The Reserve Bank of India (RBI), the country’s central banking institution, has recently been in the news for imposing penalties worth Rs 73.06 crore in 48 cases involving banks for noncompliance since January 2020. This action is taken under the provision of Section 35 A of the Banking Regulation Act, 1949, which empowers the RBI to penalize banks for violations. However, the functioning of RBI has raised several concerns, especially regarding transparency and lack of appeal mechanisms.
Issues with RBI’s Orders
One of the primary concerns arising from RBI’s orders is a lack of information access. Unlike other financial regulators, the RBI provides details only to the entity being penalised. As a result, customers and investors are often left in the dark about the non-compliance details of RBI directions by banks.
Furthermore, RBI does not provide an opportunity for the penalised party to present its side of the issue. This practice contrasts with the penalty orders passed by the Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDAI), where concerned parties are given the opportunity to offer explanations before action is taken.
Lack of Appeal Mechanism
Unlike SEBI, the RBI does not have an appellate body to challenge its orders. The absence of an appeal mechanism prevents the orders from being challenged on merit, allowing RBI to pass orders without detailed explanations or reasons. However, aggrieved bank customers can raise disputes through the Banking Ombudsman system.
RBI’s Arguments
RBI counters these concerns by stating that their orders usually reference certain regulation clauses or sub-clauses that have been violated, eliminating the need for further elaboration. Moreover, it argues against making all details public to avoid unnecessary fear and potential loss of confidence in the banks.
Understanding the Banking Regulation Act, 1949
The Banking Regulation Act, 1949, serves as a regulatory framework for banking firms in India. It empowers RBI to issue licences to commercial banks, control shareholders’ rights, supervise board and management appointments, regulate bank operations, and impose penalties if necessary. The government recently amended this act to include all cooperative banks under RBI’s supervision to protect depositor interests.
The Way Forward
According to governance and policy experts, an appellate authority similar to SEBI would be beneficial in challenging RBI orders. Additionally, keeping stakeholders informed of any non-compliance issues is of utmost importance. Detailed orders from RBI can increase the scope for interpretation and, if analysed correctly, can boost confidence in the banking system.
About Co-operative Banks
Cooperative banks are financial entities owned by their members, who also serve as their customers. These banks are established by state laws and are regulated by the RBI under the Banking Regulation Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955. Their primary aim is to fund agriculture and allied activities and finance village and cottage industries. The National Bank for Agriculture and Rural Development (NABARD) serves as the apex body for cooperative banks in India.
Urban Cooperative Banks (UCB)
UCBs are regulated by State Registrars of Co-operative Societies (RCS) for single-state operations and Central Registrar of Co-operative Societies (CRCS) for multi-state operations, and supervised by the RBI. They are authorised to issue equity shares and preference shares. In 1966, an amendment to the Banking Regulation Act, 1949, brought them under the purview of the RBI which augmented their capital through issuance of equity shares, preference shares and debt instruments.