After the Yes Bank disaster in 2018, towards the last quarter of 2019, the banking sector sent tremors across the housing society landscape with the Punjab & Maharashtra Co-operative Bank Limited (PMC Bank) fiasco when senior officials committed a masked loan fraud (involving loans to HDIL) to the tune of over Rs 6000 crore. One of the many unsuspecting casualties was Mumbai’s Eden Garden Co-operative Society that saw Rs 24 lakh stuck as RBI restricted withdrawals from PMC Bank.
PMC Bank may or may not be a one rotten apple scenario but the focus is back now on the way urban/district cooperative banks are run and societies are interested in choosing a nationalized bank for heightened security of their funds.
A society, as opposed to panicking and fretting, has to be extra vigilant when choosing a bank. Again, that’s no deterrent for housing societies because where there’s caution, there’s less trouble.
What does the law mandate for housing societies?
The very inception of a housing society mandates the opening of a bank account in a district co-operative bank as per Co-operative Societies’ Acts. However, the government allows societies to open an account with a nationalized bank upon receiving approval from the Registrar of Co-operative Societies. If the society has a solid reason to open an account in a private bank, they can obtain internal consent from the committee members and residents and send an exemption application to the Registrar. A current or institutional savings account can be opened in a private bank however membership and fund deposit in a district co-operative/nationalized bank is compulsory.
According to Maharashtra state bye-laws, “A Banking Account shall be opened by the Society in the nearest State or District Central Co-op Bank / a Scheduled Bank having awarded “ A “ Audit Class in last three consecutive years, nationalized Bank, and in any other mode permitted by general or special order of the State Government, as provided under section 70 of the Act and the account shall be operated upon and all acquaintances and discharges shall be signed by the Secretary jointly with the Chairman or Treasurer.”
What should society consider while choosing the right bank?
Whether a co-operative bank or a nationalized bank, society must consider the below factors before opening a society account in a bank:
- Security and stability: It’s imperative that you check the financial stability of a bank. To gain a macro perspective on the domestic finance landscape and the health of the banking sector, you can familiarise yourself with the RBI Financial Stability Report published annually. Key elements to research otherwise are – the lower percentage of Non-Performing Assets (unpaid loans), a higher CASA, CAR, and PCR ratio. (The Gross National Performing Assets ratio of all SCBs is projected to increase to 12.5% by March 2021). Another reliable way is to check the CRISIL ratings of a bank and whether it’s rated stable or not. CRISIL A+ is a good indicator.
- Fees: It’s best practice for a society to shortlist 8-10 banks and compare the following bank charges:
a) ATM Fees: Depending on the balance, banks allow 3-5 transactions at other banks however generally the amount charged is from Rs 5 and capped at Rs 20 per transaction (+GST). Rs 1 lakh and above deposit usually allows unlimited transactions.
b) Account Maintenance Fees: Minimum balance varies per bank and type of account. There are no non-maintenance fees in co-ops for basic savings accounts.
c) Online payment charges: As per RBI, NEFT and RTGS transactions are not chargeable, however, IMPS transactions can be charged from Rs 1 to Rs 25 and the maximum limit is Rs 2 lakh. NEFT transfers limits per day vary generally from Rs 50,000 (for the new beneficiary) up to Rs 5-10 lakh for the regular beneficiaries.
d) Debit Card Charges: Co-op and nationalized banks charge anywhere between Rs 60 to Rs 150 to issue a debit card but reissuing may be charged at a higher rate.
Other fees to look up before choosing the right bank are overdraft fees, annual fees, and transfer fees.
- Interest Rates: A society deposits long-term funds like Sinking Fund, Corpus Fund, Membership Funds, etc in the bank. If your fixed deposits are parked in a co-op bank for 18 months and above, the interest rate will begin anywhere from 7% to 10%. Nationalized banks may offer between 3% and 6% interest (p.a.) but are generally less risky and better managed. To avail higher interest and to ensure returns, it’s advisable to split Rs 1 lakh in two-three different co-op banks each as that’s a maximum insured amount by banks. Remember exit penalty for FDs can be between 0.5% and 1%.
- Services: A society should also be aware of nearby branches and ATMs of the banks as location plays a critical role in the convenience of banking. Additionally, your bank should have the expertise of wealth management and sound investment options as society enters into a long-term relationship with its financial partner. Other important services to seek are 24/7 customer service, a reliable mobile application, safe deposit box service, loans, and merchant service accounts.
While uniform policies and fair banking practices are crucial qualities of an ideal bank, another great reason to trust a bank is their investment and application of modern-day technology and customer management such as online chatbots, easily navigable IVR, and helpful relationship managers.
A society must conduct thorough research through online investigation as well as seeking the word of mouth counsel before choosing the right bank.
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