New era of civic co-operative banks!

 

The Banking Regulation (Amendment) Bill, 2020 was recently passed by both the Houses of Parliament on the issue of regulation of civic co-operative banks by the Reserve Bank. At present, along with the Reserve Bank, the co-operative departments of the states or the central co-operative department have control over the multinational co-operative banks. After the Madhavpura Co-operative Bank scam in Gujarat, the RBI took a hard line on civic co-operative banks, which has prevented any new co-operative bank from getting a license in the last 20 years. At the same time, in the years following the Madhavpura case, co-operative banks had to wait for new branch licenses, ATM approvals, scope of work and so on. The new bill has given the RBI the necessary leeway to control the co-operative banks.

 

Commenting on the bill, Finance Minister Nirmala Sitharaman said in Parliament, "This will enable the RBI to take full control of troubled banks and protect the interests of depositors." In fact, it is in the interest of the depositors that a new era of empowerment of the co-operative banking sector is beginning. Understanding the facts of this matter, this law should be welcomed by all.

 

 

In 1966, the Banking Regulation Act came into force for civil co-operative banks. It has been 55 years. In the early days, the scope, status and expansion of co-operative banks was not large, so the provisions that were imposed on all banks were not applied to co-operative banks. About 20 years ago, in the year 2000, the share of co-operative banking in the total banking sector in India was around seven to eight per cent. In the aftermath of Madhavpura case, the number of public sector banks increased, new private banks were set up, foreign banks were also added, small finance banks were set up, but new co-operative banks could not be set up. During this period, the development of co-operative banks also slowed down. The licenses of the new banks have not been obtained, so the share of co-operative banking is around three per cent today. At present the country is in dire need of small and local co-operative banks,

 

However, today, out of 750 districts in the country, more than 400 districts do not have a single co-operative bank. Despite the fact that the co-operative banking movement has a long tradition of more than a hundred years, the main reason why this sector has not grown is because of the limited control of the RBI over co-operative banks. She has fully benefited from this new law.

 

According to a report published by the Reserve Bank of India, as of March 2019, the total turnover of 1,544 co-operative banks across the country is around Rs 10 lakh crore. Maharashtra, Gujarat, Karnataka and Tamil Nadu have the highest number of co-operative banks at 1,107. The remaining states have 437 civic banks. Among the co-operative banks, A and B class banks have about 85 per cent business, while their net NPA is less than three per cent. About 95 per cent of the civic banks have a capital adequacy ratio (CRAR) of more than nine per cent, which is what the RBI expects. This is why the credibility of the civic banks, which meet all the financial criteria of soundness and efficiency, has been maintained. Experts predict that the overall condition of co-operative banking will be satisfactory by the end of March 2020.

 

Risk management requires equity and equity. It can now be raised in the open market as well. It is now possible for co-operative banks to raise capital through shares and bonds. Of course, banks are not forced to raise capital through this medium, they want to make their own decisions. The share capital raised from the sale of shares will be eligible for voting like the general members and hence the principle of 'one share one person (member)' will be maintained. The RBI has the necessary powers to do so and the RBI is controlling the voting in private banks.

 

At the same time, those who want to leave the membership will be allowed to transfer their share capital. The Reserve Bank will certainly give appropriate permission on the limit of authorized share capital, actual recovered share capital and the condition of the bank and the present procedure for the same will remain the same. One thing is for sure, banks will be able to do so only if the capital position is strong and the RBI will not consider privatization.

 

The bank needs to have a board of directors with professional quality, experience and expertise, taking into account the risks. The law stipulates that at least 50 per cent of the board of directors should be experts and experienced. However, the bill will not remove any reservations from the board of directors. There will be no need for an independent management board as it is managed by professional and experienced expert directors. The bill empowers the Reserve Bank to remove ineligible directors or such ineligible boards. The newly appointed Chief Executive Officer, however, will no longer have to be appointed as per the rules of the Reserve Bank. At the same time, the auditor is to be appointed from a panel appointed by the Reserve Bank, and only after obtaining prior approval from the General Body.

 

The Bill does not remove the powers of the Registrar of Co-operatives of the State Government. However, the RBI will now be able to decide whether to restructure the co-operative banks or merge them with other competent co-operative banks. One thing to keep in mind is that co-operation is on the state list in the constitution, while banking is on the center list. That is why the Supreme Court decision has enacted the Surface Act, which is effective for recovery of co-operative banks. Therefore, this new bill has not trampled on the situation anywhere, on the contrary, it has opened the door for development to the co-operative banks. Basically, the law regulating banking is a special law applicable only to banks and the co-operative laws of the states are general laws. Therefore, nowhere is the co-operation laws of the states being attacked. This new phase should be welcomed for the development of the civic co-operative banking sector.

 

(The author is a founding member of Sahakar Bharati.)