To protect the interests of depositors, the Lok Sabha on Wednesday passed the Banking Regulation (Amendment) Bill 2020 to bring cooperative banks under the supervision of the Reserve Bank of India (RBI).
Finance Minister Nirmala Sitharaman assured the Chamber that the legislation empowers the central bank to regulate only the banking activities of cooperatives and is not applicable to a primary agricultural credit society or a cooperative society that provides financing for agricultural development .
The bill should not “undermine” the importance of cooperatives, he said. “But, if a cooperative is performing banking functions, it is necessary to regulate it … so that it functions professionally,” he said while responding to queries raised by members.
The amendments do not affect the existing powers of state cooperative company registrars under state cooperative laws.
Referring to the problems of depositors from the Punjab and Maharashtra Cooperative Bank (PMC), based in Mumbai, and the Sri Guru Raghavendra Co-operative Bank, based in Bengaluru, due to their lack of professionalism, he said, while 430 banks Cooperatives faced liquidation in the last two. For decades, not a single commercial bank, whose depositors are protected by the Banking Regulation Law, has been liquidated.
The legislation also allows for a reconstruction or merger scheme for a bank to protect the interest of depositors without resorting to moratoriums that freeze depositors’ withdrawals. The bill replaces an ordinance that was enacted in fulfillment of the president’s commitment to “guarantee the safety of depositors in all banks” on June 26.
Sitharaman said the government was forced to issue an ordinance during the lockdown period because conditions for cooperative banks were “severe” and there was “uncertainty” regarding normal legislative business due to the Covid-19 pandemic. The government had presented the bill in Parliament in March this year, but it could not be enacted due to the outbreak of the pandemic.
“During the March budget session, we presented this bill for amendments to be made to serve the interest of depositors. But unfortunately, during the budget session, we were unable to pass this bill, ”Sitharaman said.
Moving the bill through the House, Sitharaman said the financial health of several cooperative banks was becoming “very delicate.” It said 277 urban cooperative banks were reporting losses and 105 cooperative banks could not meet the minimum capital requirement.
Divakar Vijayasarathy, Founder and Managing Partner of consulting firm DVS Advisors LLP, said: “Cooperative banks have come under severe criticism with scams on the rise that especially involve small retail depositors. State governments and their respective Regulatory Boards have not been able to efficiently maintain monitoring mechanisms for these institutions. The government was waiting for the right moment to bring them under RBI control and the timing could not have been better. “
“The capital adequacy ratios of most of these banks are worrying and the current regulatory structure does not make the restructuring of these institutions practically feasible. The bill strikes a chord and has provided a mechanism to restructure these banks and also significantly improves their regulatory oversight by a competent and efficient regulator, the RBI. This move should certainly improve confidence in cooperative banks and the interest of all stakeholders would be protected in the long term, ”he said.
Keeping agricultural cooperatives out of the scope of the bill is a tactical measure, he added.
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