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Do you have a Savings Account in a Cooperative Bank? Create a plan B

Cooperative banks have been all over the news. The Rs.4000-crore scam of PMC has hit the bank depositors hard. The regulator RBI has put restrictions on the bank and depositors can withdraw up to Rs.25,000 within six months. This scenario has put account holders of cooperative bank savings account and fixed deposits depositors on the edge.
This was not the first incident of RBI putting restrictions on a cooperative bank. In May, RBI imposed financial restrictions on Shivajirao Bhosale Sahakari Bank and depositors were allowed to withdraw just Rs.1,000.

This has shaken the public’s trust in the banking system. There been large public outcry and protest rallies as many individuals have deposited their entire lifetime worth of saving in these banks.

Depositors are also questioning the authority of the RBI as they were not able to bring these things on the forefront much earlier.

More than 1000 cooperative banks are operating in the different parts of the country. RBI officials have discussed the regulatory framework of the cooperative banks and a panel is likely to be set up to recommend legislative changes for better governance of these cooperative banks.

Just a few days ago, RBI has changed the daily monitoring system of these cooperative banks. This may be the starting point of a slew of efforts that RBI is likely to take to control the menace.

What is Cooperative Bank?

The cooperative bank is a financial institution that is established on a cooperative basis and it deals with banking business just like any other bank. The cooperative banks raise funds through shares, accepting deposits and granting loans.

However, the structure of these cooperative banks is different from commercial banks. Cooperative banks have a federal structure. State co-operative bank is at the top. It is followed by a central co-operative bank at the district level. Primary agricultural credit societies are present in different villages.

These banks are interconnected with each other through the flow of funds. The funds from the state cooperative banks flow to central co-operative bank and finally to the agricultural credit societies. That means that the amount deposited in the cooperative bank savings account and fixed deposits can be indirectly used to give credit to the primary agricultural societies.

Charitable trusts and institutions are the main depositors in these cooperatives bank. They are mandated by law to keep their deposits in these banks. However, the higher interest rates on savings accounts and fixed deposits compared to public and private banks attract individuals to these banks. These banks provide a higher interest rate as individuals take higher risk by depositing their money in these savings account and fixed deposits.

What you should do?

Most people believe that bank deposits are the safest. While it is safer than other investment options, one needs to be careful while choosing the bank to park their hard-earned money. In case a bank goes bankrupt, banks are legally bound to give you Rs.1 lakh. Bank deposits up to Rs.1 lakh is insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) under RBI. If you had Rs. 1 crore and the bank shuts down, you will only receive Rs.1 lakh. E.g. if you have Rs. 1.5 lakhs in your bank account including your savings account and fixed deposits, you will only receive Rs. 1 lakh.

Hence, it is better to diversify your bank deposits among different banks especially if you have an account with a scheduled bank. Having at least two bank accounts will help you to tide over any difficult scenarios. Also, don’t keep a large amount of savings in one savings account.

If you stay in tier IV cities and villages where not many public or private sector banks are available in the vicinity, then you can look at depositing your money in post office savings account or fixed deposits. Post offices have a wider reach than other banks which makes it easy for individuals to open a saving account near their home.

Conclusion: Parking your deposits in a cooperative bank because of the high-interest rate may not be the best reason to deposit money as it comes with a higher risk. Keep in mind to have at least two bank accounts and don’t keep a major of your savings in these bank accounts. It is always better to go for a PSU savings bank account, private bank account or post offices.

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