Government brings Cooperative banks under RBI supervision for better regulation

 

The Indian Banking Industry has drastically revolutionized and achieved new heights with the changing time. The Banking industry is significantly moving forward to support one of the most vibrant economies of the world i.e. India. To strengthen the sector and boost the economy of the country, notable changes have been introduced in the policy and regulations of the banking sector.  These changes include prudential norms, revitalization of payment mechanism, and integration of regulations between commercial and co-operative banks. The recent Government ordinance passed brings cooperative banks under the RBI supervision, thus introducing structural changes in the co-operative bank. Let us understand the reason for passing such an ordinance and its impact and implications to the banking industry. 

Government Ordinance to bring cooperative banks under RBI supervision

In a move to boost banking customer’s confidence, the Union Government decided to bring all the Urban Co-operative banks and Multi-State-Co-operative Banks under the RBI’s scrutiny. The Union Minister Prakash Javadekar in a virtual press conference on Wednesday, 24th June 2020 announced that the Union Cabinet has approved the ordinance. With this notable decision, 1,540 cooperative banks come under the RBI’s supervision. Prior to this landmark decision, the banks were under a dual regulation of the RBI and the Registrar of Co-operative Societies. The said decision came in the wake of several incidents of fraud and serious financial irregularities that surfaced recently, including the major PMC scam last year. India currently has 1540 urban cooperatives and multi-State cooperative banks, which have a depositor base of 8.6 crores, and saving worth almost ₹4.84 lakh crore. The scheduled co-operative banks of the country will come under the supervision of RBI with immediate effect from the date of the President’s approval on the ordinance. 

Impact of the decision

• Following the cabinet decision, all the Urban Cooperative Banks will come under the central bank’s purview. This would definitely mean tighter supervision on banking operations. 
• The decision to bring 1,540 cooperative banks under RBI’s regulatory supervision will give more than 8.6 crore depositors an assurance of their money being safe.
• The move to bring Cooperative banks under RBI scrutiny was aimed to improve accountability in the sector.
• The stated banks will be supervised by the RBI in the same way as the scheduled banks.

Implications of the ordinance passed

• The ordinance passed to bring all the Cooperative banks under RBI’s supervision was done through an amendment to the Banking Regulation Act. 
• According to the new decision, not only will the Cooperative bank’s financials be under the Central bank’s administration but, the appointment of CEOs in such Cooperative banks will now require prior approval from the regulatory authority the RBI.
• Given that RBI is vetoed with the power to change the management of Cooperative Banks, this move shall facilitate better management of Co-operative banks. 

• However, it is to be noted that although RBI has been given the power to change the management yet it states that the Central bank has to issue orders in consultation with the State Government and take decisions after seeking comments from them. 
• RBI can prescribe the best practices for banking operations, but cannot make any changes in the bank’s management unless in case of an emergency or an extraordinary situation like the PMC bank scam that occurred last year.