All eyes on Parliament's Monsoon session — the Banking Regulation (Amendment) Bill 2020 gets introduced

Parliament's Monsoon session kicks off today, September 14BCCL

  • The Banking Regulation (Amendment) Bill 2020 was introduced on the first day of the Monsoon session of the Indian Parliament, which kicked off today.
  • The bill was met with opposition from Congress leader Shashi Tharoor and Saugata Roy of the Trinamool Congress.
  • Finance Minister Nirmala Sitharaman asserts that the new regulation, which bring cooperative banks under the umbrella of the Reserve Bank of India (RBI), would not affect state cooperative laws.
The Monsoon session of the Indian Parliament kicked off today and the Banking Regulation (Amendment) Bill, 2020 was introduced right off the bat.

As expected, it was met with opposition from Indian National Congress (INC) and the Trinamool Congress (TMC). INC's Shashi Tharoor argued that the new bill borders of 'federalism' while TMC's Saugata Roy asserted that it attacked the states' rights.

Finance Minister Nirmala Sitharaman, who originally introduced this bill earlier this year in to avoid another Punjab and Maharashtra Co-operative Bank (PMC)-like crisis, rejected these assertions. According to her, the banking bill will only hold cooperative banks to the same standards as scheduled commercial banks.
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Sitharaman clarified that the regulations would only apply to those cooperative institutions that used the terms, "bank, banker and banking" to protect the interest of the depositors.

She cited that 277 urban cooperative banks have reported losses during the COVID-19 pandemic so far.

Opposition was to be expected
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On Sunday, the party’s spokesperson Jairam Ramesh declared strong opposition to the Banking Regulation Ordinance. “Cooperative banks are part of the structure of cooperatives and ought to be regulated by the state government, not the central government,” he said.

The bill has been proposed as a tool, to strengthen the Indian banking system by giving the country’s apex banking institution, the Reserve Bank of India (RBI), more power over India’s 98,000-plus rural and urban cooperative banks.

“If the ordinance becomes law, all key financial intermediaries will come under the control of the central government, there will be more centralisation,” said Ramesh.

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According to Sitharaman, being under the RBI’s umbrella will fortify cooperative banks by increasing professionalism, enabling access to capital, improving governance, and ensuring sound banking through the RBI.

“It is the need of the hour to avoid a PMC Bank-like crisis in the future,” she said while introducing the bill in March.

Parts of it were passed as an ordinance amidst the COVID-19 crisis by President Ram Nath Kovind.

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Banking Regulation (Amendment) Bill, 2020: The proposal
The proposed law seeks to enforce the banking guidelines of the RBI on cooperative banks, while the administrative issues will still be guided by the Registrar of Cooperative Societies. It also proposed to bring cooperative banks at par with developments in the banking sector through better management and proper regulation to protect the interest of the depositors.

This means that the RBI reserves the right to supersede any decision made by the Board of Directors for up to five years under certain conditions where the public interest may supersede the bank’s requirements to protect the interest of depositors.

However, for cooperative banks that are also registered with the Registrar of Cooperative Societies of a state, the RBI will need to consult the state to supersede the board.

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If the new bill is passed, and President of India Ram Nath Kovind gives his approval, cooperative banks will also be able to issue equity shares, preference shares, and special shares to raise funds. Also, they can issue unsecured debentures, bonds, or other securities with a maturity of ten or more years to bring in more money.

Banking Regulation (Amendment) Bill, 2020: Exceptions
Since more powers will be passed on to the RBI, the apex banking institution will also have the provision to exempt certain banks — or class of banks — from the provisions in the bank. It can be anything from the qualifications of the board of directors to the appointment of the chairman.

The RBI can also outline the period for which these exemptions will apply and under which conditions.

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For now, the Banking Regulation (Amendment) Bill, 2020, won’t apply to certain cooperative societies like agriculture credit societies and cooperative land mortgage banks. The excluded entities are not allowed to use the words ‘bank’, ‘banker’, or ‘banking’ in their name or connection with their business.

President Kovind already approved the Banking Regulation (Amendment) Ordinance, 2020, on June 27, bringing all urban cooperative banks and multi-state cooperative banks under the supervision of the RBI.

The ordinance omits some provisions like restricting cooperative banks from making loans or advances on the security of its shares or keeping cooperative banks from opening a new place of business outside the city, town, or village where it’s located without the RBI’s permission.

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