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Last Updated : Jun 28, 2020 12:59 AM IST | Source: Moneycontrol.com

Explained: Govt gives more teeth to RBI to govern co-operative banks: What does it mean?

There are about 1,482 urban co-operative banks and 58 multi-state co-operative banks in the country which are now being brought under the RBI's watch.

The government has finally decided to bring bigger co-operative banks under the supervisory power of the Reserve Bank of India (RBI) through an ordinance, said Union Minister Prakash Javadekar on Wednesday. This will mean more than 1,500 urban and multi-state cooperative banks will be brought under the RBI’s watch, Javadekar said. According to the latest government data, there are about 1,482 urban cooperative banks (UCBs) and 58 multi-state cooperative banks in the country which are now being brought under supervisory powers of the central bank. About 8.6 crore depositors in these banks with deposits of around Rs 4.84 lakh crore will come under the purview of the RBI.

What does it mean?

This is a welcome move from the perspective of safety of depositors. Till now, co-operative banks have suffered from loose regulation as the RBI didn’t have complete control over the regulation of these banks, unlike commercial banks. The government’s move marks the beginning of an important chapter in the history of the Indian banking sector as larger co-operative banks will now be regulated like commercial banks. With this amendment, the RBI will have more power to audit the books of urban co-operate banks and deal with wrongdoers.

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On 20 January, Moneycontrol reported on how dual regulation between the RBI and Registrar of Co-operative Society (RCS) was worsening the mess at India’s opaquely run co-operative banks. The government has finally woken up to the problem and has addressed this issue following the collapse of Maharashtra-based Punjab and Maharashtra Co-operative Bank (PMC). Last year, the multi-state urban co-operative bank faced a major crisis following serious financial irregularities and fraud. The RBI, in September, superseded the board of PMC Bank.

Till now, regulation of UCBs was split between the RBI and the Registrar of Co-operative Societies, while that of smaller co-operative banks is divided between National Bank for Agriculture and Rural Development (Nabard) and RCS. RCS reports to the central government. With the changes in the Banking Regulation Act, the RBI will finally get more power over UCBs.

The co-operative banking sector has suffered from poor governance and frequent political interventions in their operations, forcing the RBI to announce punitive measures on many of these banks. So far this year, the RBI has put at least 44 co-operative banks across the country under watch citing deterioration in their financials or for flouting prudential norms. These include those cases where the regulator has put fresh restrictions on the business activities and those where the RBI extended the restrictions already imposed on the entities. Two banks — CKP Co-operative Bank in Maharashtra and the Mapusa Urban Co-operative Bank of Goa — were asked to shut shop.

What about rural co-ops?

While bringing the UCBs under the RBI's closer scrutiny is a good move, it is not clear whether the same rules will apply to rural co-operative banks which also suffer from similar issues. In fact, the problem of misgovernance and fraud are more in smaller co-operative banks since these entities are largely run by local politicians. Often, these banks don’t follow processes and engage in dubious transactions.

In rural areas, there are three types of cooperative banks--primary credit co-operative banks, district-level cooperative banks and state-level cooperative banks. As on March-end 2017, there were about 33 state co-operative banks with Rs 1.2 lakh crore deposits and 370 district central co-operative banks (Rs 3.3 lakh crore deposits) and 95,595 Primary Agricultural Credit Societies (Rs 1.15 lakh crore deposits).

It is critical that these banks too are brought under tight regulations to bring order in the sector.
First Published on Jun 24, 2020 05:01 pm
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