Bill to bring cooperative banks under RBI lens gets House nod
The legislation empowers the central bank to regulate only the banking business of cooperatives and it is not applicable to a primary agricultural credit society or a cooperative society providing finance for development of the farm sector, Union finance minister Nirmala Sitharaman told the House. .Updated: Sep 17, 2020 05:45 IST
The Lok Sabha on Wednesday passed the Banking Regulation (Amendment) Bill, 2020 to bring cooperative banks under the supervision of the Reserve Bank of India (RBI) to protect depositors’ interests.
The legislation empowers the central bank to regulate only the banking business of cooperatives and it is not applicable to a primary agricultural credit society or a cooperative society providing finance for development of the farm sector, Union finance minister Nirmala Sitharaman told the House. .
The Bill is not to “undermine” the importance of cooperatives, she said. “But, if a cooperative is performing banking functions, there is a need to regulate it... so that it functions professionally,” she said, replying to queries raised by members of the House.
The amendments do not affect existing powers of the state registrars of cooperative societies under state cooperative laws.
Depositors in Mumbai-based Punjab and Maharashtra Cooperative Bank (PMC) and Bengaluru-based Sri Guru Raghavendra Cooperative Bank have in recent months faced distress because of problems confronted by the banks. While 430 cooperative banks faced liquidation in the last two decades, not a single commercial bank, whose depositors are protected by the Banking Regulation Act, have had to be liquidated, Sitharaman said.
Cooperative banks comprise urban cooperative banks (UCBs) and rural cooperative banks (RCBs). Total amount of deposits in all UCBs as of March 31, 2019 totalled Rs 484,315.85 crore and at RCBs Rs.5,05,859.16 crore.
The legislation also enables a scheme of reconstruction or amalgamation of a banking entity for protect the interests of depositors without resorting to moratorium that freeze withdrawals by depositors. The Bill replaces an ordinance that was promulgated in pursuance of the government’s commitment “to ensure safety of depositors across banks” by the President on June 26.
Sitharaman said the government was compelled to come out with an ordinance during the lockdown period because the condition of some cooperative banks was “grave” and there was “uncertainty” over the resumption of normal legislative business due to the Covid-19 pandemic. The government had tabled the Bill in Parliament in March, but it could not be enacted because of the pandemic.
“During the budget session in March, we introduced this bill in order to have the amendments brought in so that depositors’ interest will be taken care of. But unfortunately, during the budget session, we could not have this bill passed,” Sitharaman said.
Moving the Bill for passage by the House on Wednesday, Sitharaman said the financial health of several cooperative banks was becoming “very delicate”. She said that 277 urban cooperative banks were reporting losses and 105 cooperative banks were unable to meet the minimum capital requirements.
Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP, said: “Cooperative banks have been under severe criticisms with rising scams, especially involving small retail depositors. State governments and their respective regulatory boards have not been able to keep up the monitoring mechanisms efficiently over these institutions. The government was waiting for an opportune moment to bring them under the purview of RBI and the timing couldn’t have been better.”
“Capital adequacy ratios of most of these banks are concerning and the present regulatory structure does not make the restructuring of these institutions practically feasible. The Bill strikes the right chord and has given a mechanism to restructure these banks and also significantly improves their regulatory oversight by a competent and efficient regulator, the RBI. This move should certainly improve the confidence in the cooperative banks and the interests of all the stakeholders would be protected in the long run,” he said.