RBI Tightens Governance in Co-operative Banks: The Nalgonda DCCB Penalty

Posted On - 11 November, 2025 • By - King Stubb & Kasiva

On 7 August 2025, the Reserve Bank of India (“RBI”) imposed a penalty of ₹2.5 Lakh on the Nalgonda District Co-operative Central Bank Limited (“NDCCB”) for violating Section 20 of the Banking Regulation Act 1949 (“BR Act”), read with Section 56[1]. The contravention sanctioning loans to directors triggered RBI’s penalty powers under Sections 47A(1)(c) and 46(4)(i)[2].

Section 20 of the BR Act prohibits banks from granting loans to directors or entities in which they are interested, and sub-section (4) provides that unpaid loans beyond one year leads to automatic vacation of office by the director concerned.

Section 56 extends this framework to co-operative banks, clarifying that ‘banking company’ is to be read as ‘co-operative bank’. Violations fall under Section 46(4)(i), which prescribes penalties up to ₹1 Crore, while Section 47A empowers RBI to directly impose such monetary fines.

The NDCCB penalty is part of a broader crackdown. In 2025 alone, at least five district co-op banks in Telangana namely Nizamabad, Adilabad, Karimnagar, Hyderabad, and Nalgonda were fined for Section 20 violations[3]. Similarly, in Karnataka, the Bellary District Co-operative Central Bank was penalized ₹1.5 lakh for director loans and a Section 19 shareholding breach[4]. Other banks, like the Government Employees Co-op Bank, Dharwad and Bharat Co-op Bank, Bengaluru, faced penalties for KYC, cybersecurity, and supervisory lapses[5].

These actions highlight RBI’s consistent enforcement posture: insider loans and governance lapses are treated as serious statutory breaches, not minor irregularities.

Legislative Backdrop

The Banking Laws (Amendment) Act 2025 (effective from 1 August 2025) introduced governance reforms directly relevant to co-operatives. Key provisions include:

  • Extended director tenure: up to ten years, aligning with the 97th Constitutional Amendment[6];
  • Broadened removal powers: RBI can now disqualify directors on state co-operative bank boards;
  • Definitional clarity: Section 56 updated to cover central, state, and primary co-op banks;
  • Stricter norms: higher thresholds for “substantial interest” and multiple nominations for depositors.

Together, these amendments strengthen board accountability and depositor safeguards, complementing RBI’s enforcement of Sections 19 and 20.

Implications

The NDCCB penalty signals that informal practices like granting favoured loans to directors will not be tolerated. Co-operative banks must professionalize governance, tighten audit controls, and respect statutory prohibitions. For depositors, especially in rural communities reliant on co-operative banks, such enforcement helps preserve confidence.

From a systemic angle, RBI’s strictness dovetails with deposit insurance (via the Deposit Insurance and Credit Guarantee Corporation Act 1961) and its Prompt Corrective Action norms for co-operative banks.[7] These mechanisms reinforce that co-operative banks are subject to the same prudential discipline as commercial banks.

Conclusion

The NDCCB case is more than a local penalty. it reflects RBI’s evolving regulatory strategy. By enforcing insider-lending restrictions and tightening legislative governance, RBI is signalling to co-operative banks nationwide: compliance is not optional.

[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] Banking Regulation Act 1949, ss 46(4)(i), 47A(1)(c).

[3] RBI press releases, penalties on Telangana DCCBs (March–August 2025).

[4] 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.

[5] 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; 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.

[6] Banking Laws (Amendment) Act 2025, Gazette Notification, 15 April 2025.

[7] Deposit Insurance and Credit Guarantee Corporation Act 1961; Reserve Bank of India, ‘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.