5-Feb-2020: Cooperative banks to come under Reserve Bank regulation
The Union Cabinet has approved amendments to the Banking Regulation Act to bring 1,540 cooperative banks under the Reserve Bank of India (RBI) regulation.
Cooperative banks have 8.6 lakh account holders, with a total deposit of about Rs. 5 lakh crore. The proposed amendments, along with the government’s decision to increase the insurance cover on bank deposits from Rs. 1 lakh to Rs. 5 lakh, have been brought to strengthen the financial stability of cooperative banks and boost public confidence in the banking system.
The administrative matters would continue to be under the Registrar, of the Cooperative Bank. However, cooperative banks would be regulated under the RBI’s banking guidelines. Their auditing would also be done as per RBI norms.
Qualifications would be laid down for appointments, including that of Chief Executive Officers. Prior permission from the RBI would be required for the appointment of key positions.
RBI would deal with issues such as loan waivers. The RBI would also have powers to supersede the board of any cooperative bank in financial distress.
The amendments come in the wake of the recent Punjab & Maharashtra Cooperative (PMC) Bank crisis. In the PMC Bank case, the RBI had to step in after massive irregularities in its loan accounts were detected. The bank had allegedly loaned about 6,500 crores to the Housing Development & Infrastructure Limited, amounting to more than 73% of its overall exposure, which was not repaid.
It is alleged that over 21,000 fake accounts were created to conceal the bad loans. The regulator had to place a withdrawal limit for account holders, which led to major public strife and protests by them.
25-Jun-2018: RBI releases draft guidelines on constituting Board of Management in Primary (Urban) Cooperative Banks
The Reserve Bank of India today released draft guidelines on constituting Board of Management (BoM) for Primary (Urban) Cooperative Banks (UCBs). The guidelines propose that UCBs may constitute a BoM, in addition to the Board of Directors (BoD).
It may be recalled that the Expert Committee on licensing of new Urban Cooperative Banks (2010) set up under the chairmanship of Shri Y.H. Malegam had recommended, inter alia, that a BoM be constituted in every UCB, in addition to the BoD which was reiterated by the High Powered Committee on Urban Cooperative Banks (Chairman: Shri R. Gandhi) constituted in January 2015.
Under the present legal framework, the Board of Directors of a UCB performs both the executive and the supervisory roles and has the responsibility to oversee the functioning of the UCB as a co-operative society and as a bank. With a view to strengthening governance in UCBs, and as suggested during discussions with stakeholders, it is proposed to require UCBs to make a provision in their bye laws for setting up a BoM. The guidelines propose that regulatory approvals such as expansion of area of operation and opening of new branches may be allowed only for UCBs that have made such a provision in their bye laws.
6-Jun-2018: RBI allows urban cooperative banks to transition into Small Finance Banks
The Reserve Bank of India (RBI) has allowed for the voluntary transition of large multi-State urban cooperative banks (UCBs) into joint-stock companies. It has also allowed other UCBs that meet certain criteria to become Small Finance Banks (SFBs).
The High-Powered Committee on Urban Cooperative Banks (UCB), chaired by R Gandhi, the then Deputy Governor of Reserve Bank, had recommended the same in August 2015. Taking these recommendations into consideration, it has been decided to allow the voluntary transition of UCBs meeting the prescribed criteria into SFBs, said the central bank in its ‘Statement on Developmental and Regulatory Policies’.
The small finance banks are required to extend 75 per cent of their Adjusted Net Bank Credit (ANBC) to the priority sector lending (PSL).
Though UCBs were set-up as small banks offering banking services to people of small means belonging to the lower and middle classes, a well laid out transition path is required for at least the larger UCBs to convert themselves into universal/ niche commercial banks due to the changing financial landscape in the country and providing further growth opportunity to well managed UCBs.
The aspirations of large UCBs should be kept in check. The other key considerations are conflicts of interest, the decline in cooperativeness, regulatory arbitrage, limitations on raising capital, limited resolution powers of RBI, the capital structure of UCBs and opportunities for growth that will accrue after such conversions.
Co-operative banks (UCB) operate under a 'dual control' regime with supervision of both the RBI and the State Governments. The report highlighted that the weak resolution regime with respect to UCBs and non-availability of powers to the RBI to regulate and supervise UCBs at par with commercial banks restrains RBI from relaxing regulatory regimes, which in turn is a hurdle for UCB’s commercialisation.
The report had recommended that the growth of the sector has to be in a carefully calibrated manner, consistent with the legal framework and regulatory parameters and their limitations.