A Step Toward Cleaner Cooperative Banking
Cooperative banks emerged in India as a means to pool community resources and advance credit to community members, with an elected board to supervise them. However, many cooperative banks have become effective fiefdoms of one or a few, usually political, families that control them over generations.
The sector is plagued by chronic weaknesses due to the small capitalisation of the banks: insider lending, political interference, audit failures, and poor governance structures. This has led to a string of scandals, where bank accounts were manipulated to hide embezzlement and siphoning of money, causing massive losses to ordinary depositors. Benami lending, when the loan is made out to a relative or friend of a director, has been a favourite tactic. This has led to multiple cycles of RBI regulations and new ways to evade them.
With the Draft Lending to Related Parties Directions, 2025, the Reserve Bank of India (RBI) has launched a new round of regulations aimed at tightening governance in both urban and rural cooperative banks. These new directions propose stricter oversight of loans to directors, their relatives, and connected entities, which have long been weak points in cooperative banking.
One of the main provisions is that banks must adhere to materiality thresholds — that is, limits on the amount of money that can be loaned to an ‘insider’. Any loan requested above this limit, will require the bank's governing board or committee to apply greater scrutiny before granting approval. In addition, the draft mandates regular supervisory reporting, disclosure of related-party transactions, and mandatory recusal of interested directors during approvals, i.e. the director requesting the loan cannot sit on their own application.
Lessons from Past Cooperative Bank Scandals
The new norms come in response to decades of colourful frauds and mismanagement. In the past decade alone, three major scandals have rocked India’s cooperative banking sector.
| Punjab Maharashtra Cooperative Bank, Mumbai (2019) | Housing Development and Infrastructure Limited (HDIL) promoters Rakesh and Sarang Wadhawan are said to have colluded with the bank's management to siphon off ~₹4,000 crore through fake accounts. |
| New India Cooperative Bank, Mumbai (2025) | Over ₹122 crore were embezzled through forged loans and misuse of funds. |
| Nemom Service Cooperative Bank, Kerala (2025) | benami loans and forged deposits robbed the bank of nearly ₹100-crore, leading to arrests. |
Key Features of RBI’s Related-Party Lending Rules
| Materiality Thresholds (lending limits) | Overly large loans that can carry significant default risks will now require mandatory board-level approval. |
| Reporting and Disclosure | Banks must file periodic reports of related-party transactions and deviations. |
| Anti-Circumvention Clauses | Reciprocal lending arrangements (wherein directors approve each other's loans) will face forensic audits and supervisory action. |
| Unified Framework | Guidelines formed piecemeal after every scandal are now harmonised for all cooperative banks. |
Stakeholder Consultation and Future Enforcement
The RBI has invited feedback on the draft until October 2025. Once finalised, it will take effect likely in 2026, with time given to cooperative banks to
- revise credit policies in line with the materiality thresholds
- train compliance teams on reporting and disclosure
- build stronger audit mechanisms to detect reciprocal and benami lending
Will These Rules Prevent the Next Cooperative Bank Scam?
The draft regulations are a major governance reform, but challenges remain. Implementation may falter due to
- weak internal audits
- board capture by local elites/politicians
- limited RBI supervision staff.
Without independent audits, these new regulations risk going th same way as previous ones. Even with robust enforcement, however, this is just the next cycle of a game, till someone finds a loophole to exploit. Nevertheless, with new electronic surveillance tools in its hands, the RBI is in a position detect insider lending early and restore depositor confidence.
Keywords: RBI related-party lending 2025, cooperative bank governance, loans to directors rules, cooperative bank fraud India, materiality thresholds RBI, PMC Bank scam, New India Cooperative Bank embezzlement, forensic audits cooperative banks, related-party disclosure norms, RBI draft directions 2025.
