The passage of the bill to amend the Banking Regulations Act will enhance the Reserve Bank of India’s power to supervise co-operative banks to protect the interests of depositors and strengthen banking entities.
The government introduced the Bill in Lok Sabha replacing the ordinance, promulgated on June 26, 2020, in the current monsoon session. The Lower House of Parliament (Lok Sabha) passed the bill on Wednesday and it will become a law after the President signs it and it is notified.
The banking regulator has already started working on increasing the oversight of urban co-operative banks (UCBs).
Co-operative banks are exempt from several provisions of the Banking Regulation Act, 1949. The Bill applies some of these provisions to them, making their regulation under the Act similar to that of commercial banks.
The Bill intends to empower co-operative banks to raise equity or unsecured debt capital from the public subject to prior RBI approval.
The Bill also empowers the RBI to prescribe conditions on and qualifications for employment of chairman of co-operative banks. The RBI may remove a chairman not meeting ‘fit and proper’ criteria and appoint a suitable person.
RBI may supersede the Board of Directors of a co-operative bank after consultation with the state government.
The Bill allows RBI to undertake reconstruction or amalgamation of a bank without imposing a moratorium.
According to RBI's annual report for 2019-20, the Supervisory Action Framework (SAF) was reviewed and UCBs now have to report large exposures to Central Repository of Information on Large Credits (CRILC). The commercial banks already feed information on large corporate exposures to CRILC.
In order to improve the functioning of UCBs, the RBI has issued guidelines on constituting a Board of Management (BoM) and developing a Central Fraud Registry (CFR) as well as a comprehensive cyber security framework for UCBs.
The banking regulator has also initiated steps to establish the umbrella organisation for UCBs.
A major policy drive undertaken during the year was towards the amalgamation and consolidation of cooperative banks.
The Financial Stability Report (July 2020) said the performance of scheduled urban co-operative banks (SUCBs) broadly remained stable between September 2019 and March 2020. At the system level, the Capital Adequacy Ratio (CAR) of SUCBs remained at 9.8 per cent for both the quarters.
Their gross non-performing assets declined from 10.5 per cent of gross loans and advances to 9.9 per cent and their provision coverage ratio (PCR) increased from 40.9 per cent to 61.4 per cent over this period. SUCBs’ Return on Assets (RoA) improved, but remained in negative territory in March 2020 at -1.8 per cent as against -3.6 per cent observed in September 2019.