RBI Governor, PM signal reforms in trouble-prone urban co-operative banks

Governor warns depositors against chasing higher returns

Updated - December 12, 2021 09:49 pm IST

Published - December 12, 2021 09:13 pm IST - NEW DELHI

Prime Minister Narendra Modi addresses a function on 'Depositors First: Guaranteed Time-bound Deposit Insurance Payment up to ₹5 Lakh', in New Delhi on December 12, 2021.

Prime Minister Narendra Modi addresses a function on 'Depositors First: Guaranteed Time-bound Deposit Insurance Payment up to ₹5 Lakh', in New Delhi on December 12, 2021.

Reserve Bank of India (RBI) Governor Shaktikanta Das on Sunday indicated that the banking regulator will ring in sweeping regulatory changes to reform urban co-operative banks that have been plagued by a spate of failures, and warned people against parking their savings in banks offering high returns.

While terming the government’s decision to raise the insured limit for bank deposits to ₹5 lakh from ₹1 lakh with a 90-day time limit to pay out such deposits as ‘landmark’ developments, Mr. Das stressed that the payment of Deposit Insurance should be seen as a ‘measure of last resort’.

“I would like to mention in all this is that the depositors themselves must also be very discerning. It is very important to keep in mind that higher returns are usually associated with higher risks. Just because a bank is offering higher interest, the depositors should be very careful in putting their money in chasing such high returns,” the RBI Governor noted.

“I am not generalising. There are institutions that are offering higher interest rates which are viable, but depositors should always be very careful,” he reiterated at an event to mark the payment of nearly ₹1,300 crore to over 1 lakh depositors whose funds were stuck in distressed banks for years.

Prime Minister Narendra Modi , who personally handed over deposit insurance cheques to a few bank customers whose savings with distressed banks had been out of reach for years, said that an additional three lakh depositors would get their hard-earned savings, stuck in other banks, soon.

“When the RBI will oversee co-operative banks' functioning, this will also raise depositors' confidence further. We have created a new Co-operatives Ministry (referring to the Co-operation Ministry). The idea is to strengthen the co-operative system and will empower co-operative banks further,” Mr Modi said, noting that these problems afflicted co-operative banks more.

Mr. Das said the central bank keeps depositors’ interests on top while dealing with policy challenges and will continue to ensure that the entire banking system remains robust.

“Just to give an example, we have come out with new governance guidelines for commercial banks and we have constituted a committee for bringing about reforms in the urban co-operative sector. That report has been received and we will be taking action based on it,” he said,

Recalling his time as Chief Minister of Gujarat, Mr. Modi said he had urged the Central government at the time to raise the deposit insurance for bank account holders from ₹1 lakh to ₹5 lakh, but his call for protecting poor and middle-class depositors' funds in failed banks went unheeded.

Mr. Modi had assumed office as Gujarat CM in October 2001, months after the Madhavpura Mercantile Co-operative Bank got into trouble, leaving its depositors stranded.

“I remember clearly when I was CM and a bank faced problems, people used to catch our necks only. The decision either had to be taken by the Government of India or the banks, but the Chief Ministers used to face the heat,” he said.

“Their pain was natural and at that time, I had repeatedly requested the Government of India to raise the ₹1 lakh deposit insurance amount to ₹5 lakh so that maximum households are satisfied. But my suggestion went unheeded. They didn't do it. So then, the people did what they had to and sent me here,” he said, ascribing his electoral victory in the Lok Sabha to the angst of the poor, lower middle-class and middle-class sections of society who ‘suffered from and tolerated’ this for decades.

“When banks sank due to some people’s wrong policies, they not only lost their savings, but in a way their whole life would feel stuck and seemed like darkness to them. People ended up taking years to get their own money out and the problems were even more in co-operative banks,” the Prime Minister said.

Union Finance Minister Nirmala Sitharaman, who spoke after the RBI Governor and before the Prime Minister, also sought to stress that the approach of the government has been sensitive to the needs of the middle class.

While laws are generally applied prospectively from the date they are passed by Parliament and notified, Ms. Sitharaman said the government made an exception while amending the relevant Deposit Insurance laws.

“Here, we saw that some of the banks were waiting for resolution for years and depositors in those banks were also not getting relief. So exceptionally, this time, we have made it applicable retrospectively, so that people who were waiting for five-six years also get some relief. So the customer was kept in mind, the middle class' hard-earned money has been kept in mind,” she said.

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