The Reserve Bank of India (RBI) has cancelled the licence of Maharashtra-based The Laxmi Co-operative Bank Ltd with effect from September 22, 2022, because the bank had inadequate capital to run its affairs, did not have enough earning prospects and continuing the bank's operations would have affected public interest adversely. This cancellation means the bank is prohibited from conducting any ‘banking’ business like accepting or repaying deposits.
Why is the bank's licence cancelled? Laxmi Cooperative Bank is a cooperative bank based out of Solapur in Maharashtra and has been in business since 1929. As per the RBI, the bank has not followed provisions of Sec 11 and 22 of the Banking Regulation Act, 1956. As per Sec 11, primary cooperative banks are required to have a minimum capital and reserves balance of Rs 1 lakh and as per Sec 22, the bank should be in a position to repay its depositors and have earning prospects.
As per RBI's observations, the bank's present financial position is such that it would be unable to pay its present depositors the full amount. Also, the public interest would be adversely affected if the bank was allowed to carry on as the bank's continuance is prejudicial to the interests of the deposit holders.
So what next for the bank? The Commissioner for Cooperation and Registrar of Cooperative Societies, Maharashtra will:
As of September 13, the Laxmi Co-operative Bank has already paid Rs 193 crore of the total insured deposits.
What is DICGC and why would it pay? The 'Deposit Insurance and Credit Guarantee Corporation' (DICGC) is a division of the RBI which provides insurance for deposits held by depositors in cooperative and commercial banks. When deposit-taking banks fail and they are not in a position to repay customers' deposits (just like Laxmi Bank at the moment), this insurance cover ensures that the DICGC helps depositors receive their money.
A depositor-wise claim list is made and sent to the DICGC for scrutiny and payment, post which the DICGC pays the money to the bank's liquidator who then pays the depositors. The maximum amount each depositor can get is Rs 5 lakh.