In recent news, the Central government has sanctioned an Ordinance to place all urban and multi-state co-operative banks directly under the governance of the Reserve Bank of India (RBI). This significant shift is aimed at tightening the regulatory controls on these financial institutions.
Motivation Behind the Decision
This move from the Central Government was prompted by a series of frauds and severe financial irregularities, highlighted by the infamous scam at the Punjab and Maharashtra Co-operative (PMC) Bank in 2019. Previously, all co-operative banks were dual regulated by the RBI and the Registrar of Co-operative Societies, resulting in regulatory and supervisory lapses at many banks. Now, the urban and multi-state co-operative banks will be under the direct supervision of the RBI.
Benefits of the New System
With the implementation of this change, the RBI will be empowered to regulate urban and multi-state co-operative banks in the same way as commercial banks. This change comes after the Supreme Court’s declaration that co-operative banks fall within the definition of ‘Banks’ under the Banking Regulation Act, 1949 for the purposes of the Sarfaesi Act, 2002. The Sarfaesi Act is a robust tool for recovery of bad loans or Non-Performing Assets (NPAs), thereby providing more security to depositors.
Presently, in India, there are 1482 urban co-operatives banks and 58 multi-state co-operative banks. These institutions have a depositor base of 8.6 crores, amassing a savings total of Rs. 4.84 lakh crore.
The Challenges Posed by Rural Co-operative Banks
Despite the changes, rural co-operative banks will continue to operate under dual regulation from RBI and Registrar of Co-operative Societies. These banks face the exact challenges as their urban counterparts, including issues of misgovernance and fraud.
The Nature of Co-operative Banking
Co-operative banks are unique financial entities. They are owned and operated by their members, who are simultaneously the bank’s customers. Unlike commercial banks, they are divided into Urban and Rural co-operative banks based on their geographical area of operation.
These banks are registered under their respective State’s Co-operative Societies Act or the Multi-State Co-operative Societies Act, 2002. They are also governed by the Banking Regulations Act, 1949 and the Banking Laws (Co-operative Societies) Act, 1955.
Features of Co-operative Banks
A distinctiveness of co-operative banks is that they are customer-owned. That is, the members are both the owners and the customers. These banks are democratically controlled by their members, who elect a board of directors.
Furthermore, a significant portion of annual profit or surplus is distributed as reserves. A part of this profit can also be allocated to the co-operative members, within legal and statutory limits. Another attribute of cooperative banks is their contributions towards financial inclusion, especially among unbanked rural populations, as they provide affordable credit to these communities.