Banking Regulation Act Amended To Allow RBI To Regulate Cooperative Banks

India on June 27 brought cooperative banks under the regulatory framework of the Reserve Bank of India (RBI) by amending the seven-decade old Banking Regulation Act through a presidential decree.

Banking Regulation (Amendment) Ordinance 2020

An amendment in the Banking Regulation Act will now enable mergers and restructuring of banks in public interest, without having to order a moratorium, which not only limits withdrawals by depositors, but also disrupt the bank’s lending operations. Besides, cooperative banks will now be allowed to raise money via public issue and private placement, of equity or preference shares as well as unsecured debentures, with the central’s bank’s nod. Currently, access to capital for cooperative banks is limited.

“The Ordinance seeks to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with the RBI in respect of other banks to co-operative banks as well for sound banking regulation,” said the statement. Sound regulation will also enhance their professionalism and access to capital, the statement said.

The changes brought into the banking law, however, do not affect the existing powers of the state registrars of co-operative societies under state laws. Nor do the changes apply to primary farm credit societies or cooperative societies, the main business of which is long-term finance for agricultural development.

Earlier this week, the Union Cabinet had approved the Ordinance to bring 1,482 urban and 58 multi-state cooperative banks under the supervision of RBI, a move aimed at strengthening lenders’ oversight, boosting depositors’ confidence, and preventing a Punjab and Maharashtra Cooperative (PMC) Bank-like fraud.

Cooperative banks are currently under the dual control of cooperative societies as well as RBI. While the role of the cooperative society includes incorporation, registration, management, audit, supersession of board of directors and liquidation, RBI is responsible for regulatory functions.

The government’s move follows the collapse of PMC Bank, which had allegedly created fictitious accounts to hide over ₹4,355 crore of loans extended to the now bankrupt Housing Development and Infrastructure Ltd (HDIL). The fraud, which was discovered by RBI in September, trapped millions of depositors.

In March, finance minister Nirmala Sitharaman had tabled in the Lok Sabha the amendments to the Banking Regulation Act, 1949, to give the central bank more power over cooperative banks. However, due to the outbreak of the covid-19, the Parliament could not approve the changes.

“The government allowed cooperative banks to raise money by the way of public issue and private placement. This is a great step as this will increase their (cooperative banks’) access to capital, which was limited until now,” Veena Sivaramakrishnan, partner, Shardul Amarchand Magaldas & Co.

Source: News Agencies