RBI’s Governance and Enforcement of Lending Restrictions in Co-operative Banks of India

Posted On - 18 September, 2025 • By - King Stubb & Kasiva

The Reserve Bank of India (“RBI”) on 7 August 2025 imposed a monetary penalty of ₹2.50 Lakh on the Nalgonda District Co-operative Central Bank Limited (Telangana) for violations of the Banking Regulation Act, 1949 (“BR Act”).[1] The penalty was levied under RBI’s penalty powers[2] for contravention of Section 20, read with Section 56 of the BR Act. These provisions, along with Section 46(4)(i), form the statutory framework governing lending to directors and enforcement actions by RBI. Below, we examine each in detail.

Co-operative banks in India are statutory co-operative societies that carry on banking business. They are governed by a dual regulatory regime: the respective State Co-operative Societies Acts (or the Multi-State Co-operative Societies Act) for their formation and general governance, and the RBI’s regulatory framework as provided in Part V of the BR Act (via Section 56) for banking functions. Board members and management are typically elected by member-depositors, raising well-known concerns about conflicts of interest and related-party lending. Accordingly, the BR Act’s restrictions on insider lending and shareholding are consciously extended to co-operative banks.

Section 20 of the BR Act broadly prohibits a banking company from granting loans or advances on the security of its own shares, or from committing to loans or advances to or for its directors, firms where directors are partners/managers, companies in which directors have an interest, or individuals for whom directors are guarantors. Sub Section 4 further provides that any loan referred to in Sub Section (1)(b) that remains unpaid after one year is deemed to be a loan of the bank to that director, and the director is deemed to have vacated office from the date of the expiry of the one-year period. In short, Section 20 imposes a strict statutory bar on insider lending, rendering any such extensions of credit void and subject to recovery. Whereas, Section 56 of BR Act clarifies that, notwithstanding other laws, the provisions of the BR Act “shall apply to, or in relation to, co-operative banks as they apply to, or in relation to, banking companies”, subject to specified modifications. For example, in the context of a statutory co-operative bank, terms like “banking company” are read as “co-operative bank”, and references to Companies Act filings are read as references to by‑laws or state co-operative registrar filings. Thus, Section 56 brings Section 20 into force for co-operative banks, so that loans to directors of co-operative banks are prohibited under the same terms as for commercial banks.

Section 46 of the BR Act deals with penalties for contraventions or defaults. Sub-section (4) states that “if any other provision of this Act is contravened or if any default is made in … (i) complying with any requirement of this Act or of any order, rule or direction made or condition imposed thereunder”, then the person is punishable with fines of up to ₹1 Crore (or twice the amount involved – whichever is higher), with continuing default attracting a further daily fine. In other words, a breach of Section 20 falls under Section 46(4)(i), exposing the defaulting bank and its officers to the statutory penalties specified.

Section 47A of the BR Act, inserted by amendment in 1968, grants RBI express power to impose monetary penalties on a banking company for contraventions of specified provisions of the Act, including defaults covered by Section 46(4). In particular, Section 47A(1)(c) empowers RBI to levy a penalty “not exceeding one crore rupees or twice the amount involved” when there is a continuing contravention of a provision in sub‑section (4) of Section 46.

Thus, once a co-operative bank contravenes Section 20, RBI can impose a penalty under Section 47A(1)(c) read with Section 46(4)(i) (and Section 56 for applicability) to the extent provided for such defaults.

In practice, many co-operative banks have faced governance challenges including nepotism and weak audit oversight.[3] To counter this, RBI and the Government have periodically strengthened prudential norms. For example, Section 20 was amended to explicitly include “directors (including past or present) and their interests” to prevent evasion. In the co-operative schedules under Section 56 of the BR Act, “director” is defined expansively (e.g. as any person vested with management of the society’s affairs) so that de facto power-holders are caught. Other provisions of the BR Act (e.g., Sections 19, 20A, 22, etc.) regulate shareholding limits and external control of co-op banks. These restrictions reflect the imperative that co-operative bank directors must not abuse their position to further private interests at depositor expense.

Under the Societies Acts, directors are fiduciaries. RBI’s Section 20 further renders any loan to a director ipso facto void and mandates its recall. Several co-operative banks in Telangana and elsewhere have come under RBI scrutiny precisely for such transactions. For instance, RBI found that Hyderabad District and Karimnagar District Co-operative Central Banks (both Telangana) had each “sanctioned loans to its director(s)”, and Adilabad DCCB had “sanctioned loans to its directors”[4]. These infractions triggered penalties of ₹1 lakh each under Section 47A(1)(c), underscoring that such internal transactions violate the governance safeguards codified in Section 20 of the BR Act.

RBI’s enforcement framework for co-operative banks mirrors that for commercial banks, albeit adapted to the co-operative banks’ context. Since at least 2013 (when Section 47A was amended), RBI has regularly issued inspection findings and penalty orders against co-operative banks for statutory violations. Penalties are typically publicized via RBI press releases, specifying the breached provisions and defects found. In 2024–2025, RBI has notably stepped up such actions.[5]

In Telangana alone, at least five district co-op central banks were penalized in the first eight months of 2025 for Section 20 violations: Nizamabad (Mar 2025), Adilabad (June 2025), Karimnagar (June 2025), Hyderabad (June 2025), and Nalgonda (Aug 2025).[6] Each penalty (₹1–2.5 lakh) was for “contravention of provisions of Section 20 read with Section 56”, reflecting sanctioning of director loans.[7] These cases show a consistent enforcement focus: loans to directors trigger Section 20 breaches, leading to RBI action. Similarly, in Karnataka RBI penalized the Bellary District Co-operative Central Bank ₹1.5 lakh for “sanctioned loan to one of its directors” (and a related Section 19 of the BR Act regarding shareholding breach).[8] Thus, across states RBI uses Section 47A as a tool to enforce Sections 20 and 19 of the BR Act.

Beyond insider-loan cases, RBI’s press releases reveal a broad enforcement agenda. Co-operative banks have been fined for various compliance failures under Section 47A. For example, The Government Employees Co-operative Bank (Dharwad, Karnataka) was penalized ₹1 lakh in July 2025 for KYC and cybersecurity lapses under RBI directions.[9] The Bharat Co-operative Bank (Bengaluru) was fined ₹50,000 in August 2025 for not adhering to the RBI’s Supervisory Action Framework directions.[10] These orders invoke Section 47A(1)(c) read with Section 46(4)(i) and 56 of the BR Act, and thus incur RBI’s penalty power.

Comparatively, Telangana and Karnataka have seen more enforcement actions than most states, reflecting both the number of co-operative banks and RBI’s regional focus. In June–July 2025 alone, RBI penalized at least five co-op banks in Telangana (as above) and multiple banks in Karnataka (Dharwad, Bellary, Swarna Bharathi Bangalore, Shimoga, etc.). By contrast, other states have had fewer or smaller penalties (e.g. Gujarat, Maharashtra cases mostly under generic provisions).[11] The clustering of Section 20/56 cases in Telangana underscores local issues in governance there, while Karnataka’s cases illustrate varied infractions from director loans to audit compliance. Taken together, these patterns show RBI using its penalty powers broadly but with particular vigilance on director-related loans in co-operative banks.

Recent legislative reform also impacts co-op bank governance. The Banking Laws (Amendment) Act, 2025 (effective 1 Aug 2025 for most provisions) introduced several key changes (published in Gazette 15 April 2025). In the context of co-operative banks:

  • Director Tenure Extended: Section 10A(2A)(i) of the BR Act now provides that the maximum tenure of a director (other than whole-time directors or chairpersons) is ten years in case of a co-operative bank. Previously the limit was eight years for all banking company directors. This aligns cooperative banks with the 97th Constitutional Amendment (which prescribes ten years for co-op society directors) and is intended to promote board continuity and stability.
  • Broadened Removal Powers: Section 16(3) (Reserve Bank’s power to supersede a bank’s board) now expressly includes a “director of a central co-operative bank elected to the Board of the state co-operative bank”. In effect, RBI’s authority to disqualify directors covers co-operative bank directors on state bank boards, giving regulators more reach to act against errant co-operative bank directors.
  • Regulatory Timelines and Definitions: The Amendment substituted numerous timeline references (changing “Fridays” to “days” and “fortnights”) across the BR Act to simplify reporting schedules, applying equally to co-operative banks. It also inserted extensive definitions in Section 56 and the schedules to clarify terms like “co-operative bank”, “multi-State co-operative bank”, “primary agricultural credit society” etc. (e.g. Co-operative bank now explicitly includes central, state, and primary co-op banks). These definitional updates modernize the Act’s applicability to diverse co-op institutions.
  • Nomination and Other Reforms: While not limited to co-ops, new provisions allow depositors to nominate multiple persons for account pay-outs and impose higher thresholds for “substantial interest” (raising it to ₹2 Crore from ₹5 Lakh), which affects shareholding norms in co-operative banks as well.[12] Audit reforms now let Public Sector Banks fix auditor fees (aligning with companies) and require unclaimed dividends to move to the Investor Education and Protection Fund; these reforms create indirect benchmarks for co-op banks’ transparency and depositor protection.[13]

Overall, the 2025 Amendments strengthen governance by lengthening tenures, clarifying RBI’s oversight powers over co-op directors, and tightening definitions. They complement RBI’s enforcement by making the law more explicit and comprehensive regarding co-operative banking entities. For instance, with a longer-allowed tenure, banks must ensure proper vetting of directors given they may now serve a decade, heightening accountability. The expanded penalty framework of Section 47A remains untouched by the Amendment (save for the higher fine limits enacted in 2013), but the improved legislative architecture should aid enforcement.

The penalty against the Nalgonda District Co-operative Central Bank Limited (Telangana) and its peers carries important implications for the co-operative banking sector. They signal RBI’s continued emphasis on statutory compliance and tight governance, especially relating to insider transactions. Co-operative banks, often small, local, and member-managed, may perceive these actions as stern reminders of regulatory standards. Practically, banks will need to tighten board oversight and internal controls to avoid related-party lending. The fact that RBI is explicitly penalizing lenders for director loans demonstrates that old informal practices (such as friendly or below-market loans to members of the board) will not be tolerated.

From a governance perspective, these enforcement actions encourage co-operative banks to professionalize their management. Directors must be aware that loans to themselves or connected parties are not merely imprudent but illegal under Section 20. The combination of statutory prohibitions and active enforcement should also deter concentration of power. By reinforcing Section 19 (shareholding restrictions) and Section 20 of the BR Acr, RBI is cutting off avenues by which directors could influence the bank for personal gain.

It is evident that depositor protection is a core objective. Co-operative banks often serve rural and agricultural communities where confidence is fragile. Incidents of fraud or misgovernance can cause runs and losses. By penalizing non-compliance, RBI aims to safeguard depositors’ interests indirectly. The press releases explicitly note that penalties are imposed “without prejudice to the validity” of customer transactions – i.e. the action is regulatory, not punitive against depositors. Nevertheless, these actions signal that depositors’ money must not be misused to bail out insider debt.

Moreover, such enforcement may bolster deposit insurance and resolution frameworks. After the 1960s Melwyns and more recent co-op failures, India has gradually integrated co-operative banks under the Deposit Insurance and Credit Guarantee Corporation (DICGC)[14] and, now, under RBI’s corrective measures (such as its Prompt Corrective Action norms for Urban Co-operative Banks[15]), the penalty regime reinforces that depositors are entitled to the same regulatory guarantees as in the commercial banking system.

In sum, the penalty on Nalgonda DCCB is emblematic of a broader regulatory tightening: co-operative banks must now adhere strictly to statutory governance norms or face transparent consequences.

[1] Reserve Bank of India, ‘RBI imposes monetary penalty on The Nalgonda District Co-operative Central Bank Ltd., Telangana’ (Press Release, 11 August 2025) https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=3799 accessed 10 September 2025.

[2] Section 47-A(1)(c), Banking Regulation Act 1949.

[3] Reserve Bank of India, Report of the Expert Committee on Urban Co-operative Banks (Chair: N S Vishwanathan, July 2021) https://nafcub.org/assets/docs/latest-news/Report%20of%20Expert%20Committee%20on%20Urban%20Cooperative%20Banks%20-%20July%2031%2C%202021.pdf accessed 10 September 2025.

[4] Reserve Bank of India, RBI imposes monetary penalty on The Karimnagar District Co-operative Central Bank Ltd., Telangana (Press Release, 26 June 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3785  accessed 10 September 2025.

[5] Reserve Bank of India, ‘RBI imposes monetary penalty on The Janata Co-operative Bank Ltd., Godhra’ (Press Release, 16 December 2022) https://www.rbi.org.in/commonman/english/scripts/PressReleases.aspx?Id=3405 accessed 10 September 2025;

Reserve Bank of India, ‘RBI imposes monetary penalty on Lalbaug Co-operative Bank Ltd., Vadodara’ (Press Release, 22 August 2023) https://www.rbi.org.in/commonman/english/scripts/PressReleases.aspx?Id=3489 accessed 10 September 2025;

Reserve Bank of India, ‘RBI imposes monetary penalty on The Citizens’ Co-operative Bank Ltd., Jammu’ (Press Release, 6 January 2023) https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=3408 accessed 10 September 2025;

Reserve Bank of India, ‘Press Releases’ (RBI press release archive) https://www.rbi.org.in/commonman/English/scripts/pressreleases.aspx accessed 10 September 2025;

Reserve Bank of India, ‘RBI imposes monetary penalty on The Nalgonda District Co-operative Central Bank Ltd., Telangana’ (Order dated 7 August 2025; Press Release, 11 August 2025) https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=3799 accessed 10 September 2025.

[6] Reserve Bank of India, ‘RBI imposes monetary penalty on The Nizamabad District Co-operative Central Bank Ltd., Telangana’ (Press Release, 27 March 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3740 accessed 10 September 2025; Reserve Bank of India, ‘RBI imposes monetary penalty on The Adilabad District Co-operative Central Bank Ltd., Telangana’ (Press Release, 5 June 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3781 accessed 10 September 2025; Reserve Bank of India, ‘RBI imposes monetary penalty on The Karimnagar District Co-operative Central Bank Ltd., Telangana’ (Press Release, 26 June 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3785 accessed 10 September 2025; Reserve Bank of India, ‘RBI imposes monetary penalty on The Hyderabad District Co-operative Central Bank Ltd., Telangana’ (Press Release, 26 June 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3784 accessed 10 September 2025; Reserve Bank of India, ‘RBI imposes monetary penalty on The Nalgonda District Co-operative Central Bank Ltd., Telangana’ (Order dated 7 August 2025; Press Release, 11 August 2025) https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=3799 accessed 10 September 2025.

[7] Ibid.

[8] Reserve Bank of India, ‘RBI imposes monetary penalty on The Bellary District Co-operative Central Bank Ltd., Karnataka’ (Press Release, 25 August 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3802 accessed 10 September 2025.

[9] Reserve Bank of India, ‘RBI imposes monetary penalty on The Government Employees Co-operative Bank Ltd., Dharwad, Karnataka’ (Press Release, 18 July 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3789 accessed 10 September 2025.

[10] Reserve Bank of India, ‘RBI imposes monetary penalty on The Bharat Co-operative Bank Ltd., Bengaluru, Karnataka’ (Press Release, 22 August 2025) https://www.rbi.org.in/commonman/English/scripts/PressReleases.aspx?Id=3801 accessed 10 September 2025.

[11] Based on information available on the RBI’s official press release archive, i.e., Reserve Bank of India, ‘Press Releases’ (RBI Press Release Archive) https://www.rbi.org.in/commonman/English/scripts/pressreleases.aspx accessed 10 September 2025.

[12] Ministry of Finance, ‘Key Provisions of the Banking Laws (Amendment) Act, 2025 to come into effect from 1st August 2025’ (Press Release, 30 July 2025) https://www.pib.gov.in/PressReleasePage.aspx?PRID=2150371 accessed 10 September 2025.

[13] Ibid.

[14] Deposit Insurance and Credit Guarantee Corporation Act 1961; RBI, History of Deposit Insurance in India (DICGC, 2017) https://www.dicgc.org.in/pdf/History.pdf accessed 10 September 2025; RBI, Report of the Committee on Financial Sector Assessment (2009) 130–135 https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/93098.pdf accessed 10 September 2025.

[15] RBI, ‘Reserve Bank of India introduces a Prompt Corrective Action Framework for Urban Co-operative Banks’ (Press Release, 23 December 2020) https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50958 accessed 10 September 2025.