Komal Gupta
Director-Strategy and Policy, Coop Talks & Founder, Konsult Komal
The Reserve Bank of India’s decision to cancel the licence of Sarvodaya Co-operative Bank Ltd. on May 12, 2026, is not merely another regulatory action against a distressed financial institution. It is a reminder that India’s cooperative banking sector continues to face significant challenges in governance credibility, depositor protection, and institutional resilience.
In its notification, the RBI stated that the bank lacked adequate capital and earnings prospects and that its continued operations would be prejudicial to depositors’ interests. While the regulator noted that nearly 98.4 per cent of depositors would be protected under the Deposit Insurance and Credit Guarantee Corporation framework, the larger, unavoidable concern is that repeated cooperative banking failures steadily weaken public trust in institutions that were historically built on community confidence and local accessibility.
For ordinary citizens, such crises are never technical financial events. Cooperative bank depositors are often pensioners, small traders, middle-income households, local businesses, and first-generation savers who choose these institutions because they are relationship-driven, locally rooted, and socially accessible. When restrictions are imposed or licences cancelled, the consequences are immediate. Savings become inaccessible, working capital gets disrupted, healthcare expenses are delayed, and financial uncertainty deepens.
India has witnessed this cycle before. On September 23, 2019, the Reserve Bank of India imposed restrictions on Punjab and Maharashtra Co-operative Bank after large-scale financial irregularities and concealed bad loans surfaced. The initial withdrawal cap imposed on depositors was just ₹1,000 per account, triggering widespread panic among customers. Nearly nine lakh depositors were affected. Subsequent investigations revealed that the bank’s exposure to the HDIL Group exceeded ₹6,500 crore, accounting for nearly 73 per cent of its total loan book of ₹8,880 crore as of September 2019. The bank’s deposit base stood at approximately ₹11,617 crore before the crisis emerged.
The PMC crisis fundamentally altered the national conversation around cooperative banking governance. It exposed how governance failures within deposit-taking institutions can persist for years despite the presence of boards, auditors, supervisory frameworks, and regulatory oversight systems. The issue was not merely fraud. The issue was sustained institutional failure across multiple layers of governance and accountability.
Several other urban cooperative banks have witnessed distress over the years, including Madhavpura Mercantile Co-operative Bank, CKP Co-operative Bank, and Guru Raghavendra Co-operative Bank. While each case differed operationally, the underlying governance patterns often appeared strikingly similar: concentration of lending, exposure to connected parties, weak internal controls, delayed recognition of stress, inadequate audit systems, and governance structures unable to match the complexity of modern banking operations.
These failures are significant because cooperative banking remains an important pillar of India’s financial ecosystem. As of March 31, 2025, India had approximately 1,457 urban cooperative banks with deposits exceeding ₹5.84 lakh crore and assets of around ₹7.38 lakh crore.
This is not a marginal sector. It represents a major layer of grassroots banking in urban and semi-urban India.
Historically, cooperative banks have played a critical role in financial inclusion by serving communities and economic segments that often remain underserved by larger commercial institutions. Across several regions, they continue to provide local access to credit, support small enterprises, strengthen community-based financial systems, and preserve relationship-driven banking structures that larger institutions often cannot replicate.
The challenge, therefore, is not the cooperative model itself. The challenge is whether governance systems within segments of the cooperative banking sector have evolved adequately to manage the realities of modern banking risk.
Historically, urban cooperative banks operated within a fragmented governance structure. Banking functions fell under RBI supervision, while management and administrative aspects remained linked either to state cooperative departments or, in the case of multi-state cooperative banks such as PMC Bank, the Central Registrar framework. This dual structure frequently created overlaps in authority, accountability gaps, and delayed corrective intervention.
The PMC crisis ultimately triggered major regulatory reforms. Through the Banking Regulation (Amendment) Act, 2020, the RBI’s powers over cooperative banks were significantly expanded in areas relating to management oversight, reconstruction, amalgamation, audit supervision, and governance intervention. The reforms represented an important acknowledgement that cooperative banks handling public deposits required stronger prudential regulation.
In January 2026, the RBI released a discussion paper proposing the possible resumption of Urban Cooperative Bank licensing after a more than two-decade pause. The move reflected an important shift in regulatory thinking. While acknowledging historical governance failures, technology gaps, and supervisory concerns within segments of the sector, the RBI also recognised the continuing importance of Urban Cooperative Banks in financial inclusion and community-based banking. The discussion paper proposed significantly stricter entry norms, including higher capital requirements, stronger governance standards, and tighter prudential benchmarks. The RBI subsequently indicated that draft licensing guidelines would be issued after stakeholder consultations and public feedback.
The discussion paper also highlighted the scale and significance of the sector itself. As of March 31, 2025, India had 1,457 Urban Cooperative Banks with aggregate assets of approximately ₹7.38 lakh crore and deposits of around ₹5.84 lakh crore. The sector, therefore, remains far too important to be viewed only through the lens of periodic institutional failures.
Yet despite these reforms, governance vulnerabilities continue to surface across segments of the sector. This raises a difficult but necessary policy question: has governance reform within cooperative banking kept pace with the increasing complexity of the financial system?
Banking today is technology-intensive, compliance-driven, data-dependent, and increasingly interconnected. However, many cooperative institutions continue to struggle with outdated governance structures, weak technology systems, inadequate risk management frameworks, limited professional expertise at the board level, and insufficient supervisory preparedness.
In many cases, governance structures evolved slowly while financial sector risks evolved rapidly.
This governance lag is now emerging as one of the most serious structural vulnerabilities facing segments of the cooperative banking ecosystem.
The issue is not merely financial. It is institutional. Banking fundamentally operates on trust. Unlike ordinary corporate failures, banking failures create reputational contagion across the sector. Every cooperative bank collapse weakens depositor confidence not only in one institution, but also in several well-governed cooperative banks that continue to function responsibly.
This is why India cannot afford a cycle in which corrective intervention arrives only after depositor confidence has already collapsed.
The response now requires more than post-crisis regulation. It requires systemic governance modernisation.
The first priority must be the professionalisation of governance. Deposit-taking institutions cannot function effectively with weak board expertise, limited risk-oversight capability, or governance structures driven primarily by local influence. Fit and proper norms, professional management standards, board accountability frameworks, and stronger audit systems must become central to cooperative banking governance.
Second, supervisory systems must become more technology-driven and preventive. Real-time reporting frameworks, data analytics-based monitoring, early-warning systems, and stronger compliance surveillance are essential if institutional stress is to be identified before it becomes systemic.
Third, institutional coordination requires strengthening. Cooperative banking today intersects multiple governance frameworks involving regulators, cooperative departments, registrars, and sector institutions. Fragmented accountability structures cannot effectively supervise increasingly sophisticated financial entities.
This is where the Ministry of Cooperation can play an important catalytic role.
While cooperative societies remain constitutionally linked to the states, the Ministry has an opportunity to strengthen governance capacity, digitisation, institutional training, and sector-wide best practices across cooperative institutions. The Ministry can help develop stronger governance literacy programmes, director certification systems, technology modernisation initiatives, cybersecurity preparedness frameworks, and institutional capacity-building mechanisms for cooperative management.
The future sustainability of cooperative banking will depend not only on regulation but also on governance capability.
Importantly, reform efforts must preserve the foundational strengths of the cooperative model itself. India does not need fewer cooperative banks. It needs stronger and better-governed cooperative banks. The objective should not be to dilute the cooperative character of these institutions, but to strengthen institutional credibility and depositor confidence.
The future of cooperative banking in India will not be secured through sentiment alone. It will depend on whether governance systems evolve with the same seriousness and urgency as financial sector risks themselves. Protecting depositor trust can no longer remain a reactive exercise. It must become the central pillar of cooperative banking reform.
