As of early 2026, over 200 co-operative banks across India are operating under Section 35A directions from the Reserve Bank — their lending frozen, their deposit acceptance restricted, their management decisions subject to RBI approval. Some have been under these restrictions for years. Others were placed under directions last month. For depositors of these banks, the question is immediate: can I withdraw my money? Why are so many co-operative banks under restrictions — and why does the RBI use this tool instead of simply fining them?
What is a Section 35A direction?
Section 35A of the Banking Regulation Act, 1949 gives the RBI power to issue directions to any banking company:
"in the public interest, in the interest of the depositors, for securing the proper management of any banking company, or in the interest of the banking company." For co-operative banks, Section 56 extends this provision through the "As Applicable to Co-operative Societies" framework.
In practice, a Section 35A direction restricts the bank's operations. The standard restrictions — visible in every Section 35A press release — are:
- The bank shall not grant or renew any loans without RBI approval
- The bank shall not make any investment without approval
- The bank shall not accept fresh deposits without approval
- The bank shall not incur any liability including borrowing
- The bank shall not disburse any payment except as permitted
- The bank shall not sell, transfer, or dispose of any assets except as permitted
The most severe directions also freeze depositor withdrawals. The Shree Mahalaxmi UCB direction (PR_62438) — originally issued in September 2024 and extended in March 2026 — shows how these restrictions persist:
"The Reserve Bank of India is satisfied that in the public interest, it is necessary to further extend the period of operation of the Directive."
The standard restriction language: "the bank has been directed not to allow any withdrawal from savings bank or current accounts." This is the restriction that directly affects the depositor at the counter.
Which banks are under directions right now?
The RBI publishes each Section 35A direction through a press release. In 2025-2026 alone, at least 40+ new Section 35A actions have been issued — almost all targeting co-operative banks.
Recent examples:
Kanaka Pattana Sahakara Bank, Davangere (March 2026, PR_62373) — total freeze on all operations including depositor withdrawals. The direction was required to be "displayed on the bank's website/premises for perusal by interested members of the public."
Industrial Co-operative Bank, Guwahati (January 2026, PR_62202) — extension of an existing restriction period, meaning the bank had already been under directions and the RBI decided the problems weren't resolved.
The pattern is consistent: the overwhelming majority of Section 35A actions target co-operative banks — Urban Co-operative Banks and District Central Co-operative Banks. This reflects the dual regulation problem and the governance gaps that the 2020 Banking Regulation Amendment Act was designed to address.
What triggers a Section 35A direction?
The press releases don't always specify the trigger — they state the direction and the restrictions, not the underlying cause. But the triggers can be inferred from the pattern, because the RBI's supervisory data reveals why certain banks deteriorate while others don't:
Financial deterioration: The bank's capital adequacy (CRAR) has fallen below the regulatory minimum. For UCBs, that's 9% for Tier 1 and 12% for Tiers 2-4. When CRAR breaches the floor, the Supervisory Action Framework triggers escalating interventions.
Governance failure: The board has failed to comply with RBI directions, the Board of Management requirement RBI/2019-20/128, the Board of Management requirement is not met, or the bank's management has been found to be acting against depositor interests. The Mehsana UCB case — where director lending continued "despite having been penalised for the same earlier" — shows how repeat offences escalate from penalty to direction.
Fraud discovery: When an inspection reveals fraudulent transactions, fictitious accounts, or misappropriation — as in the PMC Bank case where Rs 6,500 crore in loans were hidden through 21,049 fictitious accounts.
Severe NPA levels: When non-performing assets have eroded the bank's net worth to the point where it cannot sustain operations. The NPA recognition and provisioning framework determines when this point is reached.
What happens to depositors when their bank is placed under directions?
If the direction includes a withdrawal freeze, depositors cannot access their money — period. The DICGC insurance (Rs 5 lakh per depositor per bank) applies, and the 2021 DICGC Act amendment mandates interim payment within 90 days of a moratorium being imposed.
But not every Section 35A direction includes a withdrawal freeze. Some directions restrict only lending and new deposit acceptance while allowing existing depositors to continue withdrawals. The specific restrictions are detailed in the direction itself, which the bank is required to display publicly.
For banks where withdrawals are frozen, the timeline is:
1. Direction issued — withdrawals frozen or capped
2. DICGC notified — the deposit insurance process begins
3. 90-day deadline — DICGC must make interim payments
4. Resolution process — the RBI decides whether to reconstruct, amalgamate, or liquidate
The PMC Bank precedent showed that before the 2021 amendment, depositors could wait years for resolution. The 90-day interim payment rule was the direct legislative response.
How does this connect to the penalty system?
Section 35A directions and monetary penalties are different levels on the same escalation ladder:
A monetary penalty (under Section 47A) says: you violated a direction, here's a fine, fix it. A Section 35A direction says: your bank's condition threatens depositor safety, we're restricting your operations until you prove otherwise.
The two can coexist. A bank can receive a penalty for past violations AND a Section 35A direction for present risk — simultaneously. The penalty is backward-looking (what you did wrong). The direction is forward-looking (what you can't do until you're fixed).
For lawyers advising co-operative bank boards, the escalation path matters: persistent penalties → supervisory review → Section 35A direction → board supersession (post-2020 Amendment) → moratorium → resolution. Each step narrows the bank's options. The time to fix compliance failures is before the Section 35A direction, not after.
More recent Section 35A actions: April 2026
The pace of Section 35A activity has not slowed. In April 2026 alone, the RBI extended directions against at least three co-operative banks -- each extension showing a different stage of the same pattern.
Samarth Sahakari Bank Ltd., Solapur (PR_62490, April 2026) -- originally placed under directions in October 2025, the RBI extended the restrictions for three months to July 2026. The press release stated:
"The Reserve Bank of India is satisfied that in the public interest, it is necessary to further extend the period of operation of the Directive beyond the close of business on April 07, 2026."
The standard caveat followed: "The aforesaid extension by the Reserve Bank of India should not per se be construed to imply that Reserve Bank of India is satisfied with the financial position of the bank." That caveat matters -- it means the extension is not a vote of confidence. It means the RBI hasn't seen enough improvement to lift restrictions, but also hasn't seen enough deterioration to move to the next step (moratorium or licence cancellation).
Samarth Urban Co-operative Bank Ltd., Osmanabad (PR_62492, April 2026) -- a different bank with a similar name, also under directions since October 2025, also extended to July 2026. Two separate co-operative banks in the same state, under identical restrictions, on identical timelines. This is the structural governance problem in concentrated form.
The Industrial Co-operative Bank Ltd., Guwahati (PR_62493, April 2026) -- placed under directions in July 2025, already extended once in December 2025, and now extended again to July 2026. Three extensions in less than a year. The press release reveals the layering:
"The Reserve Bank of India issued Directions under Section 35A read with Section 56 of the Banking Regulation Act, 1949 to The Industrial Co-operative Bank Ltd., Guwahati vide Directive dated July 03, 2025 for a period of six months up to close of business on January 04, 2026 which was last extended up to close of business on April 04, 2026."
This bank has been under continuous restriction for nine months and counting. The extension cycle -- six months initially, then three-month renewals -- is the standard RBI pattern. Each extension is a quarterly review point where the RBI decides whether to tighten, maintain, or release. Most banks under directions cycle through multiple extensions before resolution.
Why are almost all Section 35A actions against co-operative banks?
Because co-operative banks have structurally weaker governance than commercial banks. Boards are elected by members (who are also borrowers), not selected for banking expertise. The dual regulation problem — RBI regulates banking operations, state Registrar regulates corporate governance — meant that the RBI could see a problem in supervision but couldn't directly fix the governance that caused it.
The Banking Regulation Amendment Act 2020 gave the RBI power to supersede boards — but only for UCBs, not for all co-operative banks. For state-registered StCBs and DCCBs, the state Registrar still controls board appointments. The Section 35A direction remains the RBI's primary tool for these entities — restricting operations when it can't fix governance.
Why are commercial banks almost never subject to Section 35A? Because they have professional management, stronger capital bases, and the RBI's ISE inspection cycle catches problems earlier. When a commercial bank does face enforcement, it's typically at the penalty level — financial consequence, not operational restriction.
Last updated: April 2026