The Centre is likely to amend the Banking Regulation Act, 1949, in the winter session of Parliament so that all bank-related functions pertaining to regulation and supervision of scheduled and non-scheduled urban co-operative banks (UCBs) are vested exclusively with the Reserve Bank of India (RBI).
This move follows reservations by the finance ministry to the setting up of a supervisory body for overcoming inspection/supervisory problems arising from the present three-pronged and multi-level institutional system governing the functioning of UCBs.
The ministry is not in favour of creating a separate apex supervisory body that will shoulder the responsibility of ensuring that UCBs conform with the prescribed prudential, capital adequacy and risk-management norms as it feels that the RBI, given the present constraints of overlapping jurisdictions (of the central/ state governments and the RBI), was doing a good job of inspecting/supervising these banks and that there was no need to create an institutional mechanism as such, sources said.
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They pointed out that via the amendment bank-related functions will be exclusively brought under the purview of the Banking Regulation Act, 1949 and regulated, supervised and administered by the Reserve Bank.
There are nearly 2,100-odd UCBs in the country. In view of their large number as well as their dispersed and local character, their supervision and inspection was posing special problems for the central bank, given its manpower constraints.
"It is a daunting task to oversee the functioning of these banks in view of the fact that if the RBI wants to take action against/supersede the board of an erring UCB, it has to seek the concurrence of the registrar of state co-operatives. Often times, promoters of UCBs are politically connected and manage to stall any action by state authorities," sources said adding that once the amendment comes through, the RBI may be required to shore up its supervisory apparatus.
At present, while accounts of UCBs are required to be audited by state governments, there has been substantial delay in completing audit of a large number of UCBs. RBI conducts statutory inspections normally once in two years in respect of scheduled UCBs, once in two to three years in respect of non-scheduled UCBs, while the identified weak banks are inspected on annual basis.
The RBI is expected to step up the frequency of audits/ inspections/ reporting for the UCBs.
Many co-operative banks suffer from lack of transparency, professionalism, disregard for established lending norms and are prone to insider borrowing, sources said.