortunately continue to be a regular feature and the stake holders of the economy bear the brunt and depositors of the banks bear the maximum . The coverage of loss of deposits of Rs 5 lakhs by DICGC is a pittance by any reckoning and this cannot be even treated as a relief and safety standard for banks to maintain themselves financially stable and sound . The need for strong regulation and very effective and meaningful supervision independent of political interference in banks particularly cooperative banks is urgent and paramount and the TRUST in Banks and RBI’s supremacy in Regulation and Supervision needs to be reiterated and well established to make the Financial system very strong and supportive to develop the economy fast as envisaged
RBI supervisors are corrupt as well as inefficient.this is I have seen in cases of Rupees co-operative Bank,PEN co-operative Bank,Vasant dada co-operative Bank earlier.
In all co-operative Banks political tussle works to overcome rivalry parties and siphon public as well as poor peoples,s savings.These politicians using bank money for selfish activities.Hence dare devil honest supervision is must.
To bring the banking supervision accountable under parliamentary review it is high time the bank audit should be brought under Comptroller and Auditor General of India.
In my own opinion, every supervisory body or any organization will always have political sympathizers. Rules are always tweaked in a manner that they can be sidelined when necessary. RBI has all data all the time. The irony is our system is defined by affidavits even if they are false unless challenged. So is with the letters submitted by Bank officers to RBI. There is a need for more transparency in public domain for the Depositors and Shareholders of Co-operative Banks. Public Register of complaints pending and resolved ought to be published. Balance sheets and Audit Reports must be listed and published online.
As long as Co-Operative Banks are under Politician's Control, nothing much can be expected.The deposit holders of Co-Operative Banks have to suffer forNethas/Politicians/$Goverments faults.
The outstanding deposits of the customer with the bank is double the advance given in year 2024, so even if the fraud money is taken away from the surplus deposit amount, bank should have substantial reserves to pay all it's depositors. This is without taking into account the hard assets of the bank. So, why should RBI restrict common man from withdrawing their hard earned money.
Absolutely correct. But RBI itself wants to rob all depositors hard money. They know that they can rob 90 percent of deposits by settling 10 percent of deposits by way of insurance as only 10 percent people amount to the 90 percent of deposits.
Co Op banks are known for their cost effective, personalised finance solutions and private banks are good at looting their customers by charging exorbitant prices for their services. Mis selling of various services are rampant. People still avail it for their once in a life time kind of investment for eg. Availing housing loan at a higher rate and paying their EMI.
Well said, but RBI has people in high places covering up for their lax oversight.
Will Mr Das restore faith in RBI by putting in forensic audit of these failures of oversight, no matter who is responsible?
It is obvious that some great pooh-bah is at fault or else the responsible official would have been thrown under the bus.
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More importantly, this is the time when the government cut through political pressure to end to the dual regulatory structure governing cooperative banks, in September 2020, through the Banking Regulation (Amendment) Act, 2020. It brought all urban and multi-state cooperative banks under the direct, single-point supervision of RBI, ending joint supervision with the registrar of cooperative societies. The move was expected to enhance supervision and end regulatory ambiguities. A string of penal actions against cooperative banks in the past four years, indeed, suggested that cooperative bank failures were now a thing of the past.
1) We appreciate Ms. Sucheta Dalal for writing regards the banking crisis and the way of solving them by RBI.
2) The most of the public in India also in worldwide, watching these, various bank mergers happening from the year 1970 to till year 2025.
3) Come to the conclusion that “ we are NOT IN A NEED OF or DON’T WANT TO HAVE THIS RBI –RESERVE BANK OF INDIA – IS TO BE A ‘REGULATOR FOR BANKS’ in India. RBI is acting without any ‘ public interest’ thereon considering only their very own ‘ personnel interest’
4) Practically, we noticed, RBI is in a crucial manner, against the public , even without following very simple rights laid down in the ‘ constitution of India’, following while to solve the issues arising in some banks. Even though, more, best other ways are wide open to solve the same crisis with much of public interest.
5) Viz, (A) Yes bank crisis ( B) LVB – Lakshmi Vilas bank ( This bank was started in year 1926 – a bank of 96 year old with more than 600 branches in India) amalgamated in year 2020 with DBS bank ( This is a foreign Singapore bank, newly came to India has few branches only) (C) while doing the merger, RBI- intentionally, arbitrarily made, the shares and Bond holders money in LVB,( the whole entire life savings of the Indian citizens) were made to ZERO – fully written off – therein donated / given to the foreign bank- DBS bank. Even without any of the information to the innocent, shares and bond holders of LVB
6) A detailed investigation is to be ordered to CBI or NIA to investigate the probe of hidden things, happened in the back doors, of RBI and the concerned personnel involved, while this amalgamation of LVB with DBS bank.
7) In India, normally, while the two banks are merged the assets and liabilities of one bank are to be carried over to the other bank , without any loss to the public those are believed in the banking system in India, invested their hard earned life savings only in banks. But in the above this is not at all followed. Wherein the huge, entire ‘assets’ of LVB, were only carried over by the transferee bank.
RBI made many faults in above mergers. Etc., etc. faults repeatedly done by RBI.
8) As such we request, TO ARRANGE some resolution to pass in the Parliament to change OR REMOVE THE RBI AS A REGULATOR OF BANKS, to save the public in future . Thus no more RBI is required.
9) This Government is now changing many un wanted laws , or not needed regulations against the public etc by passing the approvals from ministry and Parliament.
Herein, We the public are expecting this removal of RBI, ( Urgently) and insert if needed some other suitable authorities, thereon, later please.
Thank you n kind regards
prabakaran K
In all co-operative Banks political tussle works to overcome rivalry parties and siphon public as well as poor peoples,s savings.These politicians using bank money for selfish activities.Hence dare devil honest supervision is must.
Punishment fear is gone & hence such Scams continue to ROT the System!
Will Mr Das restore faith in RBI by putting in forensic audit of these failures of oversight, no matter who is responsible?
It is obvious that some great pooh-bah is at fault or else the responsible official would have been thrown under the bus.