Special Considerations in the Winding Up of Co-operative Banks

When a co-operative bank fails, the consequences extend far beyond the boardroom. Depositors – often ordinary people, small traders, pensioners, and farmers – stand to lose their hard-earned savings. This is precisely why the winding up of a co-operative bank is treated very differently from the dissolution of an ordinary co-operative society. Unlike a regular co-operative society, which operates primarily for its members, a co-operative bank holds public deposits and forms part of the country’s financial infrastructure. That dual character – part co-operative, part bank – means that dissolution must satisfy not one, but two layers of regulatory authority: the Registrar of Co-operative Societies and, critically, the Reserve Bank of India.

Why co-operative banks are a special category 🔗

Co-operative banks in India occupy a unique position. They are registered and governed as co-operative societies under either the respective State Co-operative Societies Acts or the Multi-State Co-operative Societies Act, 2002, depending on their area of operation. At the same time, they accept public deposits and carry out core banking functions – which brings them squarely under the Banking Regulation Act, 1949.

This dual character means two separate regulatory bodies have a stake in what happens when a co-operative bank is wound up. As per the Constitution, states can legislate on the incorporation, regulation, and winding up of co-operative societies. States regulate co-operative societies under their respective Co-operative Societies Acts, through the Registrar of Co-operative Societies. However, certain provisions of the Banking Regulation Act, 1949 were made applicable to co-operative banks in 1965, giving the RBI powers to regulate them – done specifically to protect the interests of depositors and extend deposit insurance coverage.

The result is a system of dual control, where the Registrar handles the structural and administrative aspects of dissolution, while the RBI oversees banking-related concerns – particularly the protection of depositors and the stability of the financial system.

The legal framework governing winding up 🔗

The winding up of a co-operative bank does not follow the same path as winding up an ordinary co-operative society. Several layers of law apply simultaneously.

Role of the Registrar of Co-operative Societies 🔗

The Registrar of Co-operative Societies (RCS) retains authority over the formal order of winding up and the appointment of a liquidator. When the RBI cancels a co-operative bank’s licence, it typically requests the Commissioner for Cooperation and Registrar of Co-operative Societies of the concerned state to issue an order for winding up and appoint a liquidator. The liquidator then takes over the affairs of the bank, realises its assets, and distributes the proceeds among creditors and depositors according to the priority rules under co-operative law.

Role of the Reserve Bank of India 🔗

The RBI’s role in the winding up of a co-operative bank is both a trigger and an oversight function. Under Section 22 read with Section 56 of the Banking Regulation Act, 1949, the RBI can cancel a bank’s licence if it finds that the bank lacks adequate capital and earning prospects, cannot repay its depositors in full, or that its continued operation is detrimental to public interest. Once the licence is cancelled, the bank ceases to conduct banking business and the winding-up process is formally set in motion through the Registrar.

The RBI decides to revoke a co-operative bank’s licence when the bank lacks adequate capital and earning prospects, fails to comply with the provisions of the Banking Regulation Act, 1949, and when its continuance would be prejudicial to the interests of its depositors – as the bank would be unable to pay its depositors in full.

The Banking Regulation (Amendment) Act, 2020 and its significance 🔗

Before 2020, the RBI’s authority over co-operative banks was limited in several important ways. The RBI could regulate banking operations but had to rely on the Registrar to take action against management, undertake restructuring, or initiate liquidation. The Banking Regulation (Amendment) Act, 2020 made applicable certain provisions relating to winding up, and special provisions for the speedy disposal of winding-up proceedings of banks are now applicable to co-operative banks as well.

The decision to empower the RBI through these amendments was taken in the aftermath of the failure of the Punjab and Maharashtra Co-operative Bank, whose troubles first came to the fore in September 2019 when the RBI placed it under moratorium and put withdrawal caps, causing significant distress to depositors. The 2020 amendments also gave the RBI direct power to supersede the Board of Directors of co-operative banks – a power it previously held only for multi-state co-operative banks.

Grounds for winding up a co-operative bank 🔗

A co-operative bank can be wound up on grounds that arise from both co-operative law and banking law. While general co-operative grounds – such as inability to pay debts, persistent mismanagement, or reduction in membership below the statutory minimum – continue to apply, banking-specific grounds hold particular weight. These include failure to maintain the minimum capital requirements set by the RBI, persistent non-compliance with prudential norms such as the Cash Reserve Ratio and Statutory Liquidity Ratio, fraudulent or irregular lending practices, and the inability to repay depositors in full.

In the financial year 2024-25, the RBI imposed fines on four State Co-operative Banks and 51 District Central Co-operative Banks for various violations. Urban Co-operative Banks faced even stricter measures, with 215 penalties imposed during the year. Additionally, the RBI placed seven new Urban Co-operative Banks under All-Inclusive Directions, restricting key operations including deposit withdrawals. These escalating enforcement actions often precede the eventual cancellation of a bank’s licence and initiation of winding-up proceedings.

Depositor protection: the DICGC safety net 🔗

One of the most critical protections in the winding up of a co-operative bank is the role of the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a wholly owned subsidiary of the RBI. Every co-operative bank that holds a licence under the Banking Regulation Act is required to be registered with the DICGC as an insured bank, which means depositors are covered in the event of a bank’s failure.

Upon liquidation, every depositor is entitled to receive a deposit insurance claim amount for their deposits up to a ceiling of ₹5 lakh, subject to the DICGC Act. This insurance cover, which was increased to ₹5 lakh per depositor in 2020, ensures that a substantial majority of depositors in most co-operative banks receive full or near-full reimbursement even when the bank cannot meet its obligations. According to bank data in a recent licence cancellation case, 99.98% of depositors were entitled to receive the full amount of their deposits from the DICGC.

The DICGC’s intervention is not dependent on the completion of the winding-up process. Under amendments to the DICGC Act, insured depositors can receive their claims within 90 days of a bank being placed under restrictions – providing early relief rather than forcing depositors to wait through prolonged liquidation proceedings.

Pre-winding-up mechanisms: moratorium and All-Inclusive Directions 🔗

Before outright winding up is ordered, the RBI may deploy intermediate measures that restrict a bank’s operations while attempts are made at revival or restructuring. These are important to understand because winding up is typically a last resort.

Moratorium 🔗

A moratorium effectively freezes the bank’s operations and protects it from legal action by creditors for a defined period. During a moratorium, the bank cannot accept fresh deposits, disburse payments beyond prescribed limits, or enter into new commitments. The RBI uses this breathing space to explore merger, amalgamation, or reconstruction options.

The Punjab and Maharashtra Co-operative Bank (PMC Bank) crisis of 2019 is the most prominent illustration of this. The RBI placed an embargo under Section 35A of the Banking Regulation Act, 1949 on PMC Bank, preventing it from conducting any major banking operations. The RBI’s order did not mean that the banking licence was revoked – it deprived the bank of its core banking activities, such as renewing or issuing loans, making acquisitions, accepting new deposits, or disbursing any payments except for employee salaries and routine expenses. PMC Bank was eventually not wound up – it was merged with Unity Small Finance Bank in January 2022, demonstrating how the moratorium mechanism can serve as an alternative to dissolution.

All-Inclusive Directions 🔗

Under Section 35A read with Section 56 of the Banking Regulation Act, 1949, the RBI issues directions that bar co-operative banks from granting loans, accepting fresh deposits, or incurring liabilities without prior RBI approval. In cases of significant liquidity stress, the RBI may completely bar withdrawals or restrict them to a nominal amount per depositor. These All-Inclusive Directions (AID) function as an intensive supervisory regime intended either to nurse the bank back to health or to manage an orderly transition toward winding up if revival proves impossible.

The actual winding-up process: how it unfolds 🔗

Once the RBI concludes that a co-operative bank cannot be revived and cancels its licence, the winding-up process proceeds through the following broad stages. First, the RBI formally communicates to the concerned state’s Registrar of Co-operative Societies (or the Central Registrar for multi-state banks) that the licence has been cancelled and requests the initiation of winding-up proceedings. Second, the Registrar issues a winding-up order and appoints a liquidator. Third, the liquidator takes charge of all assets, books, and records of the bank, notifies creditors and depositors, and begins the process of realising assets. Fourth, the DICGC settles insured deposit claims, and the liquidator distributes any remaining assets in the prescribed order of priority. Fifth, once all claims are settled and assets distributed, the Registrar cancels the bank’s registration, formally bringing its existence to an end.

Throughout this process, the RBI continues to monitor the liquidator’s conduct and the progression of proceedings, particularly to ensure that depositor interests are not compromised. Under the Banking Regulation Act, the RBI is empowered to manage situations involving moratoriums, mergers, and liquidations, and can issue directives in the public interest or on banking policy.

Why stringent oversight is non-negotiable 🔗

The heightened regulatory framework for winding up co-operative banks is not bureaucratic excess – it reflects the reality that there are nearly 1,482 urban co-operative banks and 58 multi-state co-operative banks in India, with a depositor base of 8.6 crore people who have saved approximately ₹4.84 lakh crore with these banks. Any systemic failure in this sector can cause cascading harm to millions of ordinary depositors who often lack the financial sophistication or alternative options available to users of commercial banks.

Co-operative banks serve a vital financial inclusion function, particularly in semi-urban and rural areas. Many urban co-operative banks have been under the control of politicians and vested interest groups, completely lacking good governance, financial discipline, effective credit monitoring, and prudential norms applicable to lending by commercial banks, which has led to multiple bank failures and a crisis of confidence and faith among the public. It is precisely this governance vulnerability that justifies the additional layer of RBI oversight during dissolution – a mechanism designed to ensure that even when a co-operative bank fails, public trust in the financial system is preserved and depositors receive the protection they are entitled to.

The 2020 amendments to the Banking Regulation Act, and the ongoing tightening of RBI’s supervisory grip in recent years, reflect a clear policy direction: co-operative banks cannot enjoy the structural freedoms of a co-operative while escaping the regulatory responsibilities of a bank. When they fail, both those identities must be addressed – and the dual oversight of the Registrar and the RBI ensures exactly that.

What do you think? Given that co-operative banks serve millions of financially vulnerable depositors, should the RBI be given complete and exclusive authority over their winding-up process, or is the involvement of the Registrar of Co-operative Societies still necessary to protect the democratic character of the co-operative structure? And in light of cases like PMC Bank, does the current legal framework do enough to protect depositors before a bank reaches the point of dissolution?

References

1. https://www.indiacode.nic.in/handle/123456789/1885
2. https://indiankanoon.org/doc/1129081/
3. https://www.indiacode.nic.in/bitstream/123456789/1885/1/A194910.pdf
4. https://www.dicgc.org.in/sites/default/files/2024-10/DICGC_Act1961.pdf
5. https://en.wikipedia.org/wiki/Punjab_and_Maharashtra_Co-operative_Bank