After failure of Bank of Karad in 1992, Karad Janata Sahakari Bank follows in 2020

RBI cancelled the licence of Karad Janata Sahakari Bank yday:

The Reserve Bank of India (RBI) has, vide order dated December 7, 2020 cancelled the licence of The Karad Janata Sahakari Bank Ltd., Karad, Maharashtra to carry on banking business, with effect from from the close of business on December 7, 2020. The bank was under All Inclusive Directions since November 07, 2017. The Commissioner for Cooperation and Registrar of Cooperative Societies, Maharashtra has also been requested to issue an order for winding up the bank and appoint a liquidator for the bank.

The Reserve Bank cancelled the licence of the bank as:

1. 1. The bank does not have adequate capital and earning prospects. As such, it does not comply with the provisions of section 11(1) and section 22 (3) (d) read with section 56 of the Banking Regulation Act, 1949.
   2. The bank has failed to comply with the requirements of section 22(3) (a), 22 (3) (b), 22(3)(c), 22(3) (d) and 22(3)(e) read with section 56 of the Banking Regulation Act, 1949;
   3. The continuance of the bank is prejudicial to the interests of its depositors;
   4. The bank with its present financial position would be unable to pay its present depositors in full; and
   5. Public interest would be adversely affected if the bank is allowed to carry on its banking business any further.

2. Consequent to the cancellation of its licence, The Karad Janata Sahakari Bank Ltd, Karad, Maharashtra is prohibited from conducting the business of ‘banking’ which includes acceptance of deposits and repayment of deposits as defined in Section 5(b) read with Section 56 of the Banking Regulation Act, 1949 with immediate effect.

3. With the cancellation of licence and commencement of liquidation proceedings, the process of paying the depositors of The Karad Janata Sahakari Bank Ltd., Karad, Maharashtra as per the DICGC Act, 1961 will be set in motion. On liquidation, every depositor is entitled to repayment of his/her deposits up to a monetary ceiling of ₹ 5,00,000/- (Rupees Five lakh only) from the Deposit Insurance and Credit Guarantee Corporation (DICGC) as per usual terms and conditions. More than 99% of the depositors of the bank will get full payment of their deposits from DICGC.

This closure reminded me of another Karad based bank – Bank of Karad- which closed in early 1990s . Bank of Karad was established in 1946 in Karad Maharashtra. The Bank was majorly involved in Harshad Mehta Scam.

From the RBI History Volume 4:

The Bank of Karad Ltd had undertaken large transactions in securities on behalf of some brokers without verifying the genuineness of transactions or the ability of the broker clients to honour commitments under bank receipts. In view of its small size and large liability, the bank  had to be taken into liquidation, for which a petition was filed in the Bombay High Court.

The Bank was later taken over by Bank of India amidst high drama. From Trends and Progress of Banking in India (1992-93):

On the petition filed by the Reserve Bank, the Bombay High Court passed an ad-interim order on May 27, 1992, appointing a Provisional Liquidator and his taking over the assets, properties and affairs of the Bank of Karad Ltd. While the application was pending before the High Court, three banks which indicated their intention to takeover certain assets and for running the branches of Bank of Karad Ltd. were given access to the relevant records of the bank with the approval of the Bombay High Courtto enable them to give concrete offers. Based on these offers, the proposal for sale of certain assets of Bank of Karad Ltd. to Bank of Baroda was submitted to the High Court. The Bombay High Court did not approve the proposal and ordered that the Provisional Liquidator should call for fresh offers from all public sector banks, covering not only purchase of assets, takeover of staff, but also taking over of demand and time deposits liabilities of Bank of Karad Ltd.

Accordingly, the Provisional Liquidator invited fresh offers from all public sector banks. A lone offer of Bank of India was received. At the same time, the Deposit Insurance and Credit Guarantee Corporation (DICGC), who had provided Rs.37 crore to the Provisional Liquidator for making payments of insured deposits has appealed to the High Court that the purchasing bank should not be required to take over deposits liability. The Court on December 17, 1993 approved the offer of Bank of India for taking over the specified assets for a total sum of Rs.41.65 crore and also all the employees of the bank except those against whom criminal/disciplinery proceedings have been instituted. The Court also directed that the Bank of India should take over the deposits liability amounting to Rs.22.38 crore and pay the net surplus after deducting the above amount from its offer. As per the Court order, the Bank of India has to take over the deposits liability from the first day of February 1994 and settle the claims of the depositors within the period of three months thereafter.