LS passes legislation to bring cooperative banks under RBI’s supervision

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New Delhi: In a bid to protect the interest of depositors, the Lok Sabha on Wednesday passed an amendment to the Banking Regulation Act to bring cooperative banks under the supervision of the RBI.

The Banking Regulation (Amendment) Bill, 2020 replaces an ordinance that was promulgated on June 26. Replying to the debate on the bill, Finance Minister Nirmala Sitharaman said this legislation is for depositors’ safety and not for undermining powers of the Registrar of Cooperative Societies.

Powers of the Registrar of Cooperative Societies have not been encroached upon but banking activity of cooperatives will be regulated by the Reserve Bank of India (RBI), she said.

Urban cooperative banks and multi-state cooperative banks will be brought under the RBI’s supervision process applicable to commercial banks.

There are about 1,482 urban cooperative banks and 58 multi-state co-operative banks with a depositors base of about 8.6 crore.

Finance Minister Nirmala Sitharaman said that the amendments to the banking regulation law seeking to extend the supervision of RBI to cooperative banks are aimed at improving their governance and protecting depositors’ money. 

Moving the Banking Regulation (Amendment) Bill, 2020 in the Lok Sabha, Sitharaman said the government was compelled to come out with an ordinance during the lockdown period as the condition of the cooperative banks was “grave”.

Gross non-performing assets (NPAs) of cooperative banks increased from 7.27 per cent in March 2019, to over 10 per cent by March 2020, she said, adding as many as 277 urban cooperative banks have reported losses in 2018-19 fiscal.

She further said over 100 urban cooperative banks were unable to meet the minimum regulatory capital requirement and 47 had negative net worth at the end March 2019. In June, the Union Cabinet had approved an ordinance to bring cooperative banks under the supervision of the Reserve Bank of India (RBI). It also extended the provisions applicable on commercial banks to cooperative banks.

Responding to Congress’ opposition to the ordinance route taken by the Centre to amend the banking regulation law, Sitharaman said the ordinance was brought in only because the financial health of many cooperative societies which were also performing the role of banks was becoming “very delicate”.

“Due to the pandemic, the stress in cooperative banks increased and the gross NPA ratio increased from 7.27 per cent in March 2019 to over 10 per cent in March 2020. Therefore it was felt that to protect depositors’ interest we should have the ordinance brought in,” she said.

Section 45 of the Banking Regulation Act is being amended to enable making of a scheme of reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system and for securing its proper management, even without making an order of moratorium, so as to avoid disruption of the financial system.

Besides, amendments in sections 3 and 56 extend the provisions applicable to scheduled commercial banks to cooperative banks and brings them within the RBI regulation.

The amendments 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”.