Context: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Act of 2002 (SARFAESI Act) applies to cooperative banks as well, a five-judge Constitution bench has ruled.
More about the news
- According to the judgement, cooperative banks come under the category of banks as defined under Section 2(1)(c) of the Sarfaesi Act, and the recovery procedures mentioned under that law apply to cooperative banks as well.
- The bench also upheld the legislative power of the Parliament to bring cooperative banks under the ambit of Sarfaesi Act.
- The judgement also stated that cooperative banks were bound by the provisions of the Banking Regulation Act, 1949, and all the other legislation applicable to banks under the RBI Act. As a result, cooperative banks will have to comply with these rules.
- The Constitution bench decided on the issues after a series of conflicting decisions by earlier Supreme Court judgements in 2007 and 2002.
- The court was also approached to decide on Parliament’s competence to amend the definition clause (provision in an Act where words are defined) to add multi-state co-operative banks under the Sarfaesi Act.
Benefits of the judgement:
- Recognizing that cooperative banks can have Sarfaesi rights should enable cooperatives to get better control over handling defaults and on the negotiation table with defaulters.
SARFAESI Act , 2002
Background:Narasimham Committee I and II and Andhyarujina Committee have made suggestions to form new legislation for securitization and empowering banks and financial institutions to gain possession of the securities and to sell them without any intervention of the court here.
- It enables and empowers the secured creditors to take possession of their Securities, to deal with them without the intervention of the court and also alternatively to authorize any Securitization or Reconstruction Company to acquire financial assets of any Bank or Financial Institution (FI).
- The Act has been empowered with the overriding effect over the other legislation and it shall be in addition to and not in derogation of certain legislation.
- Sarfaesi Act allows secured creditors to take possession of the assets of a borrower who fails to pay dues within 60 days of demanding repayment.
Role of SARFAESI Act,2002
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 UCBs, though constitute only 2% in number, they dominate the sector in financial powers (44% of deposits and 31?vances in FY17).
The Co-operative banks share common features such as:
- Customer-owned entities: In a co-operative bank, the needs of the customers meet the needs of the owners, as co-operative bank members are both.
- Democratic member control: Co-operative banks are owned and controlled by their members, who democratically elect the board of directors. Members usually have equal voting rights, according to the co-operative principle of “one person, one vote”
- Profit allocation: In a co-operative bank, a significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves. A part of this profit can also be distributed to the co-operative members, with legal or statutory limitations in most cases.
- Regulated by the Reserve Bank of India, they are governed by the Banking Regulations Act 1949 and banking laws (co-operative societies) act, 1965.
Significance of Cooperative Banks: It has an extensive branch network all over the country, making credit easily available even to rural areas. It accounts for 67 per cent of total rural credit.
- It provides support to small and marginal farmers for buying inputs, storage and marketing assistance.
Advantages of Cooperative Banks:
- Easy to constitute: It takes a group of ten adults to form a cooperative bank. It needs a base capital of 25 lakhs only as compared to 100 crores of Small Finance Banks.
- Alternative and cheap credit: One of the objectives of the cooperative system is to provide easy accessibility to the rural section of the country so as to protect them from the clutches of greedy money lenders. It provides cheap credit to rural masses.
- Encouraging savings and investments: It has encouraged the habit of saving among the rural masses.
- Agriculture boost: Cooperative societies provide credit to agriculturalists at cheaper rates to buy inputs, warehousing facilities, marketing assistance and other facilities.
Problems of Co-operative Banks: Co-operative sector banks, particularly the urban co-operative banks (UCBs), are falling apart slowly but surely with mounting stressed assets, the full extent of which may not be known.
- Dual control: The UCBs are governed by both state co-operative bodies and the RBI - state governments' Registrar of Co-operative Societies (RCS) regulates administrative aspects (including elections) through various state laws and the RBI the banking aspect through the Banking Regulation Act of 1949 (extended to co-operative banks in 1966). That is because the co-operative bodies have a distinct character.
- These are not just financial institutions but have social responsibilities and obligations too.
Stressed assets in co-operative banking sector: An RBI report says in FY18, the asset quality of UCBs improved, although overall profitability moderated.
Among the rural co-operative segments, only the state co-operative banks (StCBs) improved their NPA ratios and profitability.
Case of Punjab and Maharashtra Cooperative (PMC) Bank: Investigations into the PMC scam have shown gross financial mismanagement and a complete breakdown of internal control mechanisms. Violating banking norms, the PMC had 73% loan exposure to the HDIL, which was masked through 21,000 fictitious accounts until a whistleblower blew the cover.
Lack of Democratic Spirit: It has been observed that the majority of the members as well as directors of the society are ill-informed about the activities of the society due to their illiteracy & indifferent attitude.
Fair Audit: It is well known that audits are done entirely by department officials & are neither regular nor comprehensive. Delays in the conduct of audits and submission of reports are widespread.
Abusing Power by the Leadership: Those who control cooperative societies are locally powerful, with strong political affiliations.
Government Interference: Right from the beginning the government has adopted an attitude of patronizing the movement. Cooperative institutions were treated as if these were part & parcel of the administrative set up of the government.
Modern Banking Practices: They are not having the modern practices of banking in there working viz. net banking, mobile Banking, online banking, e-banking, ATM banking and all other modern banking practices. Due to which they have been eliminated and remained back foot in the modern era of marketing.
Limited Coverage: The size of these societies has been very small. Most of these societies are confined to a few members and their operations extended to only one or two villages. as a result their resources remain limited, which make it impossible for them to expand their means and extend their area of operations.
Lack of institutions for the purpose of training personnel.
Recent RBI Initiatives
- Reducing concentration risks in the exposures of UCBs: The central bank plans to amend certain regulatory guidelines relating to exposure norms for single and group or interconnected borrowers, promotion of financial inclusion and priority sector lending.
- Under the current norms for UCBs, the exposure to an individual borrower should not exceed 15% of its capital funds, and the exposure to a group of borrowers should not exceed 40% of its capital funds.
- Bringing UCBs under the ambit of RBI’s Central Repository of Information on Large Credits (CRILC): It has been decided to bring UCBs with assets of ₹500 crore and above under the CRILC reporting framework.
- The database is used by banks and other financial institutions to share, among themselves and with RBI, the classification status of borrowers. Detailed instructions will be issued by 31 December 2019, it said.
- Strengthening the cybersecurity practices of these cooperative banks: RBI said it had prescribed a set of baseline cybersecurity controls for UCBs in October 2018 and has now decided to prescribe a comprehensive cyber security framework for the UCBs.
- The framework would mandate implementation of progressively stronger security measures based on the nature, variety and scale of digital product offerings of banks.
Way forward: Several committees - from Satish Marathe Committee of 1991 to R Gandhi Committee of 2015 - have diagnosed the problems with the UCBs and offered solutions aplenty.
Reorganization of Societies in order to become economically viable & efficient. To ensure this small societies should be merged to build larger societies. With a large amount of resources at its disposal big societies can avail certain facilities, which small societies cannot secure.
Accountability: The cooperative societies should also be brought under the purview of the right to information act.
Legislative Reforms: The Narasimham committee in its report had rightly observed that a legal framework that clearly defines the rights and liabilities of the parties to contracts and provides for speedy resolution of disputes is essential bedrock of the process of financial intermediation and cooperative bank serene exceptions.
The amendment in the cooperative societies act may be made to ensure the fair & ethical behavior by the board of directors.
Corporate Governance: the Madhava Rao committee suggested that at least two directors with suitable professional qualification and experience should be present on the boards of ucbs.
Marathe says UCBs are relatively smaller financial institutions which lack professionalism, expertise and sound internal check-and-balance systems. He suggests "separation of ownership from management" as key to addressing the problem, along with capacity building to overcome knowledge and experience gaps and use of technology for better checks and balances.
Loan Sanctioning Measures: The loan from credit societies should be granted in such a manner and under such conditions that these are used productively and not misused.
Failure of cooperatives would mean failure of best hope for rural India. The government should ensure the autonomous and Democratic Functioning of co-operatives, while maintaining the accountability of management to the members and other stakeholders.
Image Source: RBI