Cancellation Of The Banking Licence

Why in the News?

The Reserve Bank of India has cancelled the banking licence of Pune-based Rupee Cooperative Bank, and directed the Registrar of Cooperative Societies to liquidate it.

Key Points:

About Banking Licence

• Financial institutions wishing to carry out banking operations such as accepting deposits or lending have to obtain a licence from India’s central bank.
• The RBI issues the licence under the Banking Regulation Act of 1949 after carrying out a series of checks about the financial suitability of the applicant institution.
• No company other than one that has been issued a banking licence is allowed to use the word ‘bank’ in its name while doing business.

Involved Parameters in Granting Bank License:

• The 1949 Act in particular stresses on adequate capital and protection of the public interest before the licence is granted.

Why did RBI cancel the licence of Rupee Cooperative Bank?

• The RBI audits banks every year, and can take action if it notes an increase in bad debts or other suspicious activities in their books.
• The RBI gave the following reasons for the cancellation of the bank’s licence:
  • The Bank does not have adequate capital and earning prospects.
  •  The Continuance of the bank is prejudicial to the interests of its depositors;
  • The Bank with its present financial position would be unable to pay its present depositors in full; and
  • Public interest would be adversely affected if the bank is allowed to carry on its banking business any further.

What happens to the Depositors Money during cancellation of Banking Licence?

• The RBI has said that depositors with Rs 5 lakh or less in the bank, would get back all of their money through the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Deposit Insurance Credit Guarantee Corporation  DICGC is a wholly-owned subsidiary of the Reserve Bank of India (RBI). It provides deposit insurance that works as a protection cover for bank deposit holders when the bank fails to pay its depositors. It protects depositors’ money kept in all commercial and foreign banks located in India; central, state, and urban co-operative banks; regional rural banks; and local banks, provided that the bank has opted for DICGC cover. DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021: It added a new Section 18A in the DICGC Act, 1961, which enabled depositors to get easy and time-bound access to their deposits by DICGC as when banks are placed under ‘All Inclusive Directions’ (AID) by RBI. DICGC is liable to make interim payments to depositors up to the deposit insurance cover of ₹ 5 lakh (earlier limit was 1 lakh) within 90 days of imposition of such directions.