Banking Sector Reforms

RBI supervision of Cooperative Banks


From UPSC perspective, the following things are important :

Prelims level : Cooperative Banks

Mains level : Regulations of cooperative banks

Maharashtra government has approved a plan to set up a task force to prepare an action plan against a recent change in the law that has brought cooperative banks under the supervision of the Reserve Bank of India (RBI).

What are Cooperative Banks?

  • Co-operative banks are financial entities established on a cooperative basis and belonging to their members.
  • This means that the customers of a cooperative bank are also its owners.
  • These banks provide a wide range of regular banking and financial services. However, there are some points where they differ from other banks.
  • They came into being with the aim to promote saving and investment habits among people, especially in rural parts of the country.

Structure of co-operative banks in India

  • Broadly, cooperative banks in India are divided into two categories – urban and rural.
  • Rural cooperative credit institutions could either be short-term or long-term in nature.
  • Further, short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
  • Meanwhile, the long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
  • On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled.

Who oversees these banks?

  • In India, cooperative banks are registered under the States Cooperative Societies Act.
  • They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
  • They were brought under the RBI’s watch in 1966, a move that brought the problem of dual regulation along with it.

Now answer this PYQ in the comment box:

Q.Consider the following statements:

  1. In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks (DCCB) delivers more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks.
  2. One of the most important functions of DCCBs is to provide funds to the Primary Agricultural Credit Societies.

Which of the statements given above is / are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

How has The Banking Regulation Act been amended?

  • Cooperative banks have long been under dual regulation by the state Registrar of Societies and the RBI.
  • As a result, these banks have escaped scrutiny despite failures and frauds.
  • The changes to The Banking Regulation Act approved by Parliament in September 2020, brought cooperative banks under the direct supervision of the RBI.

Changes brought

  • The amended law has given RBI the power to supersede the board of directors of cooperative banks after consultations with the concerned state government.
  • Earlier, it could issue such directions only to multi-state cooperative banks.
  • Also, urban cooperative banks will now be treated on a par with commercial banks.
  • And a cooperative bank can, with prior approval of the RBI, issue equity shares, preference shares, or special shares to its members or to any other person residing within its area of operation, by way of public issue or private placements.
  • It can also issue unsecured debentures or bonds with a maturity of not less than 10 years.
  • This essentially means non-members can become shareholders of the bank, and this will allow the RBI to merge failing banks quickly.

What triggered the need for the changes in the law?

  • India has some 1,540 urban cooperative banks, with a depositor base of 8.6 crore and deposits of at least Rs 5 lakh crore.
  • Finance Minister told Lok Sabha last year that the financial status of at least 277 urban cooperative banks was weak, and around 105 cooperative banks were unable to meet the minimum regulatory capital requirement.
  • According to RBI’s latest financial stability report, the gross non-performing asset ratio of urban cooperative banks deteriorated from 9.89 percent in March 2020 to 10.36 percent in September 2020.
  • Not only do these banks have high levels of bad loans, they also have a small capital base — something that the changes in the law have tried to address by allowing these banks to issue shares with RBI’s approval.
  • Political interference in staff appointments is also a problem with these banks, which has added to inefficiencies.

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rashi jain
2 years ago



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