Banking Regulation (Amendment) Bill, 2020

Context: The Lok Sabha has passed an amendment to the Banking Regulation Act, 1949, which will bring cooperative banks under the direct supervision of the RBI and bring them under some of the same governance norms as commercial banks.

Background

  • Banking Regulation (Amendment) Bill was passed by the Lok Sabha and will replace an ordinance that was promulgated in June amid the coronavirus pandemic.
  • It is applicable to those cooperative banks which deal with “bank, banker and banking”

Why have the amendments been proposed?

  • The Banking Regulation Act, 1949 is being amended due to the stress under which the cooperative banks are functioning
  • As many as 430 cooperative banks have been delicensed and liquidated over the last two decades, while not a single commercial bank has gone into liquidation under the oversight of the RBI.
  • The decision has also come against the backdrop of scams at cooperative banks, including at the Punjab and Maharashtra Cooperative (PMC) Bank that came to light last year in 2019

Key Features of the Bill

  • The Bill allows the central bank to initiate a scheme for reconstruction or amalgamation of a bank without placing it under moratorium.
  • If the central bank imposes moratorium on a bank, the lender can not grant any loans or make investments in any credit instruments during the moratorium tenure, according to the Bill.
  • The co-operative banks will be allowed to issue equity, preference, or special shares on face value or at a premium to its members, or to any other person residing within their area of operations. The banks may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. However, a prior approval from RBI is mandatory for such issuance.
  • No person will be entitled to demand payment towards surrender of shares issued to him by a co-operative bank, the Bill states.
  • The Bill mentions that RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification. These provisions are related to employment, the qualification of the board of directors and, the appointment of a chairman.
  • RBI may supersede the board of directors of a multi-state co-operative bank for up to five years under certain conditions. These conditions include cases where it is in the public interest for RBI to supersede the Board, and to protect depositors.
  • The Bill discards the provision of Banking Regulation Act, 1949 that cooperative banks cannot open a new place of business or change the location of the banks outside of the village, town, or city in which it is currently located without permission from RBI
  • The changes will not affect the existing powers of the state registrars of co-operative societies under state laws. “This Bill does not regulate cooperative banks.

The amendments will not apply to which of the following?

  • The amendments will not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws.
  • The amendments also 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, and which do not use the words “bank”, “banker” or “banking” and do not act as drawees of cheques, as per the statement. 

Benefits of the bill

  • The amendment will help in protecting the interests of depositors and also strengthen cooperative banks by improving governance and oversight by extending powers already available with the RBI in respect of other banks to co-operative banks as well for sound banking regulation. 

Criticism

  • The opposition has stated that the bill is an encroachment on federalism.

Background

  • Banking Regulation (Amendment) Bill was passed by the Lok Sabha and will replace an ordinance that was promulgated in June amid the coronavirus pandemic.
  • It is applicable to those cooperative banks which deal with “bank, banker and banking”

Why have the amendments been proposed?

  • The Banking Regulation Act, 1949 is being amended due to the stress under which the cooperative banks are functioning
  • As many as 430 cooperative banks have been delicensed and liquidated over the last two decades, while not a single commercial bank has gone into liquidation under the oversight of the RBI.
  • The decision has also come against the backdrop of scams at cooperative banks, including at the Punjab and Maharashtra Cooperative (PMC) Bank that came to light last year in 2019

Key Features of the Bill

  • The Bill allows the central bank to initiate a scheme for reconstruction or amalgamation of a bank without placing it under moratorium.
  • If the central bank imposes moratorium on a bank, the lender can not grant any loans or make investments in any credit instruments during the moratorium tenure, according to the Bill.
  • The co-operative banks will be allowed to issue equity, preference, or special shares on face value or at a premium to its members, or to any other person residing within their area of operations. The banks may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. However, a prior approval from RBI is mandatory for such issuance.
  • No person will be entitled to demand payment towards surrender of shares issued to him by a co-operative bank, the Bill states.
  • The Bill mentions that RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification. These provisions are related to employment, the qualification of the board of directors and, the appointment of a chairman.
  • RBI may supersede the board of directors of a multi-state co-operative bank for up to five years under certain conditions. These conditions include cases where it is in the public interest for RBI to supersede the Board, and to protect depositors.
  • The Bill discards the provision of Banking Regulation Act, 1949 that cooperative banks cannot open a new place of business or change the location of the banks outside of the village, town, or city in which it is currently located without permission from RBI
  • The changes will not affect the existing powers of the state registrars of co-operative societies under state laws. “This Bill does not regulate cooperative banks.

The amendments will not apply to which of the following?

  • The amendments will not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws.
  • The amendments also 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, and which do not use the words “bank”, “banker” or “banking” and do not act as drawees of cheques, as per the statement. 

Benefits of the bill

  • The amendment will help in protecting the interests of depositors and also strengthen cooperative banks by improving governance and oversight by extending powers already available with the RBI in respect of other banks to co-operative banks as well for sound banking regulation. 

Criticism

  • The opposition has stated that the bill is an encroachment on federalism.

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