Co-opeative banks under RBI governance

Co-opeative banks under RBI governance



The Union Cabinet on Wednesday decided to bring all co-operative banks under the Reserve Bank of India through an ordinance. This was announced by Union information and Broadcasting minister Prakash Javadekar during a virtual press conference.  The statement adds that:

  • Government banks, including 1482 urban cooperative banks and 58 multi-state cooperative banks, are now being brought under supervisory powers of Reserve Bank of India(RBI)
  • RBI’s powers as they apply to scheduled banks will apply for cooperative banks as well.

The Minister added that the decision to bring 1,540 co-operative banks under RBI’s supervision will give an assurance to more than 8.6 crore depositors in these banks, that their money amounting to Rs. 4.84 lakh crore will stay safe.

What does it mean?

This is a welcome move from the perspective of safety of depositors. Till now, co-operative banks have suffered from loose regulation as the RBI did not have complete control over the regulation of these banks, unlike commercial banks. With the current move of the Government, an important chapter in the history of the Indian banking sector is being opened, as larger co-operative banks will now be regulated like commercial banks.  This amendment provides RBI more power to audit the books of urban co-operate banks and deal with wrongdoers.

It is well known that dual regulation between the RBI and Registrar of Co-operative Society (RCS) was worsening the mess at India’s loosely run co-operative banks. The government has finally come to address this issue following the collapse of Maharashtra-based Punjab and Maharashtra Co-operative Bank (PMC). Last year, the multi-state urban co-operative bank faced a major crisis following serious financial irregularities and fraud. The RBI, in September, superseded the board of PMC Bank.

Till now, regulation of UCBs was split between the RBI and the Registrar of Co-operative Societies, while that of smaller co-operative banks is divided between National Bank for Agriculture and Rural Development (NABARD) and RCS and the RCS reports to the central government. With the changes in the Banking Regulation Act, the RBI will finally get more power over UCBs.

The co-operative banking sector has suffered from poor governance and frequent political interventions in their operations, forcing the RBI to announce punitive measures on many of these banks. Till now RBI has put atleast 44 Co-operative banks across the country under watch citing deterioration in their financials or for flouting prudential norms.  These include those cases where the regulator has put fresh restrictions on the business activities and those where the RBI extended the restrictions already imposed on the entities. Two banks — CKP Co-operative Bank in Maharashtra and the Mapusa Urban Co-operative Bank of Goa — were asked to shut shop.

What about rural co-ops?

While bringing the UCBs under the RBI’s closer scrutiny is a good move, it is not clear whether the same rules will apply to rural co-operative banks which also suffer from similar issues. In fact, the problem of mis-governance and fraud are more in smaller co-operative banks since these entities are largely run by local politicians. Often, these banks don’t follow processes and engage in dubious transactions.

In rural areas, there are three types of cooperative banks viz (1) Primary credit co-operative banks, (2) District-level cooperative banks and (3) State-level cooperative banks. As on March-end 2017, there were about 33 state co-operative banks with Rs 1.2 lakh crore deposits and 370 district central co-operative banks with Rs 3.3 lakh crore deposits and 95,595 Primary Agricultural Credit Societies with Rs 1.15 lakh crore deposits.

It is time that these banks are also brought under tight regulations to bring order in the sector and to safeguard the investors’ interest.

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