Banking Regulation (Amendment) Bill: How RBI will ensure safety of depositors' money in cooperative banks

The Lok Sabha on Wednesday passed Banking Regulation (Amendment) Bill, 2020, which proposes to bring cooperative banks under the ambit of the Reserve Bank of India (RBI). The new law aims to improve governance at such banks and protect depositors' money, Finance Minister Nirmala Sitharaman said. "We are trying to bring this amendment to protect the depositors. As in some unfortunate situation in banks, depositors are put to hardship," she said in the Lok Sabha.

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Moving the Banking Regulation (Amendment) Bill, 2020 in the Lok Sabha, Sitharaman said the government was compelled to come out with an ordinance during the lockdown period as the condition of the cooperative banks was "grave". She said the gross non-performing assets (NPAs) of cooperative banks increased from 7.27 per cent in March 2019 to over 10 per cent by March 2020. As many as 277 urban cooperative banks have reported losses in 2018-19 fiscal, the FM said.

She added that over 100 urban cooperative banks were unable to meet the minimum regulatory capital requirement and 47 had negative net worth at the end March 2019.

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The proposal to regulate cooperative banks was floated after PMC Bank scam rocked the sector in September last year. PMC Bank was later put under restrictions by the RBI, following the unearthing of a Rs 4,355-crore scam. The scam put the savings of over 9 lakh customers at stake. Even today,  PMC Bank customers are struggling to get their hard-earned money back.

How does the bill protect interests of customers of the cooperative banks? Here's what the Banking Regulation (Amendment) Bill, 2020, says:

• The new bill gives the RBI power to allow restructuring or amalgamation of a cooperative bank. The RBI may also place a bank under moratorium and prepare a scheme for its restructuring to secure people's money. Banks do not face action for six months, and can't make payment or discharge liabilities, including disbursement of loans, during the moratorium.
• The RBI may also be able to initiate reconstruction scheme without placing a cooperative bank under moratorium.
• The Bill allows a co-operative bank to issue equity, preference, special shares, unsecured debentures or bonds on face value or at a certain premium after approval from the RBI.
• As per the bill, no person shall be entitled to demand payment towards surrender of shares issued to him by a co-operative bank. It says a co-operative bank can't withdraw or reduce its share capital, except to the extent and subject to such conditions as the Reserve Bank may specify in this behalf.
• No co-operative bank shall make any loans or advances on the security of its own shares; or grant unsecured loans or advances to any of its directors or private companies in which any of its directors is interested as partner.
• The board of directors must have at least 51 per cent members who should possess experience in accountancy, banking, economics or law. The RBI can also direct a cooperative bank to reconstitute its board or remove board members to appoint suitable individuals.
• The RBI also has the power to exempt any cooperative bank from provisions of the Act, including appointment of board members, via notifications.
• The RBI can supersede the Board of Directors of a multi-state co-operative bank for up to five years in the public interest. In case a co-operative bank is registered with the Registrar of Co-operative Societies of a State, the Reserve Bank may issue such order in consultation with the concerned State Government.

Edited by Manoj Sharma with PTI inputs

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