By D. Krishna, CE( Retd) NAFCUB
In his Independence day address, the Prime Minister touched upon plethora of subjects of importance to the Country. Among them was his reference to the legislation of arming the RBI with powers to safeguard the interest of depositors of the cooperative banks. It is an indication of importance given to cooperative banks by the government and its intention to bring them to mainstream banking and its concern for depositors of banks.
It is crystal clear that the priority of the government is to do all it can in ensuring that the depositors of cooperative banks are given the same level of safety of their deposits as are enjoyed by the depositors of commercial banks. The public at large also desires this and depositors in particular welcome it with open arms, given the plight of depositors of the 250 urban cooperative banks whose licenses were cancelled by RBI in the last decade or so. Plight of depositors of failed cooperative bank was brought to national focus by the recent failure of PMC which perhaps hastened the promulgation of the Ordinance.
It appears that the government would have asked the RBI as to why in the first place there is a difference in the treatment of depositors of cooperative banks and those of commercial banks in respect of safety of their deposits, to which the RBI would have expressed their inability to do so on account of inadequate powers of regulation over cooperative banks. Now, the government, through promulgation of the Ordinance has empowered the RBI to deal with the issue.
The Ordinance is an important step in the process of bringing the cooperative banks in the mainstream banking system of the Country. The Ordinance, has removed a very large number of those clauses which had made many sections of the main Banking Regulations Act not being applicable to cooperative banks. With this, the main BR Act 1949 is applicable to cooperative banks almost in its entirety. Since the Banking Regulation Act was originally drafted with banking companies in mind, the Ordinance provides for reading cooperative banks in place of banking companies, bye laws in place of memorandum and articles of association, and Registrar of cooperatives/central registrar in place of Registrar of Companies.It also states “The provisions of this Act, notwithstanding anything contained in any other law for the time being in force, shall apply to or in relation to cooperative societies, as they apply to, or in relation to, banking companies subject to the following modifications………” .
The Ordinance empowers RBI to initiate a quick resolution process of troubled banks to secure the interest of depositors by allowing it to initiate reconstruction or amalgamation even without going through the process of requesting government to impose moratorium first, by bringing amendment to Sec45 of the Act. It is feared in some quarters in the sector that removal of one step of asking government which provided a safety valve may not be good. However, the past experience shows that it has been only a technical step and in all cases without exception the moratorium is imposed and then removed on the request of the Regulator.
The Ordinance also attempts to address the issue of lack of avenues of raising capital by cooperative banks by amending Sec12 of the Act. However, the construct of the amendment is not very clear and it remains to be seen as to how RBI comes out of guidelines for issue of instruments envisaged in the Ordinance.
The two questions that is agitating and perhaps not without some reason, are
i Whether the cooperative banks safe with all the powers of regulation being vested entirely with RBI ?
ii. Whether the cooperative character of the cooperative banks are being entirely compromised?
In addition there are questions raised on the legal validity of the Ordinance. Since this has to be examined by the Courts and a petition has already been filed in one of the High Courts, we will get answer to this aspect .
In respect of the apprehension of results of concentration of powers to regulate being given entirely to RBI, perhaps the sector should take note that RBI is the regulator of the entire banking system in the Country,like all central banks all over the World are . The government would consider the sector to be naïve and immature, if it raises this issue with them, as it would mean that sector is questioning the competence of RBI to be judicious in its usage of the powers vested in it. However, it would be open to the representative associations of the sector like NAFCUB, NAFCSOB and others to engage the RBI in issue based discussions and convince the Regulator of their view point, and their success would entirely depend on the merits of the issue and their ability to convince.
In respect of the second issue of dilution of cooperative character, the judicial scrutiny of the Ordinance will settle it. The world over the basic ingredient of a cooperative is the “one man one vote” and as long as this is followed, while members elect a managing committee, by and large, there is appears no basis for cooperative character being eroded.
Perhaps more important is emphasizing universal cooperative values where participation of members in usage of services of the banks is encouraged.
The statement of objects and reasons given in the Banking Regulation(Amendment)Bill 2020 which was tabled in the Parliament but not discussed, and which is now brought as Ordinance, talks about proposal “to bring cooperative banks on par with the developments in the banking sector through better management and proper regulation of cooperative banks with a view to ensure that the affairs of the cooperative banks are conducted in a manner that protects the interests of the depositors.” It further proposes “to strengthen cooperative banks by increasing professionalism enabling access to capital improving governance and ensuring sound banking through the Reserve Bank of India”
It has to be seriously contemplated by the sector, whether by expressing opposition to the Ordinance in its totality, it is going against the wishes of the depositors and the public. Such opposition, in which case would be counter productive, notwithstanding the apprehensions about assault on cooperative character and democratic functioning etc.
The energies of the sector would be better channelized if it takes up with RBI the following issues strongly.
1. RBI should stop all its moves to nudge urban cooperative banks to privatise, whether through the small finance bank route or through commercial banks route, now that they have all the regulatory powers over cooperative banks.
2. RBI should withdraw the circulars in respect of constitution of BOM by urban cooperative banks as it is no longer required in view of RBI’s full control over their BOD, in terms of the Ordinance.
3. RBI should start giving urban cooperative banks all those operational freedoms that are given to commercial banks in a time bound manner so that the sector benefits from its being mainstreamed on account of the Ordinance. It should begin with approvals to open branches without much preconditions for banks which are not under any kind of directions.
4. It should be ensured that resolution of all those urban cooperative banks which are under all inclusive directions of RBI are carried out in a time bound schedule and in such a manner that their depositors are not made to suffer or lose, which is the main purpose of the Ordinance.
5.RBI should reconsider its circular regarding imposition of the following conditions on urban cooperative banks sometime back which could have far reaching implications on profitability of many well performing banks
a. Reduction in single party/group exposure norms from 25/40 per cent of capital funds to 15/25 per cent.
b. Mandating priority sector lending to be 75 per cent from 40 per cent.
c. Restrictions regarding lending by mandating 50 percent of loans to be of size not exceeding Rs25 lacs
Perhaps engaging RBI on these issues to get positive results is far more important than opposing the Ordinance in its entirety.