The Rs 122-crore embezzlement at New India Co-operative Bank, where a former chairman and general manager allegedly siphoned funds to overseas entities and pilfered cash from vaults, is a stark reminder of the rot festering in India’s cooperative banking sector.
This scandal, coupled with the catastrophic collapse of Punjab and Maharashtra Co-operative (PMC) Bank in 2019, where Rs 4,000 crore was funnelled to a single borrower, lays bare a system riddled with corruption, weak oversight, and regulatory blind spots. Cooperative banks, designed to serve small depositors—shopkeepers, pensioners, and salaried workers—have instead become conduits for insider fraud, leaving millions betrayed. The path to redemption demands bold, structural reforms.
Here are five ways to fix this broken system, drawing lessons from the New India debacle and the sector’s recurring failures.
First, political influence must be purged from cooperative bank governance. These institutions, often controlled by local politicians or their proxies, function as personal fiefdoms rather than public trusts. Board members, handpicked for loyalty rather than competence, greenlight dubious loans to cronies or turn a blind eye to fraud. The New India case, with its web of suspect loans and unchecked NPAs worth Rs 400 crore, reeks of such collusion. To break this nexus, cooperative banks need independent boards staffed with professionals vetted for integrity and expertise, not political clout. Legislation barring elected officials or their associates from board positions is non-negotiable. Only then can these banks prioritise depositors over vested interests.
Second, the auditing process demands a complete overhaul. The New India scam, where cash was allegedly stolen from vaults over six years, exposes audits as woefully inadequate. Current inspections, often predictable and superficial, fail to detect intricate frauds like those at PMC, where non-performing assets were hidden for years. Forensic audits, conducted by independent firms with no ties to the bank, should become standard practice. Real-time monitoring systems, leveraging AI to flag irregular transactions or loan concentrations, could catch red flags early. Auditors must also face stricter accountability—complicity, as seen in cases where fraud went unreported, should invite criminal penalties, not just fines.
Third, the fractured regulatory framework must be unified under the Reserve Bank of India (RBI). Currently, cooperative banks operate under a dual structure: larger urban cooperative banks fall under the RBI, while smaller ones are overseen by state registrars. This split creates loopholes, with state authorities, swayed by local politics, often failing to enforce governance standards. The New India and PMC scandals, both involving urban cooperative banks, show even RBI oversight is insufficient, but smaller banks under state control fare worse, as seen in the Rs 96-crore Angamaly Urban Co-operative Bank fraud.
Bringing all cooperative banks under the RBI’s purview, with a dedicated supervisory wing, would ensure consistent standards. The RBI must also tighten its inspection regime, moving beyond box-ticking to proactive risk assessment.
Fourth, a fresh code for loan underwriting is critical to curb reckless lending. Cooperative banks have become notorious for disbursing loans based on connections rather than creditworthiness.
At New India, over 2,000 suspect loans are now under scrutiny, while PMC’s collapse stemmed from 73% of its loan portfolio being tied to one borrower, HDIL. A standardised, transparent underwriting process, mandating rigorous due diligence, collateral valuation, and caps on single-borrower exposure, is essential. Digital platforms could enforce compliance, reducing human discretion. Loan approvals should require oversight by independent credit committees, not just board members who may be complicit in fraud.
This would ensure loans serve genuine businesses, not shell companies or cronies.
Finally, depositor protection must be strengthened to restore faith. The New India and PMC scandals left depositors stranded, facing withdrawal curbs or lost savings. The Deposit Insurance and Credit Guarantee Corporation (DICGC) currently covers deposits up to Rs 5 lakh, but claims are often delayed, as PMC victims discovered. Expanding coverage and streamlining payouts would provide a safety net. Equally important is public education—depositors must be taught to scrutinise a bank’s health, from NPA ratios to governance red flags, before entrusting their savings. Transparency, with banks mandated to publish real-time financial metrics online, would empower customers to make informed choices.
The cooperative banking system, meant to uplift India’s small savers, has instead become a graveyard of trust. The New India episode, like PMC before it, underscores the urgency of reform. Purging political influence, fortifying audits, unifying regulation, tightening loan processes, and safeguarding depositors are not optional—they are the bare minimum to prevent more scandals.
Without these changes, cooperative banks risk remaining a cautionary tale of greed and betrayal, eroding the financial security of millions. The RBI and government must act decisively, or the sector’s collapse will be not a question of if, but when.