Context: The Banking Regulation (Amendment) Bill, 2020 was passed in the Lok Sabha.
- In June, the President had promulgated the Banking Regulation Amendment Ordinance 2020 that gave Reserve Bank of India the power to prepare a scheme of reconstruction or amalgamation of a bank without placing it under moratorium.
- The ordinance, now replaced by the bill, brings urban and multi-state cooperative banks under the RBI’s ambit.
- The proposed law seeks to enforce banking regulation guidelines of the RBI in cooperative banks, while administrative issues will still be guided by the Registrar of Cooperatives.
- Poor state of UCBs:
- There are 1,540 cooperative banks with a depositor base of 8.60 crore having total savings of about Rs 5 lakh crore.
- The financial status of 277 urban cooperative banks is weak.
- 328 urban cooperative banks have more than 15% gross NPA ratio"
- Under the dual control by RBI and State Governments under whom the Registrars of Cooperative Societies function, many UCBs have failed.
About the Bill
- Oversight of cooperative banks would be brought under the Reserve Bank of India through an amendment to the Banking Regulation Act, in order to increase professionalism and improve corporate governance.
- Cooperative banks would be audited according to RBI rules.
- Appointment of CEOs would require prior approval from the central bank.
- The RBI will also have the right to supersede the management of a cooperative bank in case of governance failure.
About Cooperative banks
- A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
- Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest.
- The structure of commercial banking is of branch-banking type; while the co-operative banking structure is a three tier federal one.
- A State Co-operative Bank works at the apex level (ie. works at state level).
- The Central Co-operative Bank works at the Intermediate Level. (ie. District Co-operative Banks ltd. works at district level)
- Primary co-operative credit societies at base level (At village level)
- According to an RBI report, there were 1,551 urban cooperative banks as on 31 March 2018, and 96,612 rural cooperative banks as on 31 March 2017, with the latter accounting for 65.8% of the total asset size of all cooperative banks.
- The Urban Cooperative Banks (UCBs), though constitute only 2% in number, they dominate the sector in financial powers (44% of deposits and 31?vances in FY17).
Difference between cooperative and scheduled commercial banks
There are three key points of difference between scheduled commercial banks and co-operative banks.
- Dual control: Unlike commercial banks, UCBs are only partly regulated by the RBI.
- RBI has been ‘vested powers to issue licence to UCBs under Section 22 and 23 Banking Regulation Act, 1949 to carry on banking business and to open new places of business (branches, extension counters, etc.) respectively.
- While their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government.
- Unlike commercial banks which are structured as joint stock companies, UCBs are structured as co-operatives, with their members carrying unlimited liability.
- While there is a clear distinction between a commercial bank’s shareholders and its borrowers, in a UCB borrowers can double up as shareholders.
In the event UCBs fail, deposits with them are covered by the Deposit Insurance and Credit Guarantee Corporation of India up to a sum of ₹5 lakh per depositor, the same as for a commercial bank.Image Source: Economic Times