On the evening of September 23, 2019, Sanjay Gulati waited outside a branch of Punjab & Maharashtra Co-operative Bank in Mumbai. He had come to withdraw money for his daughter's college fees. The RBI had just imposed restrictions limiting withdrawals to Rs 1,000 per depositor. Over the following days, Gulati suffered a heart attack and died. He was one of several PMC depositors who died during the crisis. Their deaths turned a regulatory failure into a political emergency — and forced Parliament to confront a question it had avoided for decades: why do co-operative banks keep failing, and why can't the RBI stop it?
The answer lies in dual regulation. The RBI controls banking operations; state Registrars of Co-operative Societies control governance, elections, and management. When the governance side fails, the banking side collapses, and the RBI is left cleaning up a mess it was never given the tools to prevent.
Why Does Dual Regulation Make Co-operative Banks So Vulnerable?
The board of a co-operative bank is elected by its members — who are also its borrowers. A borrower-elected board has every incentive to approve easy loans, delay NPA recognition, and resist outside scrutiny. The RBI can set prudential norms and inspect books, but before 2020, it could not remove a co-operative bank's board, appoint professional directors, or force a reconstruction scheme. Those powers belonged to the state Registrar — a political appointee with no banking expertise and little incentive to act against politically connected boards.
The first SAF circular for UCBs in 2012 RBI/2011-12/420 (since withdrawn) acknowledged this gap implicitly. It created triggers for supervisory action when financial indicators deteriorated, but the escalation ladder ran out of rungs quickly — the RBI could restrict operations, but it could not touch the board causing the problems. Why did this arrangement persist? Because co-operative banks are creatures of state legislation, and state governments treat them as instruments of local patronage. For a comprehensive timeline of how this regulatory architecture evolved, see Co-operative Banks Regulation: The Complete Timeline.
What Actually Happened at PMC Bank?
PMC Bank's failure was not a case of bad luck or market conditions. It was fraud, enabled by exactly the governance weaknesses that dual regulation was supposed to prevent but never did.
The bank's management created 21,049 fictitious loan accounts to disguise its exposure to a single borrower group — HDIL, a real estate company. The true exposure was approximately Rs 6,500 crore, representing over 73% of the bank's total assets. The bank's own auditors, its elected board, and the state Registrar all failed to detect what amounted to a parallel set of books.
"Unlike in the case of commercial banks, the Reserve Bank has no powers to draw up an enforceable scheme of reconstruction of a cooperative bank." (RBI press release on PMC Bank directions, March 2020)
That sentence, buried in a routine extension of PMC Bank's Section 35A directions, was an extraordinary public admission. Why couldn't the RBI resolve the bank? Because the Banking Regulation Act, 1949 — as applicable to co-operative societies — did not give it reconstruction powers over co-ops. The 2005 merger framework (Guidelines for merger / amalgamation of Urban Co-o) had already flagged this:
"Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of co-operative banks, the State Governments have incorporated in their respective Co-operative Societies Acts a provision for obtaining prior sanction in writing, of RBI." (Voluntary merger guidelines for UCBs, RBI_2631)
PMC depositors were locked out for years. The DICGC insurance limit was raised from Rs 1 lakh to Rs 5 lakh in 2020, partly in response to the crisis. But for depositors above that threshold, the wait continued until Unity Small Finance Bank acquired PMC's operations in 2022. For a detailed account, see How PMC Bank Failed: A Regulatory Autopsy.
What Did the 2020 Banking Regulation Amendment Actually Change?
Parliament passed the Banking Regulation (Amendment) Act, 2020 in September of that year, directly in response to the PMC crisis. The amendment gave the RBI three powers it had never had over co-operative banks.
First, the power to supersede boards. The RBI could now remove an entire UCB board and appoint an administrator — closing the most critical gap, because it no longer needed to petition the state Registrar to act against a failing board.
Second, the power to require a Board of Management. The RBI had issued guidelines on BoM constitution in December 2019 RBI/2019-20/128, but the 2020 amendment gave them statutory backing. UCBs with deposits of Rs 100 crore and above must now constitute a BoM with professional banking experience. Why this threshold? Because governance failures concentrated in larger UCBs where stakes attracted manipulation but oversight was no better than at smaller banks.
"UCBs with deposit size of Rs 100 crore and above shall constitute BoM which will also be a mandatory requirement for allowing such banks to expand their area of operation and open new branches." (Board of Management guidelines, RBI/2019-20/128)
Third, the power to force reconstruction or amalgamation. Before 2020, the RBI could suggest mergers but could not impose them. The amendment brought Sections 45 (scheme of reconstruction) and Section 45A (compulsory amalgamation) within the RBI's toolkit for co-operative banks — the same provisions that had allowed the RBI to resolve YES Bank and Lakshmi Vilas Bank among commercial banks.
Why Are 200+ UCBs Still Under Regulatory Directions?
The 2020 amendment gave the RBI new powers, but it did not retroactively fix banks already failing. Section 35A remains the primary tool for restricting troubled co-operative banks. The pattern is consistent: the RBI imposes all-inclusive directions restricting withdrawals, lending, and deposits, then extends them every three to six months — sometimes for years.
The Adoor Co-operative Urban Bank in Kerala has been under Section 35A directions since November 2018, with repeated extensions. The Durga Co-operative Urban Bank in Vijayawada has been under similar directions since July 2022. The Industrial Co-operative Bank in Guwahati received fresh directions in July 2025, extended into 2026. Why does enforcement fall so disproportionately on co-ops? Because the RBI's database shows over 900 Section 35A actions against co-operative banks, compared to a handful against commercial banks. For a deeper analysis, see Banks Under RBI Directions: What Section 35A Means for Your Deposits.
How Does the Supervisory Action Framework Catch Failing Banks?
The SAF — now replaced by the Prompt Corrective Action framework from April 2025 — was the RBI's early warning system for UCBs. The revised SAF of January 2020 RBI/2019-20/135 set three automatic escalation triggers: net NPAs exceeding 6% of net advances, two consecutive years of losses, and CRAR falling below 9%. Each trigger carries escalating restrictions — from requiring board-approved recovery plans to prohibiting fresh lending to, at the extreme end, all-inclusive Section 35A directions and show-cause notices for licence cancellation.
"Actions such as imposition of all-inclusive directions under section 35A of the Banking Regulation Act, 1949 (as applicable to co-operative societies) and issue of show cause notice for cancellation of banking license may be considered by the Reserve Bank when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors." (Revised SAF for UCBs, RBI/2019-20/135)
The PCA framework that replaced SAF in July 2024 RBI/2024-25/55 went further with three explicit risk thresholds: CRAR breaches up to 250 bps below minimum at Threshold 1, up to 400 bps at Threshold 2, and beyond 400 bps at Threshold 3. Net NPAs between 6-9% trigger Threshold 1; 9-12% Threshold 2; above 12% Threshold 3. Why did the RBI rename SAF to PCA? Because the PCA label — already applied to commercial banks since 2002 — signals that co-operative banks will now face the same supervisory rigour.
Can the RBI Actually Fix Co-operative Bank Governance?
Not entirely. The 2020 amendment closed the most dangerous gaps, but the fundamental tension remains. Co-operative banks exist to serve their members, and their democratic governance structure is a feature, not a bug — until it becomes one. The RBI can now remove boards and require professional management, but it cannot change the incentive structure: directors elected by borrowers who want cheap credit and depositors who want high interest rates will always take excessive risks.
The penalty record tells the story. The RBI regularly imposes monetary penalties on co-operative banks for violations — KYC failures at the Bhadran People's Co-operative Bank in Gujarat (December 2024), dividend declaration violations at the Arantangi Co-operative Town Bank in Tamil Nadu (October 2025). The penalties are small — Rs 50,000 to Rs 2 lakh — because the banks are small. But the violations are persistent, and they point to a sector where compliance culture has not kept pace with regulatory expectations.
The four-tier categorisation framework tries to match regulation to risk — Tier 1 UCBs (deposits up to Rs 100 crore) face lighter requirements, while Tier 4 UCBs (above Rs 10,000 crore) approach commercial bank standards. The BoM requirement, PCA framework, and enhanced DICGC coverage are layers that did not exist before PMC. Whether they prevent the next PMC depends on whether the RBI uses its new powers proactively. The record so far suggests it still relies primarily on post-crisis intervention — Section 35A directions after the damage is done — rather than early governance action that might prevent the damage in the first place.
Last updated: April 2026