Co-operative Banks Under RBI Supervision

• 25 Jun 2020

Why In News

Recently, the Central government approved an Ordinance to bring all urban and multi-state co-operative banks under the direct supervision of the Reserve Bank of India (RBI).

Key Points

• Reason:
  
  • The decision comes after several instances of fraud and serious financial irregularities, including the major scam at the Punjab and Maharashtra Co-operative (PMC) Bank in 2019.
  • Till now, all the co-operative banks came under dual regulation of the RBI and the Registrar of Co-operative Societies, resulting in regulatory and supervisory lapses at many of these banks.
    
    • The RBI had no powers to draw up an enforceable scheme of reconstruction of a co-operative bank.
    • However, from now onwards the urban and multi-state co-operative will come under the direct supervision of RBI.
• Benefit:
  
  • The move will empower the RBI to regulate all urban and multi-state co-operative banks on the lines of commercial banks.
    
    • Earlier, the Supreme Court pronounced that co-operative banks come within the definition of ‘Banks’ under the Banking Regulation Act, 1949 for the purposes of the Sarfaesi Act, 2002.
    • The Sarfaesi Act is an effective tool for bad loans (Non-Performing Assets) recovery.
  • It will also provide more security to depositors.
    
    • In India, there are 1482 urban co-operatives banks and 58 multi-state co-operative banks.
    • These banks have a depositor base of 8.6 crores, who have saved a huge amount of Rs. 4.84 lakh crore with these banks.
• Issues Involved:
  
  • The rural co-operative banks will continue to remain under the dual regulation of RBI and Registrar of Co-operative Societies.
  • The rural co-operative banks face the same issue of misgovernance and fraud, like urban co-operatives banks.

Co-operative Banking

• A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. It is distinct from commercial banks.
• They are broadly classified into Urban and Rural co-operative banks based on their region of operation.
• They are registered under the Co-operative Societies Act of the State concerned or under the Multi-State Co-operative Societies Act, 2002.
• The Co-operative banks are also governed by the
  
  • Banking Regulations Act, 1949.
  • Banking Laws (Co-operative Societies) Act, 1955.
• Features of Co-operative Banks:
  
  • Customer Owned Entities: Co-operative bank members are both customer and owner of the bank.
  • Democratic Member Control: These banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
  • Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
  • Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to masses in rural areas.

Source: IE