Social media these days is abuzz with posts highlighting the attractive fixed deposit rates offered by Indian cooperative banks. While such posts may paint a rosy picture of the extra interest, financial wisdom reminds us to look beyond the hype and consider the full spectrum of factors before taking the plunge into the world of lesser-known banks. Here is a lowdown.
What are Cooperative Banks
The rural cooperative credit system in India is primarily mandated to ensure the flow of credit to the agriculture sector. It comprises short-term and long-term cooperative credit structures. There are central cooperative banks at the district level (DCCBs) and State cooperative banks (StCBs). Additionally, there are urban cooperative banks (UCBs) catering to the financial needs of customers in urban and semi-urban areas. The RBI regulates the banking functions of StCBs/DCCBs/UCBs.
There is a dual control structure, with banking-related functions regulated by the RBI and management-related functions regulated by respective State Governments/Central Government. According to the latest RBI data on scheduled banks, there are 34 State cooperative banks, over 350 district central cooperative banks, and 49 urban cooperative banks.
Higher Interest Rates
A glance at deposit interest rates on cooperative bank websites reveals that they typically offer 25-50 basis points higher than top commercial banks in the 1-year, and 1-2 year tenure buckets. For instance, while many public sector banks offer 5.75-6.75 per cent interest rate in the 1-year bucket, some cooperative banks provide 6-7.25 per cent rates.
Note that interest rates in cooperative banks do not appear to be as regularly revised as in bigger commercial banks, providing some comfort on the reinvestment risk part for deposit holders seeking regular income from bank FDs.
At present, all cooperative banks are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Each depositor in a bank is insured up to a maximum of ₹5 lakh for both the principal and interest amount held by them across different branches in each bank. However, practical experience has time and again shown that bank depositors often endure long waits in limbo before being able to access their insured deposit money.
Evaluate Risks
Cooperative banks appear higher on the risk-reward spectrum. Every other month, the RBI cancels the license of some cooperative banks, and thus, ceasure of their banking operations.
For instance, in October, the RBI cancelled the license of Nagar Urban Co-operative Bank Ltd., Ahmednagar (Maharashtra); in September, it had done so for Nashik Zilla Girna Sahakari Bank Limited, Nashik (Maharashtra), for Sri Mallikarjuna Pattana Sahakari Bank Niyamita, Maski (Karnataka), for National Urban Co-operative Bank Limited, Bahraich (Uttar Pradesh); in July, RBI had canceled the license for United India Co-operative Bank Limited, Nagina, Bijnor (Uttar Pradesh), for Sri Sharada Mahila Co-operative Bank Ltd., Tumkur (Karnataka)...the list is long.
Typically, the licenses of such cooperative banks are terminated due to inadequate capital and earning prospects, non-compliance with norms, unhealthy financial situation making them unable to pay their present depositors in full, etc.
This leads us to the fundamental query – are one’s deposits in cooperative bank safe? Should the bank undergo liquidation, the safeguard provided by DICGC will come into effect? In essence, they are as secure as any other lender up to ₹5 lakh . Nevertheless, considering the prolonged and intricate process involved in claiming deposit insurance, it would be wise to prioritise complete security and peace of mind over a slightly higher interest rate measured in basis points.
Confusion About Society, Banks
Many standalone credit cooperative societies operate in India. But they are not authorised by the RBI to carry out banking businesses. Still, many such societies, using various under-the-radar methods, seem to take deposits from the general public informally. Often, agents of such societies lure outside depositors with promises of high-interest rates (10-12 per cent per annum). With the proliferation of social media, it is easier to access potential customers and lure them.
Cooperative societies/primary cooperative credit societies that are accepting deposits from non-members, etc. should be avoided. The insurance cover from DICGC is not available for deposits placed with these entities. Hence, your money could be at 100 per cent risk if you, as an outsider, keep deposits in such societies.
Also, recently, cases have come to the fore in some States where political influence has led to mismanagement in cooperatives.
Due Diligence
There is no shortcut for doing your homework on cooperative banks. Firstly, check the bank’s overall rating by a reputed rating agency. Read the rating rationale and consider the risks mentioned.
Next, if you can lay your hands on financial statements, check for metrics such as Capital Adequacy Ratio (CAR), Non-Performing Assets, etc., and if they are not in line with other banks, it’s better to avoid such cooperative banks.
Also, one must pay attention to the recent events at the bank. Try to find out what kind of media articles are being written about such cooperative banks. Often, such media articles don’t get prominence given the hyper-local nature of cooperative banks, but they could provide a complete picture of the financial situation of such a bank.
In terms of technology, cooperative banks are far behind commercial banks and hence user experiences are not comparable, especially in mobile and internet banking areas.