Banking Regulation (Amendment) Bill, 2020

The regulated banking sector, regional rural financial institutions, small financing banks, and cooperative banks make up India’s banking system. Cooperative banks offer banking services to those with little financial resources, therefore achieving the goal of financial inclusiveness. Since around 2015, approximately 90% of cooperative bank loans were for much less than Rs 5 lakh, equivalent to 33% of mere financial by these institutions. Co-operative banks are cooperative organisations with banking as their primary activity. These organisations are owned, marketed, managed, and administered by their members to assist them.

Highlights of bill

• Several requirements of the Banking Act of 1949 do not apply to cooperative banks. A few of these rules are applied under the Bill, rendering their supervision under the Act identical to commercial banks.
• Subject to prior RBI permission, cooperative banks may issue public equity or unsecured loan capital.
• The RBI may impose criteria and requirements for chairmanships of cooperative banks. The RBI can dismiss a Chairman who does not fulfil the ‘lawful’ criterion and designate a qualified replacement. It may provide orders to rebuild the Board of Directors to secure that there are enough suitable individuals in the group.
• After consulting with the state legislature, the RBI may replace a cooperative bank’s board members.
• The Bill permits the RBI to rebuild or amalgamate a bank without having to impose a moratorium.

Major Issues

Cooperative banks offer banking services to those with limited financial resources. However, the lack of regulatory control by the RBI on par with commercial banks has led to cooperative banks’ poor performance. The bill aims to broaden RBI’s control of co-operative banks in terms of management, capital, auditing, and winding up. Within the Constitution, ‘banking’ is a Union List topic, and ‘integration, administration, and tying up’ of co-operative organisations’ is a States List issue. The issue is whether administration, audits, capital, and closing down of cooperative banks are necessary to regulate banking activities, and hence whether the Bill fits within Parliament’s legislative authority. The bill allows cooperative banks to offer shareholdings to users and anyone who lives in its service region. It’s uncertain what it implies to collect equity funds from the market because cooperative organisations raise money from their members. Furthermore, constraints on members’ ability to redeem their share capital can restrict their departure options.

Context

The Banking Regulation (Amendment) Bill, 2020 modifies the BR Act to provide the RBI more regulatory authority for co-operative banks in terms of management, capitalisation, audit, & liquidation. On Sept 14, 2020, the Bill was introduced in Lok Sabha. The Finance Minister emphasised the necessity for the Bill to safeguard depositors’ interests while proposing it, using the crisis there at Punjab and Maharashtra Co-operative (PMC) Bank as an example. The Banking Regulation (Amendment) Act, 2020, was proclaimed on June 26, 2020, and the Bill is replacing it. On March 3, 2020, a bill that sought to make similar modifications was presented, but it was dropped on September 14.

The Bill proposes two changes: it extends previously excluded elements of the BR Act to cooperative banks, and it amends some parts of the Act which pertain to all banks.

Cooperative Banks get four major changes:

• Management credentials are prescribed
• The Board of Directors is in session
• Auditing and closing
• Sale of securities and shares

Parliament’s legislative authority

The Bill expands the RBI’s supervision of co-operative banks in terms of management, capital, audit and tying up. The issue would be whether Parliament seems to have the authority to regulate cooperative banks in these areas. These organisations are incorporated as co-operative societies under various government Co-operative Societies Laws and engage in banking activities.

Under entry 45 of the Union List inside the Constitution’s Seventh Schedule, Parliament can act on ‘banking.’ entry 32 of something like the State List deals with the ‘capital, audit and liquidation of co-operative organisations. Furthermore, Article 43 of the Union List exempts matters relating to the incorporation, regulation, and closing down of cooperative societies from Parliament’s jurisdiction.

Conclusion

On March 3, 2020, the Finance minister, Ms Nirmala Sitharaman, presented the Banking Regulation (Amendment) Bill, 2020. The Bill was introduced in Lok Sabha. In the case of cooperative banks, the Bill proposes to alter the Banking Regulation Act of 1949. The Act governs co-operative banks in terms of management, licensing and operations.

The Bill clarifies that the Act does not apply to primary agricultural credit unions or cooperative societies whose core business is long-term agricultural development finance. Furthermore, these groups are prohibited from using the words ‘bank,’ ‘banker,’ or ‘banking’ in their names or in conjunction with their businesses and acting as a clearinghouse for checks.