Cooperative Banks under RBI
The Union Cabinet recently approved an amendment to the Banking Regulation Act to bring multi-state cooperative banks under the watch of the central bank and prevent a repeat of Punjab and Maharashtra Cooperative (PMC) Bank-like crisis.
● Cooperative Societies is a State Subject under Entry 32 of the State List of Seventh Schedule of the Constitution of India.
● Cooperatives Banks are registered under the Cooperative Societies Act, 1912. These are regulated by the Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965.
● PMC Bank is not the first case of failure of the cooperative banking system in India. The Madhavpura Cooperative Bank scam in 2001-02 was a clear signal to bring certain changes in the regulatory and supervisory structure of cooperative banks.
Advantages of Cooperative Banks
⮚ Registration and legal requirements are comparatively easy compared to traditional banks. Moreover, it provides cheap credit to rural masses.
⮚ Advancement in farming: Cooperative societies provide credit to agriculturalists at cheaper rates to buy inputs, warehousing facilities, marketing assistance and other facilities.
⮚ These banks often provide assistance for buying cheap products and services and help them by introducing them to modern technology and better farming methods to improve their output.
Problems faced in the Indian Cooperative Banking System
Dual control & Dependence of Finance - Cooperative banks are controlled under the dual system, i.e. by their respective State government as well as by RBI which poses a problem in coordination and management. Moreover, these depend heavily on RBI, NABARD and the government for refinancing facilities.
Political interference- Politicians use them to increase their vote bank and usually get their representatives elected over the board of directors in order to gain undue advantages like sanctioning of loans which later gets written off.
Lesser capital base– Raising working capital has been a major hurdle for almost all cooperative banks, as they have small capital base.
Obsolete technology- Cooperative banks are often reluctant to adopt new technologies like computerized data management. Moreover, overdue loans are increasing yearly, restricting the recycling of funds.
Recent Government Initiatives
▪ Government Amended Banking Regulation Act to bring multi-state cooperative banks under the watch of the central bank. The amendments will apply to all urban co-operative banks and multi-state cooperative banks.
▪ Reserve Bank to have control over Cooperative banks.
▪ Now, Cooperative banks will be audited as per RBI rules. Prior nod from RBI will be required for CEO appointment.
▪ The move will ensure greater accountability and transparency in the functioning of cooperative banks.
There is no end to scams in the Indian financial space, where, in a matter of years, public sector banks, private banks, non-banking financial companies, and also cooperative banks have been caught on the wrong foot. The inherent follies in their operations need to be addressed effectively if the public has to continue placing its trust in the banking system. Thus, the recent move of Amendment to the Banking Regulation Act to bring multi-state cooperative banks under the watch of the central bank by government will ensure better professionalism, corporate governance and will protect interest of depositors.
PEPPER IT WITH
Vaidyanathan Committee Report, Core Banking Solution (CBS)
R . Gandhi panel on reforms for the cooperative banking sector
Some of recommendations are as follows-
Greater control and supervision of RBI upon the cooperative banks.
Creation of umbrella organisation for supervising and coordinating the activities of all cooperatives. Such an organisation should be over and above the board of directors and should be reporting directly to RBI so as to bring it under better control.
Amendment of the Banking Regulation Act to give more powers to the RBI over cooperative banks, empowering the RBI to wind up and liquidate banks independent of other regulators under the cooperative societies' laws, and allowing urban cooperative banks to be converted into small finance banks under the RBI's supervision