To avoid PMC-like crises, Cabinet approves banking regulation amendment law

The Reserve Bank of India (RBI) is set to get more auditory and supervisory powers over urban and multi-state co-operative banks, with the Union Cabinet approving the Banking Regulation Amendment Bill, 2020, on Wednesday.

 “Like commercial banks, multi-state and urban co-operative banks will be brought under the regulations of the RBI. These changes will be only for the banking side and administrative rights will continue to remain with the registrars,” said Information and Broadcasting Minister Prakash Javadekar.

The Union Cabinet was chaired by Prime Minister Narendra Modi.

Javadekar added that the audit of such co-operative banks will be according to RBI regulations and the best management practices laid down by the regulator will also apply to them. Further, the RBI will be allowed to set the minimum level of qualifications for the board members of such lenders which will need the consent of the regulator to appoint a chief executive officer.

The managements of such banks are elected through co-operative bodies at present and the RBI has limited control over their appointments.

“If the situation gets worse, the RBI will get powers to supersede the board. All these measures will give financial stability to the sector and protect the depositors’ interests. The RBI will bring the co-operative banks under its control in a phased manner,” the minister said.

The move is the fallout of a fraud unearthed at Punjab and Maharashtra Co-operative Bank whose management had allegedly handed over Rs 6,700 crore worth loans to real estate firm HDIL.

There was a dual control of the RBI and respective states and the central governments that restricted timely regulator action against co-operative banks. However, even after the recent proposed changes in legislation, the RBI will be gaining control over a small fraction of co-operative banks.

As of March 2019, 1,544 urban co-operative banks accounted for merely 1.6 per cent out of the 97,792 co-operative banks. In fact, 96,248 rural co-operative banks accounted for around 65 per cent of the assets of co-operatives and were controlled by the respective state government legislation.

Javadekar said co-operative banks had 86 million depositors with total deposits of around Rs 5 trillion. While the registrars under the state and central governments have control over incorporation, registration, management, recovery, audit, supersession of board of directors and liquidation, the RBI is “invested with regulatory functions”, according to the RBI’s Trends and Progress Report 2018-19.

The RBI is also responsible for the supervision of urban co-operative banks, empowered to give suggestions on prudential norms for capital adequacy, income recognition, asset classification and provisioning, liquidity requirements and single or group exposure norms.