Rajya Sabha passes Banking Amendment Bill 2020 bringing cooperative banks under RBI's umbrella

Banking (Amendment) Bill 2020 passed in Rajya Sabha BCCL
  • The Banking (Amendment) Bill 2020 has been passed in Rajya Sabha.
  • In her reply, Finance Minister Sitharaman highlighted that the bill is to protect the interest of depositors.
  • According to her, with the bill becoming law, cooperative banks can avail a quick recovery without depending on the moratorium.
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The Banking Regulation (Amendment) Bill, 2020 has been passed in Rajya Sabha after clearing Lok Sabha earlier this week. It was introduced earlier this year in March by Finance Minister Nirmala Sitharaman to avoid another Punjab and Maharashtra Co-operative Bank (PMC)-like crisis.

"During the COVID period, many cooperative banks have come under stress. 277 urban cooperative banks are reporting losses, 105 are unable to meet minimum regulatory capital requirement," said Sitharaman in her response.

According to her, not only will the new bill protect the interest of depositors but also give cooperative banks the opportunity to recover without having to depend on moratoriums.

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Mahesh Poddar of the Bharatiya Janata Party (BJP) kicked things off in support of the bill followed by Sujeet Kumar of Bharatiya Janata Dal (BJD). “ Bill is in alignment with the principle of encouraging ease of doing business and it reduces the burden on the courts and supports the Bill,” said Kumar.

Getting the Banking (Amendment) Bill 2020 from Lok Sabha to Rajya Sabha
Sitharaman responded to queries raised by 32 MPs during the Lok Sabha session. "Consultation with States is required only when legislating on concurrent list items, but this Bill is under the union legislative power. So consultation is not necessary," she said.

The Finance Minister highlighted that over the past 20 years, 430 cooperative banks were de-licenced and were forced to liquidate. In comparison, not a single commercial bank under the Banking Regulation Act has gone into liquidation during the same time frame.

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Parts of it were already passed as an ordinance amidst the COVID-19 crisis by President Ram Nath Kovind. The bill amends the Banking Regulation Act of 1949, which regulates the functioning of banks and provides details on various aspects such as licensing, management, and operations of banks.

The bill was 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.

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.

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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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