Too small to matter: The quiet collapse of a people's bank

A wholly owned subsidiary of the Reserve Bank of India (RBI), the Deposit Insurance and Credit Guarantee Corporation (DICGC), insures deposits in RBI-regulated banks up to a maximum of Rs 5 lakh per customer. This is intended to protect savers in the event of a bank collapse.

Now consider the latest bank collapse—one that has harmed some of the poorest and most vulnerable depositors in the system but generated little public outcry. The bank is small, its network limited, and its depositors lack influence.

This is the New India Cooperative Bank, an urban cooperative bank headquartered in Mumbai, which collapsed on February 13, 2025. Its depositors—many of them auto or taxi drivers, small traders, vegetable vendors, and owners of corner stores—were left in the lurch.

New India was a multi-state scheduled bank with 22 branches in Maharashtra and Gujarat and around 6,000 depositors — small in number and silent in a fast-growing backing sector that is touted as a pillar of India’s growing economy.

After the collapse, depositors, including many senior citizens, stood in queues outside the bank, filling out forms and filing claims for their insured deposits. They were assured that their money would be paid into alternate accounts by May 2025. But on May 13, three months after they were barred from withdrawing funds, and following a limited release of Rs 25,000 per depositor, came a terse one-line announcement from DICGC: “… the DICGC has extended the date on which it shall become liable to pay depositors of New India Co-operative Bank Limited by a period of 90 days, i.e., till August 12, 2025.” No further explanation was offered. 

On the one hand, India’s banking system is said to be becoming more financially inclusive. On the other, some of its poorest depositors find themselves locked out of their life savings, victims of a collapse they cannot understand. Just last fortnight, RBI Deputy Governor M Rajeshwar Rao, speaking at a financial inclusion summit in Mumbai, noted, “RBI’s financial inclusion index, which captures the extent of financial inclusion across the country … has increased from 60.1 in March 2023 to 64.2 in March 2024, showing a year-on-year increase of 6.82 per cent.”

This makes for a commendable big-picture headline. But it becomes a tragic story when viewed through the lens of a small bank collapse — one that has wiped out the hard-earned savings of citizens who struggle daily to earn a living. The lack of official outrage, the unexplained delays in disbursing insured deposits, and disturbing accounts of corruption uncovered during investigation tell a grim story: even as India celebrates growth and inclusion, its system seems to be collapsing in its nuts and bolts. 

What is remarkable about the bank’s collapse is how quietly it vanished. Its failure has gone largely unnoticed, despite the devastating impact on those who trusted it as a home-built institution. A 12,000-page charge sheet has been filed, but it offers little solace to depositors still waiting for their money. Police say some of the accused have fled the country.

The pain of New India’s collapse is compounded by its origins. The bank was founded to serve the working class and was the brainchild of the late George Fernandes (1930-2019), the fiery trade unionist and former Union minister. Fernandes mobilised taxi drivers to form a bank after one among them was denied a loan by the “regular” banks during the ‘license-Raj’. New India became a bank for the unionised workers, auto drivers, and small businesses — people long excluded by the formal backing system. But in today’s liberalised India, unions have weakened, and the very bank built on worker solidarity now stands robbed, allegedly by its own insiders. Among the accused are members of the family of one of the founders, Ranjit Bhanu, an associate of George Fernandes.

While governance failures in cooperative banks are often attributed to political interference, local power structures, and outdated systems, the RBI cannot wash its hands of responsibility. These banks require greater, if not different, regulatory attention. They serve financially
excluded populations in remote areas and run on deposits from the poor — people who place their trust in the formal banking system.

In recent years, several such collapses have occurred, with New India being only the latest. This points to deeper structural and governance issues that the RBI appears either unable or unwilling to fix. In March this year, Finance Minister Nirmala Sitharaman told the Rajya Sabha that licences of 40 urban cooperative banks had been cancelled in the past three years. The minister quoted the RBI as saying it had not maintained “bank-wise details of the amount of deposits and advances in the institutions that failed to honour their commitments…”, a startling admission. An annexure from the DICGC listed 43 “bank failures” during the same period — all cooperative banks. 

Just five years ago, the State Bank of India rescued Yes Bank — then India’s fourth largest private sector bank — based on the belief that some institutions are “too big to fail”. But this approach, while arguably necessary, creates recklessness or wrongdoing. In contrast, “too small to matter” failures like New India’s do equally severe damage – less visible, less reported, but deeply disruptive. They erode public trust in the entire edifice of the banking system and its regulatory frameworks.

(The writer is a journalist and faculty member at SPJIMR; Syndicate: The Billion Press)