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Explainer| Why Kerala is upset with the RBI on regulation of cooperative banks

The banking regulator has been tightening rules on such lenders. It has cancelled the permits of at least six cooperative banks and issued over 200 directives against wrongdoers. Now a fresh rule issued on cooperative societies has stirred a controversy.

November 30, 2021 / 05:30 PM IST
Kerala Legislative Assembly

Kerala Legislative Assembly

On November 22, the Reserve Bank of India (RBI) issued a circular that warned cooperative societies about using the word ‘bank’ in their names and accepting deposits from non-members. “It has come to the notice of the RBI that some Co-operative Societies are using the word ‘Bank’ in their names in violation of Section 7 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) (the BR Act, 1949),” the notice RBI said.

The banking regulator noted that some cooperative societies are accepting deposits from non-members/ nominal members/ associate members which is tantamount to conducting banking business in violation of the provisions of the BR Act. “Such societies have neither been issued any licence under BR Act, 1949, nor are they authorized by the RBI for doing banking business. The insurance cover from Deposit Insurance and Credit Guarantee Corporation (DICGC) is also not available for deposits placed with these societies,” the RBI said. “Members of the public are advised to exercise caution and carry out due diligence of such co-operative societies if they claim to be a bank, and look for banking licence issued by the RBI before dealing with them.”

The warning message and its tone haven’t gone down quite well with some states, particularly Kerala. The state’s Left-led government has publicly said it is consulting legal experts to challenge the RBI stance. According to local reports, the Kerala government plans to move the Supreme Court against the RBI directive arguing that such stringent regulations will impact the functioning of cooperative societies in the state. Kerala minister for cooperation V.N. Vasavan also said his government would consult with other states that are likely to be affected by the new rules.

Why is Kerala upset?

The Kerala government has alleged that strict regulations proposed by the RBI will affect the cooperative sector in the state. The state also alleged that the central government was trying to overcome the two favourable orders passed by the Supreme Court in favour of the cooperative sector. In July 2021, the apex court struck down parts of a constitutional amendment that diminished the exclusive authority of states over cooperative societies. The state is also planning to write to the RBI to highlight the potential impact of the new rules on local cooperatives.


On its part, the RBI has over the years been tightening regulations governing cooperative banks, having cancelled the licences of at least six of them and issuing over 200 directives. In 2020, the RBI had unleashed a big clampdown on cooperative banks and in the recent past, cancelled the licences of four cooperative banks: Vasantdada Nagari Sahakari Bank, Karad Janata Sahakari Bank, CKP Co-operative Bank and the Mapusa Urban Co-operative Bank of Goa.

What are the core problems in the cooperative sector?

Enough has been written about the plight of cooperative banks. Poor governance, light-touch regulation, local political intervention and a change in the composition of the banking industry leading to tight competition are all factors impacting the cooperative banking industry.

State governments (through the registrar of cooperative societies) continue to control the smaller cooperative banks while the RBI too oversees the operations of such institutions. This dual regulation has caused confusion in the past. Following the Punjab and Maharashtra Co-operative Bank episode, where the banking regulator had to step in and impose restrictions on its operations, urban cooperative banks, which are the bigger entities, have got some regulatory attention with the RBI getting more powers to govern them. But the issue of dual regulation with respect to smaller cooperative banks still persists.

Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: Nov 30, 2021 05:30 pm
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