Recent Ordinance on Cooperative Banks, amending the Banking Regulation (BR) Act, 1949, has given a ray of hope for all the stakeholders of cooperative banks, particularly Urban Cooperative Banks (UCBs) for their better future. The Ordinance, inter alia, enhances the powers of RBI to regulate and supervise cooperative banks; provides additional options to cooperative banks to augment the capital in the form of bonds, debentures, equity etc; equips the RBI to resort to the reconstruction of the failed cooperative banks through merger, amalgamation, etc; establishes a say to the RBI in deciding on the management including its supersession. The entire spirit of the Ordinance is to ensure the depositors’ interest and to infuse the professionalism into cooperative banks. In a way, the Ordinance is expected to be a shot in the arm for RBI to ensure not only depositors’ interest but also financial stability. It assumes significance in the background of failed Punjab and Maharashtra Cooperative (PMC) Bank whose resolution has been languishing for want of adequate regulatory powers of the RBI, in comparison to that of Yes Bank.
Regulation of UCBs – A historical perspective
This development takes us back to delve into the concerns which have been historically associated with the UCBs and have been engaging the minds, inter alia, of depositors, RBI and public at large. As known, UCBs are regulated on the one hand by RBI for the banking-related functions under the provisions of Section 56 of BR Act, 1949 (AACS) and on the other, by Registrar of Cooperatives of the respective state governments with regard to functions such as registration, management, audit, recovery, etc. In the case of Multi-State Co-operative Banks, the Central Registrar of the Co-operatives takes the role of Registrar of Cooperative Societies (RCS). The duality of control owes its origin to mid-1960s when the depositors of the then failed co-operative societies having banking functions clamoured for insurance coverage on par with the depositors of failed commercial banks. Since such societies were outside the purview of the RBI, it had preconditioned that such failed entities could be considered for Deposit Insurance And Credit Guarantee Corporation (DICGC) coverage if they were, forthwith, brought under the regulation of RBI. Accordingly, UCBs had begun to be statutorily required to abide by the provisions of newly amended Section 56 of BR Act (AACS) with effect from March 1, 1966, thereby leading to the duality of control by RBI and RCS / Central Registrar of Cooperative Societies (CRCS). It needs to be appreciated that the aforesaid provisions were substantially pruned and diluted vis-à-vis the provisions applicable to commercial banks under the BR Act. In hindsight, the new dispensation has proved to be too inadequate for the RBI to have an effective regulation leading to the maladies associated with UCBs.
Evolution of UCBsUCBs, which are the urban counterparts of the Rural Co-operative banks, have a chequered history. Having started as mutual cooperatives and transformed into UCBs did play, in the beginning, a useful role in providing banking services in unbanked areas in a cost-effective and easily accessible manner. Further, the recommendations of the RBI-instituted Marathe Committee (1992) heralded an extremely liberalised licencing policy of the RBI. The spirit of such liberal licencing was to abandon ‘One District One Bank’ so as to increase the banking access by removing the fetters on UCBs. This has led to mushrooming of UCBs in the country, however, with an extreme concentration in selected states such as Maharashtra, Gujarat, Karnataka, Andhra Pradesh, and Tamil Nadu. As per the last available data, there are 1544 UCBs of which 54 and 1490 banks are operating with scheduled and non-scheduled status respectively.
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