Apart from the regulatory changes related to co-operative banks, one of the key changes the Ordinance makes in the existing law, the Banking Regulation Act, 1949, is to allow the RBI to frame a reconstruction or amalgamation scheme for all banks “even without making an order of moratorium, so as to avoid disruption of the financial system”, a press statement issued by the finance ministry on Saturday said.
The RBI has to impose restrictions on lending and withdrawal activities before it can frame a revival scheme for commercial and co-operative banks, according to the previous law.
In March, the RBI had imposed a two-week moratorium on private lender YES Bank, restricting withdrawals to Rs 50,000 per depositor, while simultaneously appointing an administrator and framing a revival plan for the bank with the help of the central government. This created panic among the depositors, who rushed to withdraw their money, as the moratorium was perceived by them as a sign that their money was not safe. A similar situation arose in all other cases where the RBI imposed a moratorium in the past.
The Ordinance also empowers the RBI to frame an enforceable reconstruction scheme for co-operative banks, just like it does in the case of commercial banks (like YES Bank). It further allows the RBI to frame governance norms for the co-operative banks akin to all commercial banks.
“The Ordinance seeks to protect the interests of depositors and strengthen co-operative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to co-operative banks as well as for sound banking regulation, and by ensuring professionalism and enabling their access to capital,” the press statement said.
The amendments, however, will not apply to primary agricultural credit societies (PACS), or co-operative societies, whose primary object and principal business is long-term finance for agricultural development, and which do not use the word “bank” or “banker” or “banking” in their name.
The RBI had in September 2019 started imposing restrictions on Punjab and Maharashtra Cooperative (PMC) Bank after it discovered financial irregularities, hiding and misreporting of loans given to one loan account belonging to real estate developer HDIL. The restrictions will continue to remain in place till December 2020, though the regulator has been relaxing it from time-to-time depending upon the financial position of the urban co-operative bank.
For now, the RBI has superseded PMC Bank’s board and appointed an administrator, while barring the bank from lending and accepting fresh deposits.