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Banking Regulation (Amendment) Ordinance, 2020 - Co-operative Banks

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July 04, 2020

Why in news?

  • The Centre recently passed the Banking Regulation (Amendment) Ordinance, 2020.
  • It gives the RBI more regulatory powers over urban co-operative banks (UCBs) and multi-State co-operative societies.

What does the amendment mean in practice?

  • The Ordinance amends the Banking Regulation Act, 1949 as applicable to cooperative banks.
  • With respect to UCBs and multi-State co-operative societies, the RBI will now have powers to -
    1. supersede boards
    2. restructure managements
    3. formulate resolution plans
  • The change will subject 1,544 co-operative banks to greater RBI supervision.
  • It will also partly address the problem of dual regulation by registrars of co-operative societies.
  • Notably, the dual regulation is often cited as the reason for the string of co-operative bank failures.
  • The Centre has expressed hope that this decision would reassure the 8.6 crore depositors in these banks about the safety of their money.

What are the concerns though?

  • RBI - The RBI already has enough responsibilities in monitoring regulatory compliance by the following under its watch:
  1. 86 scheduled commercial banks
  2. 10 small finance banks
  3. 53 regional rural banks
  4. thousands of NBFCs
  5. housing finance companies (recently been added)
  • So, the addition of over 1,500 new constituents is unlikely to make its task easier.
  • Role of UCBs - The UCBs were originally conceptualised to further financial inclusion.
  • But it is questionable if the UCBs are faithfully fulfilling this mandate.
  • A 2014 study in this regard shed some light.
  • It finds that smaller, unscheduled UCBs were indeed focussed on sub-Rs.10-lakh loans
  • The larger scheduled UCBs actually make up for the bulk of the deposit and asset base of the co-operative banking sector.
  • But these have stayed quite far from their original mandates.
  • These were actively vying with commercial banks in extending non-priority sector loans to commercial borrowers.
  • In the process, they have availed themselves of numerous regulatory concessions.
  • UCBs do cater to smaller depositors ignored by commercial banks.
  • But the failure of players such as PMC Bank shows that their lax lending practices can put depositors’ money at risk.
  • Approach - Banking correspondents, Mudra loans and Jan Dhan accounts, apart from microfinance NBFCs and small finance banks are active in the banking landscape.
  • Given this, the UCBs seem less relevant.
  • There are better alternatives to balance macro financial inclusion objectives with depositor interests.
  • It is perhaps for this reason that the RBI has refrained from granting new UCB licences in recent years.

How has RBI dealt with it?

  • RBI has tried to implement the recommendations that UCBs be actively encouraged to convert into small finance banks.
  • By doing so, the regulatory arbitrage can be bridged.
  • Since the PMC Bank failure, the RBI has ushered in several new rules to tighten governance structures at UCBs.
  • It has sought more disclosures of loan books and constituted new boards of management.
  • However, given the deep-rooted issues at many UCBs, it is doubtful if they will be able to manage the transition.

 

Source: BusinessLine

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