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RBI Cautions Co-operative Societies Against Using Term "Bank", understanding India’s ‘BANKING’ structure

  • Category
    Economy
  • Published
    1st Dec, 2021

Context

The Reserve Bank of India has noted that some cooperative societies are using the word ‘bank’ in their names, in contravention of Banking Regulation Act. Some cooperative societies are even accepting deposits from non-members without any licensing or approval from the central bank.

In light of these developments, the RBI clarified that cooperative societies are not allowed to use “bank", “banker" or “banking" in their names.

Analysis

Understanding the ‘banking’ structure of India                                                    

Reserve Bank of India is the central bank of the country and regulates the banking system of India.

  • Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians.
  • The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank.
  • Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. 

The structure of the banking system of India can be broadly divided into following categories:

  • Commercial Banks: They are regulated under the Banking Regulation Act, 1949. Their primary function is to accept deposits and grant loans to the general public, corporate and government. Commercial banks can be divided into-
    • Public sector banks: These are the nationalised banks. (g.- Central Bank of India)
    • Private sector banks: Major stake or equity is held by private shareholders. (g.- Axis Bank)
    • Foreign banks: Its headquarters in a foreign country but operates in India as a private entity. (e.g- HSBC, Citibank)
    • Regional Rural Banks (RRB): These are also scheduled commercial banks but they are established with the main objective of providing credit to weaker sections of the society like agricultural labourers, marginal farmers and small enterprises. (g.- Sarva Haryana Gramin Bank (sponsored by Punjab National Bank)
  • Small Finance Banks: This banking segment is aimed to provide financial inclusion to sections of the society that are not served by other banks.  (g.- Au Small Finance Bank Ltd.)
  • Payments Banks: It is a new model of bank, conceptualised by the RBI to accept a restricted deposit. (e.g.- Airtel Payment Bank)
  • Co-operative Banks: Registered under the Cooperative Societies Act, 1912, they are run by an elected managing committee. 
  • Cooperative Society is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspiration through jointly owned and democratically controlled enterprises.
  • These are service enterprises aiming at rendering service to its members. They are of two type:
    • Urban Co-operative Banks
    • Rural Co-operative Banks

Banks can also be classified on the basis of Scheduled and Non-Scheduled Banks.

Scheduled Banks

  • They are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934.
  • Such banks are also covered under the depositor insurance program of Deposit Insurance and Credit Guarantee Corporation (DICGC).
  • To qualify as a scheduled bank, the bank should conform to the following conditions:
    • paid-up capital of Rs. 5 Lakh and above
    • A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors
    • A bank should be a corporation rather than a sole-proprietorship or partnership firm
  • Non-scheduled banks 
  • These banks refer to the local area banks which are not listed in the Second Schedule of Reserve Bank of India.
  • Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the RBI, but with them.

Why co-operatives cannot use the term ‘bank’?

  • The Banking Regulation Act, 1949 (BR Act, 1949) was amended by the Banking Regulation (Amendment) Act, 2020 (Act 39 of 2020) which came into force on September 29, 2020.
  • Accordingly, co-operative societies cannot use the words “bank", “banker" or “banking" as part of their names, except as permitted under the provisions of BR Act, 1949 or by the Reserve Bank of India.
  • Using “bank" in their names in violation of Section 7 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies).
  • Such societies neither possess any licence under Banking Regulation Act, nor have they authorised by the RBI for carrying out banking business.
  • Allowed functions: A co-operative bank may issue equity, preference, or special shares on face value or at a premium to its members, via a public issue or private placement.

Central Bank of India

  • Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians.
  • The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank.
  • Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. 

What they “cannot” do?

  • They cannot accept deposits from non-members without any licensing or approval from the central bank.
  • They are not authorised by the RBI for carrying out banking business.

The insurance cover from Deposit Insurance and Credit Guarantee Corporation (DICGC) is also not available for deposits placed with these societies.

  •  DICGC is a wholly-owned subsidiary of the Reserve Bank of India (RBI).
  • It provides deposit insurance that works as a protection cover for bank deposit holders when the bank fails to pay its depositors.
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