Earlier this year the Finance Minister, Nirmala Sitharaman had announced that the government was intending to bring in the co-operative banks under RBI’s supervision in Budget 2020. On June 26, 2020, the government then promulgated an ordinance to this effect since the bill could not be passed in this year’s Budget session of Parliament.
This ordinance brings the government banks, including 1,482 urban cooperative banks and 58 multi-state cooperative banks, under the supervisory umbrella of the RBI which means that RBI’s powers will now apply to the cooperative banks as they have always applied to scheduled banks.
“The Ordinance seeks to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to Co-operative Banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital,” an official statement said on Saturday.
“The amendments do not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws”, it added.
“The amendments also do not apply to Primary Agricultural Credit Societies (PACS) or co-operative societies whose primary object and principal business is long-term finance for agricultural development, and which do not use the words “bank”, “banker” or “banking” and do not act as drawees of cheques.” it said.
After the said ordinance, these banks will fall under the dual regulation of the RBI and the Registrar of Co-operative Societies. The promulgation to shift urban and multi-state cooperative banks under the supervision of the RBI was motivated after various instances of fraud and major financial irregularities, including the renowned scam at Punjab and Maharashtra Co-operative (PMC) Bank in the recent past. In February, the Union Cabinet sought to amend the Banking Regulation Act to strengthen the cooperative banks in the country.
So far the RBI only had powers over commercial banks, however, RBI now has powers to draw up an enforceable scheme of reconstruction of a co-operative bank as well. The government it seems was always of the view that there was a need to enhance the accountability of all banks which hold public money and are often riddled in controversies around mismanagement and corruption. According to the new regime, the appointment of CEOs in such cooperative banks will now require prior approval from the RBI as it is the new regulatory authority.
This ordinance for most part seems to be a move forward, however, it can always be the case where interference of the government can prove to be a bit much. The RBI has issued various circulars that would hinder the progress of cooperative banks. For instance, co-operative banks are instructed to raise the priority sector lending up to 75% by 2024 against the present limit of 40%. If co-operative banks fail to achieve this impossible target, would RBI stop granting permission for the expansion of business?
Co-operative banks have always been categorising NPAs as per specific instructions given in earlier circulars. But the sudden change in rules and regulations which are applicable for nationalised banks and implemented with retrospective effect could be construed as a bit unfair.