A overview of the Banking regulation act (amendment) Bill, 2020 and it's impact in cooperative banks
Introduction. On March 3rd, 2020 the finance minister in the parliament introduced an amendment to the Banking regulation act, 1949. The amendment which was passed in the Lok Sabha on 15th September seeks to bring some major amendments to the existing laws particularly in the area of reconstruction, amalgamation, moratorium rules, and most importantly to cooperative banks. The main objective of the amendment has been to bring the workings of the cooperative banks under its wing. Quoting the finance Minister herself the amendment aims to address the “problems faced by depositors of cooperative banks over the last two years”. The amendment primarily seeks to bring cooperative banks under the supervision of the Reserve Bank of India (RBI). By the virtue of section 56 of the Banking regulation act, certain provisions of the Banking regulation act are already applicable in the case of cooperative banks; this amendment shall however bring cooperative banks completely under the RBI’s wing. The impact of this amendment banks who shall now find themselves “integrated into the mainstream banking system. What are cooperative banks and why are they important? Simply put cooperative banks are banks based on the concept of cooperative ownership, in the sense its members are the owners. Cooperative banks are the instrument used by the Indian banking system to reach rural areas where the concept of banking is still not prevalent. Moneylenders and informal sources who often charge exorbitant rates of interest are unfortunately still rampant. This is rather ironic as rural areas are most in need of finance especially for farming and its allied expenses. Banks however find it very difficult to thrive in rural areas, which is primarily due to reluctance amongst residents to keep money in the bank and the prevalence of cash transactions in these areas. Cooperative banks in essence are an attempt to encourage savings and investment among the rural populace and also at the same time penetrate the availability of financial services to these regions. Cooperative banks are not companies that are registered under the Banking Regulation act, 1949; Rather, they are cooperative societies that are registered under the cooperative societies act, 1912. They are primarily formed by people belonging to the same local or professional community, cooperative banks for these communities is a major step in financial self-reliance. The popularity of this model can be deduced from its membership alone. 200 million Indians are members of a cooperative structure, which accounts for 46% of all rural credit. Thus it becomes even more important to understand how the current amendment affects these banks. What does the Bill propose? Cooperative Banks are primarily affected by the amendment made to Part V section 56 of the act which provides for the “application of the act to cooperative Banks”. The Bill however specifies certain exceptions, which are a) Primary agricultural credit society b) Cooperative societies whose primary business is long term financing for agricultural development. The Primary amendments a) Allowing issues of shares and securities by cooperative banks by an amendment to section 12 of the Act will now be able to issue equity, preference, or special shares with the prior permission of the RBI. This however shall only be limited to persons who reside within its area of operations. Further co-operative banks may also raise and issue debt instruments such as unsecured debentures, bonds, and any other similar securities with a maturity period of more than 10 years. However, these shall be subject to RBI’s approval. The amendment provides a much-needed breather to cooperative banks that have been slowly declining. As of December 2019, NPA’s for cooperative banks rose to 7.1%, and cooperative banks have been increasingly shutting down. Their assets have also dipped to 10.6% in FY 19 from 19.4% in FY05. The amendment will allow cooperative banks to seek financial resources outside of their deposits and will give a sense of financial stability to the fledgling sector. Even Though in the near future it is unlikely that cooperative banks will be freely allowed to seek financing from the public at large, the amendment is indeed a step in the right direction. Additionally, another amendment to section 12 also protects cooperative banks from having to pay shareholders who surrender their shares which further reinforces the amendment’s objective of ensuring financial stability for cooperatives. b) Management qualifications and Board of directors: Similar to other banking companies regulated under the BRA, management of the cooperative banks shall also be subject to scrutiny by the RBI. Part III of the Banking regulations act regulates the “business of banking companies” and it lays down certain criteria that are required to be fulfilled by the directors of the Bank (including the chairman). Section 10C of the act lays down the requisite qualifications that a person must hold to be eligible to become a director or chairman of a company. These preconditions shall now also apply to cooperative banks. A cooperative bank now under section 10A(2) will have to appoint a board in which 51% of the members have specialized knowledge in one of the many fields mentioned under the section. Additionally, the bill will also subject cooperative Banks chairman to the same disqualification criteria as for any other bank in the act. Extending the qualification provisions of the bill can be seen largely due to the billion-dollar PMC scandal. The directors of the bank were held liable for the scandal and causing massive losses to the depositors. Considering the losses suffered by the depositors and the fact that the fallout of PMC can be ultimately traced back to its management the amendment aims to bring uniformity in the appointment of its board. Another provision that has been extended to cooperative banks is regarding part IIA of the act which provides RBI control over the bank's management. Under this part section, 36AA empowers the RBI to remove a person from a managerial position in the bank and under 36AB it is empowered to appoint additional directors to the board. The Bill amends part IIA and inserts section 36AAA which empowers the RBI to supersede directors of a cooperative bank in the public interest or in the interest of depositors. It however must be noted that this provision is only applicable to multi-state cooperative banks. Additionally, the bill also seeks to omit certain provisions that apply to cooperative Banks. These include amending section 20 and removing the restriction on loans and advances made against its shares. It additionally also removes restrictions on unsecured loans and advances and how it can forward. Conclusion. The Bill undoubtedly brings about drastic changes in the act concerning cooperative banks. The most important aspect of the act is that it effectively puts RBI in charge of the affairs of the cooperative Bank. Even now it is too early to debate as to whether the changes made by the bill are for the better or worse, but it is
clear that considering the current situation of cooperative banks a change is needed.