The Ordinance confers more power and control to the RBI over the co-operative societies, thereby ensuring strict monitoring of funds and increasing accountability.

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Money Banking Friday, July 03, 2020 - 18:16

The Banking Regulation (Amendment) Ordinance, 2020 was promulgated by the President of India on June 26, 2020 with the intent of bringing all urban co-operative banks and multi-state co-operative banks under the supervision of the Reserve Bank of India (RBI). The aim is to improve governance and oversight in respect of such banks, so as to protect the interest of depositors.

Until the Ordinance came into being, the scenario in India was such that co-operative banks were registered either under the relevant State Co-operative Societies Acts or under the Multi State Co-operative Societies Act, 2002. These societies were largely regulated by and continue to be regulated and supervised by the Registrar of Co-operative Societies or by the Central Registrar of Co-operative Societies, as applicable.

Co-operative banks were eventually brought under the regulatory ambit of the RBI. In March 1966, co-operative banks with a paid-up share capital and reserve of Rs 1 Lakh and above were brought under the purview of the Banking Regulation Act, 1949 and therefore within the ambit of the Reserve Bank’s supervision. Alongside this, the Banking Laws (Application to Co-operative Societies) Act, 1965 were enacted to further amend the Reserve Bank of India Act, 1934 and the Banking Regulation Act, with a specific purpose of regulating banking businesses of certain co-operative societies and for matters connected therewith.

Owing to the above move, a fresh issue of dual regulation of such banks arose. The legislations in place pre-Ordinance did not place co-operative banks on par with developments in the banking sector while bearing in mind the ever-improving management and regulation of the banking sector (other than the co-operative banking sector) at large.

Due to several scams in co-operative banks coming to light, several customers were posed with the issue of withdrawing their money from such banks. One such instance involved the RBI placing a curb on the Punjab and Maharashtra Co-operative Bank, in September 2019 owing to financial irregularities and misreporting of loans given by the bank. A similar curb was then placed on the People’s Co-operative Bank of Kanpur. Post the above events, the Banking Regulation (Amendment) Bill, 2020 was introduced in the Lok Sabha on March 3, 2020, with the primary object of the Bill being the enforcement of banking regulation guidelines of the Reserve Bank of India on co-operative banks. The Bill is currently pending approval.

With growing issues around co-operative banks and constantly developing practises in the regular banking sector, the Ordinance is an attempt to address the requirement of the hour of strengthening cooperative banks by increasing professionalism, improving governance, enabling access to capital as well as ensuring effective banking practises through the RBI. It is relevant to note however that the Ordinance does not affect any of the existing powers of the State Registrars of Co-operative Societies or the Central Registrar of Co-operative Societies.

The Ordinance

In the introduction to the Ordinance, it is stated that the Banking Regulation (Amendment) Bill, 2020 had been introduced and could not be taken up for further consideration by the Lok Sabha and that circumstances warranted the promulgation of the Ordinance. The reason behind the Ordinance appears to secure about Rs 4.84 lakh crore, being held by co-operative banks across the country, with more than 8.6 crore depositors, particularly during the pandemic situation.

The Ordinance does not apply to primary agricultural credit societies or co-operative societies whose primary object and principal business is providing of long-term finance for agricultural development, notwithstanding anything contained in the National Bank for Agriculture and Rural Development Act, 1981. It is further stated that these societies must not use the words “banks” or “banking” in their name or in connection with their business and not act as an entity to clear cheques.

The Ordinance brings 1,482 Urban Co-operative Banks and 58 Multi State Co-operative Banks under the supervision of the RBI. In other words, the RBI can regulate cooperative banks in the same manner as scheduled banks across the country.

Reconstruction of co-operative banks

The Ordinance has amended Section 45 of the Act, to enable making of a scheme of ‘reconstruction’ or amalgamation of a banking company to protect the interest of the public, depositors, and the banking system. The amended Section 45(4) empowers the RBI to prepare a scheme for reconstruction or amalgamation during the period of moratorium ‘or at any other time’.

Co-operative Societies

In Part V of the Act, which deals with the applicability of the Act to co-operative societies, the applicability of Section 56 has been amended to state that the amended Act shall apply to co-operative societies (with modifications), notwithstanding any other law for the time being in force.

Issuance of shares/debentures

Under Section 12 of the amended Act, a co-operative bank may cause public issue or private placement of equity, preference or special shares on face value. It may issue unsecured debentures or bonds with maturity of ten years or more. The above actions shall be subject to the prior approval of RBI. Section 12(2) has been amended to state that no person shall be entitled to demand payment towards surrender of shares issued by a co-operative bank. Further, the co-operative bank cannot withdraw or reduce share capital, without the sanction of the RBI.

Power to supersede

Under Section 36AAA of the amended Act, the RBI may supersede the Board of a co-operative Bank, for reasons to be recorded in writing, owing to protection of prevention of actions detrimental to the interest of the depositors.

Impact of the Ordinance

The Ordinance has introduced provisions seeking to protect the interest of depositors and strengthen co-operative banks by improving governance and oversight by enhancing the power of RBI with respect to co-operative banks to ensure safety of public money lying in the hands of the co-operative banks across the country.

The Ordinance confers more power and control to the RBI over the co-operative societies, thereby ensuring strict monitoring of handling of funds and increasing their accountability.

Overlapping jurisdiction: In view of the Ordinance, the Urban and Multi-State Cooperative Banks, apart from being governed by the respective Co-operative Societies Acts of the concerned States, will additionally come within the jurisdiction of the RBI. This appears to be a parallel or an overlapping jurisdiction and there is no identified dichotomy in their respective jurisdictions. However, the Ordinance is a welcome and requisite measure to secure the interest of depositors.

Views express are author's own

Karthik Jayakumar and Arvind Srevatsa are advocates practicing in the Madras High Court

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