RBI Imposes Penalties on Three Karnataka Cooperative Banks for Director Loans, NPA Lapses, and Exposure Breaches

₹1.00 Lakh

• Non-compliance with IRAC norms (failure to classify accounts as NPAs)

Key Supervisory Findings & Regulatory Concerns

The RBI's inspection reports highlighted three critical areas of compliance and governance vulnerability across cooperative balance sheets:

1. Prohibited Related-Party & Director Lending

Both Shri Vijay Mahantesh Co-operative Bank and The Pragathi Co-operative Bank were penalized for sanctioning credit facilities to directors, their relatives, or commercial entities in which board members held an interest. Under Section 20 of the Banking Regulation Act, 1949, primary cooperative banks are strictly barred from extending credit to directors to prevent institutional conflicts of interest and governance capture.

2. Asset Classification Delays & NPA Camouflaging

Shri Vijay Mahantesh Co-operative Bank and Vikas Souharda Co-operative Bank failed to classify delinquent borrower accounts as Non-Performing Assets (NPAs). Delaying asset degradation distorts true balance-sheet health, defers mandatory credit provisioning, and misleads depositors regarding underlying asset quality.

3. Concentration and Inter-Bank Counterparty Over-Exposure

The Pragathi Co-operative Bank breached regulatory thresholds governing single-borrower credit exposure as well as prudential inter-bank gross and counterparty exposure limits. Exceeding exposure ceilings amplifies credit concentration risk and exposes regional lenders to institutional contagion if a major counterparty defaults.

Statutory Basis & Scope of Action

The penalties were levied pursuant to powers conferred under Section 47A(1)(c) read with Section 46(4)(i) and Section 56 of the Banking Regulation Act, 1949.

The RBI clarified that these enforcement actions are based strictly on deficiencies in statutory and regulatory compliance and are not intended to pronounce upon the validity of any underlying transactions or agreements entered into by the banks with their customers.