Urban co-operative banks: RBI's Section 35A directions and DICGC cover
Why in news: RBI announced on 21 October 2026 that Puducherry Co-operative Urban Bank is under Section 35A directions for six months, with withdrawals capped at ₹5,000.
Urban co-operative banks answer to two authorities: the Registrar of Co-operative Societies and the Reserve Bank of India. RBI can freeze a weak bank's lending, deposits and payments through directions under Section 35A of the Banking Regulation Act, 1949, while DICGC insures each depositor up to ₹5 lakh. Puducherry Co-operative Urban Bank came under such directions on 21 October 2026.
Syllabus: GS3 · Indian Economy & Growth; Prelims · Economy & Social Development; GS2 · Statutory & Regulatory Bodies
Why this matters for UPSC
GS3 Indian economy (banking regulation) and GS2 regulatory bodies: Prelims asks what Section 35A, Section 56, DICGC and the four tiers provide; Mains asks whether dual control and deposit insurance protect co-operative bank depositors.
In short
Urban co-operative banks are co-operative societies doing banking; the Registrar of Co-operative Societies and RBI share control under co-operative laws and the Banking Regulation Act, 1949.
Section 35A directions protect depositors only when RBI acts early; ending split accountability with Registrars and closer watch on Tier 1 banks should come next.
Why it matters
For a household that keeps its savings in a neighbourhood co-operative bank, all-inclusive directions mean it can suddenly draw only a small sum, such as ₹5,000, however much it holds. Deposit insurance limits the damage: savings up to ₹5 lakh in each bank come back within about three months, but anything above that waits on the bank's revival or liquidation. Traders who bank there lose access to working money, and borrowers cannot get fresh loans. The larger issue is trust. Co-operative banks are run by elected boards and watched by two authorities, and each failure tests whether regulation can catch stress early enough that depositors are never locked in.
Prelims pointers
- Section 56, Banking Regulation Act, 1949: applies the Act to co-operative banks with modifications; inserted by the Banking Laws (Application to Co-operative Societies) Act, 1965.
- Section 3, Banking Regulation Act: excludes primary agricultural credit societies and long-term agricultural finance societies that avoid the word 'bank' and do not act as drawee of cheques.
- UCB deposit tiers (RBI, 2022): Tier 1 to ₹100 crore, plus all unit and salary earners' banks; Tier 2 to ₹1,000 crore; Tier 3 to ₹10,000 crore; Tier 4 above.
- UCB capital floors (RBI, July 2022): net worth ₹2 crore for single-district Tier 1 banks, ₹5 crore for others; CRAR 9% for Tier 1, 12% for Tiers 2 to 4.
- Section 45, Banking Regulation Act (amended 2020): a scheme of reconstruction or amalgamation of a bank can now be made without first ordering a moratorium.
- Deposits not insured by DICGC: those of foreign governments, the Central and State governments, other banks, and deposits received outside India.
- PCA for UCBs (RBI circular, 26 July 2024): indicators are CRAR, net NPA ratio and net profit; it excludes Tier 1 banks and banks under all-inclusive directions.
- Expert Committee on Urban Co-operative Banks: set up by RBI on 15 February 2021 under N. S. Vishwanathan; it recommended the four-tier regulatory framework.
Practise a UPSC-style question
With reference to the Banking Regulation (Amendment) Act, 2020, consider the following statements:
1. It transferred the powers of State Registrars of Co-operative Societies under State co-operative laws to the Reserve Bank of India.
2. Its amendments do not apply to primary agricultural credit societies.
3. It enables a scheme of reconstruction or amalgamation of a bank to be made without first ordering a moratorium.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Show the answer
Answer: (b) 2 and 3 only
Answer: (b) 2 and 3 only. The 2020 amendment widened RBI's powers but left the State Registrars' powers intact.
Statement 1: incorrect. The government stated in 2020 that the amendments do not affect the existing powers of State Registrars of Co-operative Societies under State co-operative laws.
Statement 2: correct. Primary agricultural credit societies, and long-term agricultural finance societies that do not use the word 'bank', are outside the amendments.
Statement 3: correct. The amended Section 45 of the Banking Regulation Act, 1949 allows a reconstruction or amalgamation scheme even without a moratorium order.
Eliminate: Statement 1 is the surest: dual control survives, since Registrars keep their powers. Out: (a), (c), (d).
Trap: Swapped attribution. The question pins the Registrars' powers on RBI, though the 2020 amendment only extended RBI's banking powers.
Remember: 2020 amendment: more RBI power over co-operative banks, Registrars untouched, PACS excluded.
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