Video Summary

[RSTV The Big Picture] The Banking Regulation (Amendment) Bill, 2020

The Bill comes in the backdrop of PMC Bank scam, seeks to strengthen cooperative banks by increasing professionalism, enabling access to capital, improving governance and ensuring sound banking through the RBI.
By IT's Video Summary Team
March 13, 2020

Contents

  • Introduction
  • Rationale
  • Co-operative banks
  • Need for the amendment
  • Provisions of the Bill
  • Actions expected in Future
  • Way Forward
  • Conclusion

The Banking Regulation (Amendment) Bill, 2020

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Introduction:

The Banking Regulation (Amendment) Bill, 2020 was introduced by the Finance Minister Nirmala Sitharaman in the Lok Sabha recently, to provide more powers to the RBI for regulating cooperative banks.

Rationale:

  • The amendment to the Banking Regulation Act, 1949 is aimedto bring multi-state co-operative banks under the watch of the Central bank (RBI) and prevent a repeat of Punjab and Maharashtra Cooperative Bank (PMC) like crisis.
  • The amendment aims to bring cooperative banks at par with the commercial banks and protect the interests of the depositor.

Co-operative banks:

  • Co-operative banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners.
  • The primary purpose of the cooperative banking has been to serve the people and fill in the void in the absence of formal banking sector in the past.
  • They are regulated by the Reserve Bank of India under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965 or theyare under dual control of Registrar of Cooperative Societies and Reserve Bank of India.
  • While the role of registrar of cooperative societies includes incorporation, registration, management, audit, supersession of board and liquidation, RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.

Need for the amendment:

  • There are 1,540 cooperative banks in India with a depositor base of 8.60 crore having total savings of about Rs 5 lakh crore.
  • Urban cooperative banks reported nearly 1,000 cases of fraud worth more than ₹220 crores in past five fiscal years.
  • The recent PMC bank crisis triggered the need for encompassing laws for better management and governance.
  • The major violations include major financial irregularities, failure of internal control and systems, and wrongdoing and under-reporting of its lending exposure.
  • Hence, the responsibility of the government increases to safeguard the rights of the depositors.

Provisions of the Bill:

  • The proposed law seeks to enforce banking regulation guidelines of the RBI in cooperative banks, while administrative issues will still be guided by Registrar of Cooperatives.
  • The cooperative banks would be audited according to RBI rules.
  •  The appointment of CEOs would require prior approval from the Central bank.
  • RBI can supersede management in case of liquidation or failure of any cooperative bank.
  • These measures would be implemented in a phased manner.
  • The amendments will apply to all urban co-operative banks and multi-state cooperative banks.
  • RBI got power to supersede the Board of Directors and supplement it with Board of Management with bringing professional experts.
  • The rationale is to increase professionalism and improve corporate governance, keeping in mind the recent PMC crisis and need for structural reforms in banks.

Actions expected in Future:

  • The RBI is expected to make provisions for minimum Capital requirement for Cooperative Banks or raising the capital by the means of both Equity and Debt instruments.
  • Prompt remedial action like merger or consolidation of cooperative banks to ensure better management and Audit by RBI.

Way Forward:

  • Capital infusion in the banks.
  • Strict licensing to the new cooperative banks.
  • Need for effective management, surveillance and governance.
  • Minimization of procedural error.
  • Technological advancement in regulation and supervisory technology.
  • Risk evaluation and intervention, regular inspection and audit.
  • Need to build investors’ trust by adopting transparent policies.

Conclusion:

The bill is the need of the hour to avoid a PMC Bank-like crisis in the future. It gives RBI more teeth to deal with management, operational and board level issues and minimizes state interference. The exercise is needed for the clean-up of the entire banking system of India and restore the trust of depositors and investors in the banking system.

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