Politics vs governance

RBI's supervision of co-op banks gets a body blow

The Madhya Pradesh High Court’s decision to stay the Reserve Bank of India’s (RBI’s) circular that barred elected representatives from being appointed to the boards of urban co-operative banks (UCBs) may delay the shift towards better governance in these banks. This followed the order of the Gujarat High Court to strike down the said provisions, and it was also upheld by the Supreme Court. The RBI had on June 25 this year said that Members of Parliament, Assemblies, municipal corporations, municipalities, or other local bodies could not hold the corner-room post, or be a whole-time director on UCBs. This was to preclude political interference in these banks and the possible abuse of governance standards, which has extracted a heavy cost, the blowout at the Punjab and Maharashtra Urban Co-operative Bank being the latest to hit the headlines.

The central bank in recent years is trying to cut down the room for regulatory arbitrage for all manner of regulated entities. The amendment to the Banking Regulation Act, notified on September 29, 2020, was to give more muscle to the banking regulator for the oversight of UCBs. For instance, the RBI’s stance that persons engaged in any other business or vocation; directors of companies (except non-profit ones); and partners of firms that carry on any trade, business or industry, having a substantial interest in any company or working as director, manager, managing agent, partner or proprietor of any trading, commercial or industrial concern will not be eligible to be on the board of a UCB. This is not new and is part of the Banking Regulation Act, 1949. So too, that a whole-time director shall not be below 35 and above 70 at any time during their terms in office. As for the restriction on the tenure of managing directors and whole-time director at not more than 15 years at UCBs, this was to align the norms with those of private banks.
 

It is pertinent to recall the observation in the recent report of the Expert Committee on UCBs that one of the major concerns with these banks is poor governance. Prior to the recent legislative changes, the RBI did not have any powers with respect to board composition and executive appointment. Now that there is parity in this regard with commercial banks, the compliance with fit-and-proper requirements should be a sine qua non for any regulatory authorisation, particularly for the large UCBs. And that concurrently steps should be taken to enhance the skill sets of the board members through specially curated training programmes.

Given the frayed relations between the Centre and a few state governments of late, the freshly minted governance norms were expected to cause friction. The states have held the view that some of the RBI’s moves were in conflict with the provisions of State Co-operative Societies Act, and that the powers bestowed on the RBI to deal with matters pertaining to the issuance and refund of share capital, appointment, or disqualification of directors, constitution of the board of management, appointment of CEOs, and audit obligations were excessive in nature. It is, indeed, in the realm of possibility that more petitions may be filed in courts. The casualty of this will be a much longer path in their rehabilitation at a time when digital banking has arrived in a big way, calling for fresh banking strategies, not to mention the urgent need to infuse capital into these banks.