RBI to gain control on co-op banks in a phased manner
The Union government will notify the recently promulgated Ordinance to give more teeth to the Reserve Bank of India (RBI) over co-operative banks in a phased manner. For now, the new Ordinance has been made effective from June 29 to cover multi-state co-operative banks, according to a notification issued by the finance ministry on Tuesday. However, a large majority of cooperative banks that operate in one state, or state co-operative banks, will be covered under the new law from a later date, said a top government official.
“We will notify the new law for state cooperative banks from a later date. But cooperative banks registered in multiple states will come under the purview of the new law immediately,” the official said.
President Ram Nath Kovind had approved the Banking Regulation (Amendment) Ordinance, 2020, on June 26 to give more powers to the RBI to restructure co-operative banks, to give more say in the management, and to allow the regulator to frame a revival plan for such struggling lenders without placing restrictions on depositors.
Right now, the state laws regulated the incorporation, regulation, and winding-up of co-operative societies, and the Registrar of Co-operative Societies appointed by state governments act as the regulatory authority for them. But co-operatives in multiple states are governed by the Multi-state Cooperative Societies Act, 2002, under the central government’s domain.
Some of the banking-related functions came under the RBI, which adopted a ‘lighttouch’ regulation for them. So while multistate co-operative banks will have to comply with tighter regulatory norms, akin to commercial banks, immediately, state cooperative banks will take some time to come under the full regulatory purview.
The new Ordinance enables the RBI to take “control over management” of co-operative banks registered with a state government, apart from multi-state co-operative banks. The amendments made by the government, however, do not apply to primary agricultural credit societies or co-operative societies whose primary objective and principal business is long-term finance for agricultural development. According to another government official, some state governments had shown resistance to the central government’s move to give more control to the RBI over co-operative banks falling under the state’s domain.
A note prepared by former Planning Commission advisor K D Zacharias, uploaded on the RBI’S website, noted that “banking being a central subject, and co-operatives operating within a state being a state subject under the Constitution, providing overriding effect to the banking laws over the law governing co-operative societies in case of conflict is a contentious issue”.
While issuing a press statement on
Saturday about the Ordinance, the government made sure to emphasise that the “amendments do not affect the existing powers of the state registrars of co-operative societies under state co-operative laws”.
Experts said that the Ordinance will help in doing away with the duality of regulatory control over co-operative banks, along with allowing them to raise capital from other avenues.
“The most critical change brought about by the Ordinance is the ability of co-operative banks to raise capital from the market. Earlier, the means of raising resources were significantly curtailed,” Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co. said, adding through the Ordinance, the RBI has put certain checks and balances for raising capital.
This will help increase the capital base for co-operative banks and allow them to undertake transactions in a more efficient and diversified manner.