Economy · GS3.1 · 2026-10-23 · 3 min read · 2026-10-23-am

RBI Issues Directions to Cooperative Banks under Banking Regulation Act

The Reserve Bank of India (RBI) has issued regulatory directions to Puducherry Co-operative Urban Bank Ltd and extended restrictions on The Suri Friends’ Union Co-operative Bank Ltd under Sections 35A and 56 of the Banking Regulation Act, 1949. These actions highlight RBI's role in supervising cooperative banks to protect depositors and maintain financial stability.

RBI uses its powers under the Banking Regulation Act to impose operational restrictions on cooperative banks to safeguard depositors and ensure financial discipline.

Why is this in the news?

On October 19 and 22, 2026, RBI issued and extended directions under Sections 35A and 56 of the Banking Regulation Act to Puducherry Co-operative Urban Bank Ltd and The Suri Friends’ Union Co-operative Bank Ltd respectively, imposing operational restrictions.

[1] Reserve Bank of India [2] Reserve Bank of India

What directions did RBI issue to Puducherry Co-operative Urban Bank Ltd?

Operational restrictions. From October 21, 2026, the bank cannot grant or renew loans, make investments, incur liabilities, accept fresh deposits, or dispose of assets without RBI's prior written approval.
Withdrawal limits. Depositors can withdraw up to ₹5,000 from their accounts, and the bank may set off loans against deposits under specified conditions.
Essential expenditures allowed. The bank may pay for essential items such as employee salaries, rent, and electricity bills as per RBI directions.
Reason for directions. RBI issued these directions due to the bank's poor liquidity and inadequate efforts to address supervisory concerns, aiming to protect depositors.
Deposit insurance. Depositors are entitled to insurance claims up to ₹5,00,000 from the Deposit Insurance and Credit Guarantee Corporation (DICGC) after verification.
License status. These directions do not mean cancellation of the bank's license; the bank continues operations under restrictions until its financial position improves.

[1] Reserve Bank of India

Why was the directive period extended for The Suri Friends’ Union Co-operative Bank Ltd?

Extension details. RBI extended the directive period for The Suri Friends’ Union Co-operative Bank Ltd by three months from October 22, 2026, to January 22, 2027.
Legal basis. The extension was issued under Sections 35A and 56 of the Banking Regulation Act, 1949.
Public interest. RBI stated the extension is necessary in the public interest but clarified it does not imply satisfaction with the bank's financial position.
Unchanged terms. All other terms and conditions of the original directive remain unchanged during the extension period.

[2] Reserve Bank of India

Why do RBI's directions to cooperative banks matter for UPSC aspirants?

Regulatory powers. RBI exercises powers under the Banking Regulation Act to supervise cooperative banks, ensuring financial discipline and depositor protection.
Financial stability. Such directions help maintain trust in the banking system by preventing bank failures and safeguarding public deposits.
Legal provisions. Understanding Sections 35A and 56 of the Banking Regulation Act is important for questions on financial sector regulation and governance.
Cooperative bank governance. The issue highlights challenges in cooperative bank management and RBI's role in enforcing corrective measures.

[1] Reserve Bank of India [2] Reserve Bank of India

Key numbers

Figure	What it measures	Source
₹5,000	Maximum withdrawal allowed per depositor from Puducherry Co-operative Urban Bank Ltd accounts	[1] Reserve Bank of India
₹5,00,000	Deposit insurance coverage limit per depositor under DICGC	[1] Reserve Bank of India
3 months	Extension period of RBI directive for The Suri Friends’ Union Co-operative Bank Ltd	[2] Reserve Bank of India

Back to basics: Banking Regulation Act and RBI's supervisory role

The Banking Regulation Act, 1949, empowers the Reserve Bank of India to regulate and supervise banking institutions, including cooperative banks. Sections 35A and 56 allow RBI to issue directions to banks to protect depositors' interests and ensure financial stability. Cooperative banks are financial entities owned and operated by their members, often serving local communities, and require regulatory oversight to maintain sound governance and liquidity.

Practice: MCQ, Mains and revision

Prelims MCQ

Consider the following statements regarding RBI's directions to cooperative banks: 1. RBI can restrict a cooperative bank from granting loans without its prior approval under Section 35A of the Banking Regulation Act. 2. Deposit insurance coverage by DICGC for cooperative banks is up to ₹5,00,000 per depositor. Which of the statements given above is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

Answer and trap

Answer: (a). Statement 2 is incorrect because the deposit insurance coverage by DICGC is up to ₹5,00,000, not more; the question tests careful reading of the exact insurance limit.

Mains question (15 marks)

Examine the role of the Reserve Bank of India in regulating cooperative banks and protecting depositors.

Examine: Explain RBI's regulatory powers over cooperative banks and how it safeguards depositor interests.

Intro: The Reserve Bank of India regulates cooperative banks under the Banking Regulation Act to ensure financial stability and depositor protection.

RBI uses Sections 35A and 56 to issue directions restricting bank operations when financial health is weak.
Such directions may limit loans, deposits, and asset sales to prevent worsening liquidity and protect depositors.
RBI monitors compliance and can extend or modify directives based on the bank's progress.
Deposit Insurance and Credit Guarantee Corporation provides insurance cover up to ₹5,00,000 to depositors, mitigating risk.

Conclusion: RBI's supervisory role is crucial for maintaining trust and stability in the cooperative banking sector.

Quick revision

Under which sections of the Banking Regulation Act did RBI issue directions to cooperative banks?: RBI issued directions under Sections 35A and 56 of the Banking Regulation Act, 1949.
What is the maximum withdrawal allowed per depositor from Puducherry Co-operative Urban Bank Ltd as per RBI directions?: ₹5,000 is the maximum withdrawal allowed per depositor.
What is the deposit insurance limit provided by DICGC for cooperative bank depositors?: The deposit insurance coverage limit is ₹5,00,000 per depositor.