The Reserve Bank of India (RBI) has cancelled the licences of over 15 cooperative banks since January 2023 alone. The pace at which cooperative bank licences have been cancelled has shot up since dual regulation of cooperative banks was cancelled and they were put under the exclusive regulatory oversight of RBI after the disastrous collapse of Punjab and Maharashtra Cooperative (PMC) Bank.
Once the central bank revokes the permit, the cooperative bank has to immediately stop taking fresh business from the declared date and initiate a winding-up process, including returning depositors’ money. Bank deposits under Rs5 lakh are covered under the deposit insurance cover from the Deposit Insurance and Guarantee Corporation (DIGC). But what happens to loan accounts of customers of such banks? Do they continue paying their equated monthly instalments (EMIs) at the stipulated due date or should they stop doing so, at the risk of negatively impacting their credit scores?
Such a question was raised by Urmilla Patel (name changed), who has a home loan account at Kapol Cooperative Bank, whose licence was recently cancelled by RBI. Urmilla, who has been diligently paying her housing loan EMIs for 15 years, received a call from Kapol Cooperative Bank notifying her about the licence cancellation by RBI. She was advised by the Bank’s representative to refrain from paying the EMI, which was due next month, and to await further instructions, as the central bank had frozen all accounts.
Worried about the impact this would have on her credit score, she approached the Bank to make a full and final payment. To her surprise, the Bank not only demanded a 2% pre-closure fee, which was in line with the terms and conditions of the loan but also asked that the final payment be made in cash.
A letter from the branch officer in charge sent to Ms Patel reads – “we want to inform you that if you want to close your account now you have to deposit full outstanding amount with interest upto closure of account and 2% pre-closure charges on total outstanding amount as per loan sanction letter dated 08/09/2009 term no. 14(3) in cash only” (emphasis as implied in original letter).
She wrote to Moneylife Foundation seeking advice. Moneylife Foundation wrote to RBI seeking clarification on three crucial aspects – a) whether there had been a directive to customers to stop paying EMIs on loans with Kapol Cooperative Bank; b) the potential impact this would have on credit scores and repayment schedules of customers in similar situations c) what would be impact on her credit score if there is a gap or change in repayment—how would the customer be protected?
RBI acknowledged our concerns and directed the inquiry to the relevant department.
While a general clarification is still awaited, Kapol Cooperative Bank contacted Ms Patel and asked her not to pay the outstanding amount in cash. Instead, they assured her that the Bank would inform her about the amount to be paid when the account is unfrozen or if a new account is opened.
This positive development provides relief to Ms Patel, but it has still not clarified the impact if any on her credit score. RBI needs to issue broad guidelines with regard to how loan payments will be handled when a cooperative bank’s licence is cancelled. This includes putting in place a system that allows borrowers to continue repayment and a protocol for informing credit bureaus about the changes.
Until RBI comes out with guidelines, it is best that borrowers seek clarification before rushing to make cash payments to Kapol Cooperative Bank or any other bank whose licences have been cancelled.