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Parliament passes Bill to bring Co-operative Banks under RBI Supervision

October 9, 2020

The Banking Regulation (Amendment) Bill, 2020[i] was passed by Lok Sabha on September 16,  2020 and by Rajya Sabha on September 22, 2020. The Bill replaces Banking Regulation (Amendment) Ordinance, 2020[ii] which was promulgated in June, 2020. The Bill seeks to amend Banking Regulation Act, 1949[iii] and bring cooperative banks under the supervision of the Reserve Bank of India (RBI)

Co-operative Banks in India

Cooperative Banks have played an instrumental role in India’s growth and development. These smaller, more localized banks fulfilled banking needs of those for whom branches of Scheduled Banks were inaccessible. People have had immense trust in them because often they are created by persons belonging to the same local or professional community, sharing a common interest with the aim not to maximize the profits but to provide the best possible products and services to its members.

In the recent years, co-operative banks have suffered on account of serious governance issues that resulted in depositors running from pillar to post for their own money. Most prominently at PMC Bank, of its total loan book of Rs 8,880 crore, as on March 31, 2019, about 70 percent had been taken by real estate firm HDIL which is currently facing corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code. Subsequently, the Bank collapsed and depositors were only allowed to withdraw a maximum amount of Rs. 50,000 from their accounts.

In the year 2019, RBI cancelled the license of CKP Co-operative Bank, Mapusa Urban Co-operative Bank and imposed restrictions on Guru Raghavendra Sahakara (Co-operative) Bank Niyamitha and Kolikata Mahila Cooperative Bank. This year, RBI has put at least 44 co-operative banks across the country under watch citing deterioration in their financials or for flouting prudential norms[iv]. Nirmala Sitharaman stated that during the COVID-19 period, many cooperative banks have come under stress. 277 urban cooperative banks are reporting losses and 105 have been unable to meet minimum regulatory capital requirements[v].

Banking Regulation (Amendment) Bill, 2020- Key Highlights:

  • The Bill brings all the co-operative banks under RBI’s umbrella except primary agricultural credit society and co-operative society whose primary object and principal business is providing long-term finance for agricultural development. Thus, Cooperative banks will now be subject to same guidelines as Scheduled Banks with certain exceptions.
  • Section 12 of the Bill allows cooperative banks to issue equity shares or preference shares or special shares or unsecured debentures or bonds or other like securities with initial or original maturity of not less than ten years with prior approval of RBI and such conditions as may be specified by RBI.
  • Pursuant to Section 10(1)(b) of the Banking Regulation Act, Co-operative banks can no more employ as Chairman, someone who is insolvent or has been convicted of a crime involving moral turpitude or whose remuneration takes the form of commission or share in profits of the bank. RBI may remove the Chairman if he is not fit and proper and appoint a suitable person if the bank does not do so.
  • Under Section 36AAA, RBI will now have the power to supersede the Board of Directors of a co-operative bank after consultation with the state government.
  • RBI has been the power to exempt co-operative banks from complying with certain provisions relating to employment, qualifications of the Board of Directors and, appointment of a chairman by issuing a notification in the official gazette through insertion of Section 53A in the Banking Regulation Act, 1949.

The amendment addresses rampant governance issues prevalent in cooperative banks that have resulted in losses not only to account holders but erodes confidence of people in the entire banking sector. These provisions bring cooperative banks to similar footing in terms of regulatory oversight as those applicable on Scheduled Banks.

It is expected that the scrutiny and oversight of RBI over cooperative banks will ensure that the money of local communities are protected. The power given to cooperative banks under Section 12 will also allow cooperative banks to raise money, maintain liquidity and recover from the crisis by issuing shares either through private placement or public offer.

[i]https://www.prsindia.org/sites/default/files/bill_files/Banking%20Regulation%20Bill%2C%202020%20as%20passed%20by%20LS.pdf

[ii] https://pibcms.nic.in/WriteReadData/userfiles/PIB%20Delhi/cooperative%20bank%20(2).pdf

[iii] https://rbidocs.rbi.org.in/rdocs/publications/pdfs/banki15122014.pdf

[iv] https://www.moneycontrol.com/news/business/in-2020-so-far-rbi-has-put-44-co-op-banks-under-watch-how-deep-is-the-mess-here-5406961.html

[v] https://www.businessinsider.in/finance/banks/news/rajya-sabha-passes-banking-amendment-bill-2020/articleshow/78251384.cms

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