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A wholly owned subsidiary of the Reserve Bank of India (RBI) called the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures all deposits in RBI-regulated banks up to a maximum of Rs.5 lakhs per customer to protect savers in the event of a bank collapse. Now consider the latest bank collapse that has hurt some of the poorest and weakest depositors in the banking system but has not made any waves, given that the bank is small, its network is limited, and the depositors carry no influence.
What is remarkable about the collapse is the bank’s entirely unspectacular disappearance, as if nothing has happened, and the almost unnoticed devastating effect on the weakest in the system who have trusted the bank as a home-built institution to serve everyday workers
This is the New India Cooperative Bank, an urban cooperative bank headquartered in Mumbai, which collapsed on Feb. 13, 2025, leaving its depositors, many of them auto or taxi drivers, small savers and sundry businesses like vegetable vendors, small stores and the like in the lurch. This is a multi-State scheduled bank with some 22 branches in Maharashtra and Gujarat, carrying a total of some 6,000 depositors who have no voice in a large banking system that is said to be growing fast in a growing economy.
The bank became a place that welcomed unionised workers, auto drivers and small businesses who were then shunned by bigger and fancier banks
Small depositors, many of them senior citizens, queued up outside the bank, regulated by police, filled forms and sent in claims for their deposit insurance to kick in, all being assured that their moneys were secure and would be paid into another account by May 2025. But on 13 May 2025, three months after they were barred from withdrawing money (and later allowed a maximum of Rs.25,000 per depositor) came a terse one-line announcement from DICGC. It read: “… the DICGC has extended the date on which it shall become liable to pay depositors of New India Co-operative Bank Limited, by a period of 90 days i.e. till August 12, 2025.” There were no further references, explanations or elaboration of the circumstances under which the depositors were told to wait for three more months.
On one hand, the Indian banking system is said to be becoming more financially inclusive, and at another level, some of the poorest of depositors find themselves locked out of their life savings in a collapse they can’t understand. Take the statement just last fortnight by the RBI deputy governor M Rajeshwar Rao, who while speaking at a summit in Mumbai on financial inclusion said: “RBI’s financial inclusion index, which captures the extent of financial inclusion across the country … has increased from 60.1 in March 2023 to 64.2 in March 2024, showing a Y-o-Y increase of 6.82 per cent.”
On one hand, the Indian banking system is said to be becoming more financially inclusive, and at another level, some of the poorest of depositors find themselves locked out of their life savings in a collapse they can’t understand
This is a commendable big picture story that works well in the headline but turns into a horror story when it translates to the small picture of a small collapse that has taken with it the fortunes and lifetime earnings of ordinary citizens, many of whom struggle to eke out a living. The lack of official outrage, the unexplained slow pace and extended time span for deposit insurance to pay out the depositors and the shocking accounts of corruption emerging in the light of criminal investigations into the bank tell the story of an India that is collapsing in the nuts and bolts of its operations even as we may celebrate a big picture story of growth and inclusion.
Among the accused are members of the family of one of the founders, Ranjit Bhanu, who was an associate of George Fernandes
What is remarkable about the collapse is the bank’s entirely unspectacular disappearance, as if nothing has happened, and the almost unnoticed devastating effect on the weakest in the system who have trusted the bank as a home-built institution to serve everyday workers. A 12,000-page chargesheet has been filed in the case but it brings little solace to depositors still waiting for their money. Police said some of the accused have fled the country.
The collapse of the New India, an urban cooperative bank, is particularly painful because the institution traces its history to organising workers and has as its founding father none other than the late George Fernandes (1930-2019), the feisty trade union leader whose life was dedicated to fighting for the rights of those at the grassroots of the Indian economy. Fernandes got together taxi drivers to form a bank when one of them was denied a loan by the “regular” banks in the days of what has come to be called the license-control-Raj.
While it may be possible to explain the lack of governance in cooperative banks given their interlinkages to politicians, local area influence and slow adoption of modern systems, the RBI cannot escape responsibility for failing in its supervisory functions
The bank became a place that welcomed unionised workers, auto drivers and small businesses who were then shunned by bigger and fancier banks. In the new, liberalised India, unions have long been disbanded or have at least lost their teeth, and the bank that was founded with the workers as its backbone has now been shredded and robbed, it would appear, by a bunch of insiders. Among the accused are members of the family of one of the founders, Ranjit Bhanu, who was an associate of George Fernandes.
While it may be possible to explain the lack of governance in cooperative banks given their interlinkages to politicians, local area influence and slow adoption of modern systems, the RBI cannot escape responsibility for failing in its supervisory functions.
These banks clearly need different if not more attention given that they are small, they take financial inclusion deep into the interior and they run on deposits from some of the weakest and poorest who have trusted the banking system. Recent times have seen a string of collapses, of which New India is only the latest, indicating structural and governance issues that the RBI has been unable or unwilling to address effectively.
In March this year, Finance Minister Nirmala Sitharaman told the Rajya Sabha that licenses of 40 urban cooperative banks were cancelled in the last three years. The minister quoted the RBI as saying that it had not maintained “the bank-wise details of the amount of deposits and advances in the institutions that failed to honour their commitments to borrowers and lenders in the last three years along with the action taken by RBI over them”, a remarkable admission from the RBI. An annexure of the list of bank failures came from DICGC. It listed as many as 43 “bank failures” in the last three years, all of them cooperatives.
Licenses of 40 urban cooperative banks were cancelled in the last three years
It was some five years ago that SBI rescued Yes Bank, then the fourth largest private sector bank, on the idea that some institutions are “too big to fail” – which has its own problems in terms of the implicit guarantee it provides against recklessness or wrongdoing. It is true that spectacular failures carry the risk of spectacular aftereffects on the economy. But the unspectacular failures, like the New India case is, drive a different kind of damage – almost unseen, unheard but no less disruptive in the way they erode the trust of the ordinary citizen in the entire edifice of the banking system and its regulatory frameworks.