RBI to gain regulatory control over co-operative banks in a phased manner

The Union government will notify the recently-promulgated Ordinance to give more teeth to the Reserve Bank of India (RBI) over co-operative banks in a phased manner.

For now, the new Ordinance has been made effective from June 29 to cover multi-state co-operative banks, according to a notification issued by the finance ministry on Tuesday. However, a large majority of co-operative banks that operate only in one state, or state co-operative banks, will be covered under the new law from a later date, a top government official said, requesting anonymity.

“We will notify the new law for state co-operative banks from a later date which is being decided. But co-operative banks registered in multiple states will come under the purview of the new law immediately,” the official said.

President Ram Nath Kovind had approved the Banking Regulation (Amendment) Ordinance, 2020 on June 26 to give more powers to RBI to restructure co-operative banks, give it more say in the management and allow the regulator to frame a revival plan for such struggling lenders without putting restrictions on depositors.

Right now, the state laws regulated the incorporation, regulation and winding up of co-operating societies and the Registrar of Co-operative Societies appointed by the State governments act as the regulatory authority for them. But co-operatives in multiple states are governed by the Multi-State Co-operative Societies Act, 2002 under the Central government’s domain. Some of the banking-related functions came under the Reserve Bank of India which adopted a light-touch regulation for them. So while the multi-state co-operative banks will have to comply with tighter regulatory norms, akin to commercial banks, immediately, the state co-operative banks will take some time to come under the full regulatory purview.

The new Ordinance enables the RBI to get “control over management” of co-operative banks registered with a state government, too, apart from multi-state co-operative banks. The amendments made by the government, however, do 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.

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According to another government official, some of the State governments had shown resistance to the Central government’s move to give more control to the RBI over co-operative banks falling under the State’s domain.

A note prepared by former Planning Commission adviser K.D. Zacharias, uploaded on the RBI’s website, noted that “banking being a Central subject and co-operatives operating within a State being a State subject under the Constitution, providing over-riding effect to the banking laws over the law governing cooperative societies in case of conflict is a contentious issue.”

While issuing a press statement on Saturday about the Ordinance, the government made sure to emphasise that the “amendments do not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws.”

Experts said that the Ordinance will help in doing away with the duality of regulatory control over co-operative banks, along with allowing them to raise capital from other avenues.

“The most critical change brought about by the Ordinance is the ability of the cooperative banks to raise capital from the market. Earlier, the means of raising resources were significantly curtailed,” Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co. said, adding that through the Ordinance, the RBI has put certain checks and balances for raising capital which will help increase the capital base for cooperative banks and allow them to undertake transactions in a more efficient and diversified manner.