Context: The Union Cabinet recently approved an ordinance to bring all urban and multi-State cooperative banks under the direct supervision of the Reserve Bank of India (RBI).

Rationale for the move

  • To ensure that depositors are protected
    • Currently the urban cooperatives and multi-State cooperative banks, which are 1,540 in number and have a depositor base of 8.6 crore, who have saved nearly ₹4.84 lakh crore.
    • As these banks have been brought under the RBI supervision process, the depositors would certainly get more security.
  • Dual regulation and several instances of fraud
    • Currently, these cooperatives banks come under dual regulation of the RBI and the Registrar of Co-operative Societies.
    • There have been several instances of fraud and serious financial irregularities including the major scam at the Punjab and Maharashtra Co-operative (PMC) Bank last year.
      • Ultimately the RBI was forced to supersede the PMC Bank’s board and impose strict restrictions. 

Cooperative Banking

  • 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.
  • Administration:
    • Co-operative banks in India are registered under the States Cooperative Societies Act. 
    • They are also regulated by the Reserve Bank of India (RBI) and governed by the
      • Banking Regulations Act 1949
      • Banking Laws (Co-operative Societies) Act, 1955.
  • These banks are owned and controlled by the members, who democratically elect a board of directors. 
    • Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
  • Dual Regulation
    • Primary Cooperative Banks, popularly known as Urban Cooperative Banks (UCBs) are regulated and supervised by the Registrar of Cooperative Societies (RCS) of State concerned.
    • The banking related functions are regulated and supervised by the Reserve Bank under the provisions of the Banking Regulation Act, 1949.