Revised Banking Regulation Act

Recently, Union Cabinet approved amendments to the Banking Regulation Act to empower the central bank to have greater control over cooperative banks.

About

• Union cabinet clearedchanges in Banking Regulation Act to give RBI wider powers.
• Ambit:The amendments will apply to all urban co-operative banks and multi-state cooperative banks.
  • They will not be applicable to rural cooperatives.
  • The changes will cover nearly 1,500 cooperative banks and will be implemented in a phased manner.
• Objective: This was done in order to prevent malpractices, ensure better regulation and prevent frauds such as the one seen at Punjab and Maharashtra Co-operative Bank Ltd (PMC).
  • Amendment to Banking Regulation Act aims to strengthen cooperative banks and avoid PMC Bank like crisis.
• PMC scam: Due to PMC scam lakhs of customers faced difficulties in withdrawing their money due to restrictions imposed by the RBI.
  • Urban cooperative banks reported nearly 1,000 cases of fraud worth more than ?220 crore in past five fiscal years.
• Current regulations:Cooperative banks are currently under dual control of Registrar of Cooperative Societies and RBI.
  • The role of registrar of cooperative societies includes incorporation, registration, management, audit, supersession of board and liquidation.
  • RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.
• New changes:The administrative role will continue to be done by the Registrar of Cooperative Societies.

Implications

• Audit under RBI norms:Cooperative banks will be brought under the regulation of the RBI. They will be audited according to RBI’s norms.
  • Cooperative banks will now be required to meet stricter capital norms.
  • The amendments will now give legislative powers to the central bank.
• Appointments with permission of RBI:Appointments of chief executives will also require permission from the banking regulator, as is the case for commercial banks.
• RBI takeover in case of stress: Central bank can supersede the board and take control, in consultation with state government, if any cooperative bank is under stress.
• Improve financial stability: To strengthen the Cooperative Banks, amendments to the Banking Regulation Act will help increase professionalism, enable access to capital and improving governance and oversight for sound banking through the RBI.
  • Observingthe new changes will help strengthen financial stability.

Additional measures

• Increased deposit insurance: In order to ensure that depositors' money is safe, Budget 2020 permitted the Deposit Insurance and Credit Guarantee Corporation (DICGC) to increase deposit insurance coverage for a depositor, which is now Rs 1 lakh, to Rs 5 lakh per depositor.

Facts about Cooperatives

• Rural cooperatives are under state-policies: RBI has considerable control over urban cooperative bank but has a limited control over the rural cooperative banks which are guided by state-level policies.
• Assets of rural cooperatives are higher:As per RBI’s Trends and Progress in Banking Report, as of March-end 2018, rural co-operative banks accounted for 64.7 percent of the total assets of cooperatives.
  • Rural cooperatives are also more in number as compared to urban cooperative banks.