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Banking Regulation Amendment

Banking Regulation Amendment

Introduction

  • A bill to provide more powers to the RBI for regulating cooperative banks was introduced by Finance Minister Nirmala Sitharaman in the Lok Sabha.
  • The Banking Regulation (Amendment) Bill, 2020, which comes in the backdrop of PMC Bank scam, seeks to strengthen cooperative banks by increasing professionalism, enabling access to capital, improving governance and ensuring sound banking through the RBI.
  • 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 Cooperative Societies.
  • It also proposed to bring cooperative banks on par with developments in the banking sector through better management and proper regulation of cooperative banks with a view to ensure that affairs of cooperative banks are conducted in a manner that protects the interest of depositors

What are Cooperative Banks?

  • Co-operative banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners.
  • The primary purpose of the cooperative banking has been to serve the people and fill in the void in the absence of formal banking sector in the past.
  • They are regulated by the Reserve Bank of India under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965 or theyare under dual control of Registrar of Cooperative Societies and Reserve Bank of India.                          Banking Regulation Amendment
  • While the role of registrar of cooperative societies includes incorporation, registration, management, audit, supersession of board and liquidation, RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.

Structure Of Cooperative Banks

  • Broadly, co-operative banks in India are divided into two categories – urban and rural.
  • Rural cooperative credit institutions could either be short-term or long-term in nature.
    • Short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
    • Long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
  • Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled. Scheduled and non-scheduled UCBs are again of two kinds- multi-state and those operating in single state.

Issues With Cooperative Banking In India

  • Politicians in local as well as in state use them to increase their vote bank and usually get their representatives elected over the board of director in order to gain undue advantages.
  • The cooperatives in northeast states and in states like West Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.
  • A serious problem of the cooperative credit is the overdue loans of the cooperative banks which have been continuously increasing over the years.
  • Large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.                                    Banking Regulation Amendment
  • The cooperatives have resource constraints as their owned funds hardly make a sizeable portfolio of the working capital.
  • Raising working capital has been a major hurdle in their effective functioning.

About The Banking Regulation Amendment Bill, 2020:

  • Cooperative banks will be audited according to RBI’s norms.
  • RBI can supersede the board, in consultation with the state government, if any cooperative bank is under stress.
  • It is proposed to bring the co-operative banks on par with the developments in the banking sector through better management and proper regulation of co-operative banks with a view to ensure that the affairs of the co-operative banks are conducted in a manner that protects the interests of the depositors.
  • Appointments of chief executives will also require permission from the banking regulator, as is the case for commercial banks.
  • It is further proposed to strengthen the co-operative banks by increasing professionalism, enabling access to capital, improving governance and ensuring sound banking through the Reserve Bank of India
  • Audit of such banks will be as per central bank’s guidelines and recruitment for banks’ management will be based on certain qualifications
  • The administrative role will continue to be done by the Registrar of Cooperative Societies. The amendments will apply to all urban co-operative banks and multi-state cooperative banks.

Why this was necessary?

  • This was felt necessary in the wake of the recent Punjab & Maharashtra Cooperative (PMC) Bank crisis.
  • Cooperative banks have 8.6 lakh account holders, with a total deposit of about ₹5 lakh crore.
  • Besides, Urban cooperative banks reported nearly 1,000 cases of fraud worth more than ₹220 crore in past five fiscal years.                        Banking Regulation Amendment

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