RBI Extends Sri Guru Raghavendra Bank Directive 2026-27

What Happened?

On November 6, 2026, the Reserve Bank of India (RBI) extended restrictive Directions issued under Section 35A read with Section 56 of the Banking Regulation Act, 1949 for Sri Guru Raghavendra Sahakara Bank Niyamitha, Bengaluru. The Directive has been extended for a further period of six months, from November 10, 2026 to May 10, 2027, subject to review. This is a continuation of restrictions that were initially imposed in January 2020.

Background & Legal Context

What is the Banking Regulation Act, 1949?

The Banking Regulation Act, 1949 is the primary legislation that governs banking operations in India. Section 35A empowers the RBI to issue Directions to any banking company if, in the opinion of the RBI, the banking company is unable to meet its obligations or if it is in the public interest to do so. Section 56 of the same Act provides the framework for implementing these Directions.

What does the Directive mean?

When RBI issues a Directive under Section 35A, it means the bank is placed under regulatory restrictions. These typically include:

• Restrictions on new deposits and advances
• Withdrawal limits on existing deposits
• Restrictions on lending operations
• Enhanced monitoring and compliance requirements
• Restrictions on branching or expansion

Connection to Income Tax Act 2025

While the Banking Regulation Act governs this matter, it has significant implications for Income Tax compliance under the Income Tax Act, 2025. For Assessment Year 2025-26 and AY 2026-27, any taxpayer who holds deposits, savings accounts, or investments with Sri Guru Raghavendra Sahakara Bank must report these accurately in their Income Tax Returns (ITR). The bank's restricted status does not exempt taxpayers from reporting income or interest earned from such deposits.

Under Section 56 of the Income Tax Act, 2025, if any taxpayer receives interest income from bank deposits during the financial year, it must be reported as income. The restriction placed by RBI does not create any tax immunity or exemption. Interest accrued or received remains taxable income for the relevant assessment year.

What Does This Mean for You?

For Depositors and Account Holders

If you hold deposits, savings accounts, current accounts, or other financial instruments with Sri Guru Raghavendra Sahakara Bank, you need to understand the practical implications:

• Withdrawal Restrictions: The Directive typically restricts the amount you can withdraw from your account. The RBI specifies withdrawal limits, and you cannot access your full balance as per normal banking rules.
• No New Deposits: Fresh deposits are generally not accepted from new customers, though existing account holders may have limited options.
• Deposit Insurance Coverage: Your deposits are protected under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme up to ₹5 lakh per depositor per bank. This protection remains even during the Directive period.
• No Interest Accrual Suspension: Interest continues to accrue on your deposits as per the existing contract, regardless of the Directive status.

For Taxpayers Filing ITR

If you received interest or other income from this bank during Financial Year 2025-26 (for AY 2026-27 ITR filing), you must:

• Report the full interest income earned, even if you could not physically withdraw it
• Claim deductions under Section 80TTA (for senior citizens) or Section 80TTB (for senior citizens on specified deposits) if applicable
• Maintain proper documentation of interest certificates from the bank
• Disclose the restricted bank account in Schedule FA (Financial Assets) of your ITR if required

For Business Owners and Companies

If your business held working capital or operating funds in this bank, the restriction impacts cash flow management. However, from a tax perspective:

• Bad debts cannot be claimed simply because withdrawal is restricted
• Interest income must still be reported
• Provisions for potential loss should comply with Accounting Standards and Income Computation and Disclosure Standards (ICDS) under the Income Tax Act, 2025

Important Note from RBI

The RBI has specifically clarified that "the extension and/or modification should not per-se be construed to imply that the RBI is satisfied with the financial position of the bank." This means the situation remains serious, and the extension is a precautionary measure, not a sign of improvement.

What Should You Do Now?

Immediate Actions

• Check Your Account Status: Contact the bank directly or visit the RBI website to understand what specific restrictions apply to your account category (deposit type, account age, customer type).
• Verify Interest Certificates: Request Form 16A (TDS certificate) and interest statements from the bank for the financial year. These are needed for ITR filing.
• Assess Your Liquidity: If funds are critical, explore available withdrawal limits and plan accordingly.
• Update Your Financial Records: Maintain accurate records of all transactions, interest earned, and TDS deducted by the bank.

For ITR Filing (AY 2026-27)

• Report all income from this bank in the "Income from Other Sources" section
• Attach supporting documents such as interest certificates and TDS certificates
• If you believe any portion of your deposit will not be recovered, do not claim it as bad debt without legal advice—such claims require strict compliance with Section 36(1)(vii) of the Income Tax Act, 2025
• If the bank defaults completely in future, you may claim the loss as per applicable legal provisions, but only after proper legal proceedings

Long-term Planning

• Consider diversifying your bank deposits to RBI-regulated banks without restrictions
• Monitor RBI announcements for any further extensions or changes to the Directive
• If the bank merges with another entity (as sometimes happens with restricted banks), ensure your DICGC coverage is re-evaluated
• Consult a Chartered Accountant for personalized tax advice based on your specific situation

Key Takeaways

• Six-Month Extension: RBI has extended the Directive until May 10, 2027, indicating ongoing concerns about the bank's financial health.
• Withdrawal Restrictions Continue: Account holders cannot withdraw the full amount of their deposits; specific limits apply based on deposit type and RBI guidelines.
• Tax Compliance Unchanged: Interest income from this bank must still be reported in your ITR under the Income Tax Act, 2025, regardless of withdrawal restrictions.
• DICGC Protection Active: Your deposits are protected up to ₹5 lakh per depositor per bank under deposit insurance, even during the Directive period.
• No Exemption from Tax: The Directive does not create any tax exemption; accrued interest remains taxable income for AY 2025-26, AY 2026-27, and subsequent years.

Final Thought: If you hold significant deposits in this bank, now is the time to review your tax position, ensure proper documentation, and consider restructuring your bank deposits for better security and liquidity. The RBI's continued extension signals that recovery or merger may take considerable time.

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