New Delhi: The Lok Sabha on Wednesday passed the Banking Regulation (Amendment) Bill, 2020 which seeks to bring cooperative banks under the supervision of the Reserve Bank of India (RBI) to improve their governance and protect depositors’ money while empowering the banking regulator to prepare a restructuring or amalgamation scheme for a struggling bank without first placing it under a moratorium.

The bill replaces the ordinance that was promulgated on June 26.

Replying to the debate on the bill in the house, finance minister Nirmala Sitharaman said the legislation was for depositors’ safety and not for undermining the powers of the Registrar of Cooperative Societies.

“We have brought this amendment to protect the depositors,” said Sitharaman.

She said the government was compelled to come out with an ordinance during the lockdown as the condition of the cooperative banks was “grave”. “Absolutely there was a need for an ordinance. Several members have highlighted that because of Covid, one wasn’t sure when the next session of Parliament would be and in the meanwhile the protection of depositors was of critical importance,” she said.

She said 105 urban cooperative banks were unable to meet the minimum regulatory capital requirement and 47 had negative net worth at the end March 2019.

Due to the pandemic, the stress in cooperative banks increased and the gross non-performing assets (NPA) ratio increased to over 10% in March 2020 from 7.27% in March 2019, said the finance minister. “Therefore, it was felt that to protect depositors’ interest we should have the ordinance brought in,” she said.

She said that in the past two decades 430 cooperative banks had been de-licensed and gone into liquidation.

The amendments do not apply to Primary Agricultural Credit Societies (PACS) or cooperative 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’.

“We are not doing anything to touch state cooperatives, we are not doing anything to primary agricultural credit societies, we are not doing anything to touch cooperative societies whose primary object and business is providing long-term finance for agricultural development,” said Sitharaman.

The amendments would be applicable only to those cooperative societies which are engaged in banking, she said.

More powers to RBI to reconstruct a bank

The latest changes will empower the banking regulator to prepare a restructuring or amalgamation scheme for a struggling bank without first placing it under a moratorium, which freezes or limits withdrawals by depositors.

The bill passed seeks to amend section 45 of the Banking Regulation Act to enable the RBI to make a scheme of reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system, and for securing its proper management, even without making an order of moratorium, so as to avoid disruption of the financial system.

At present the RBI, under section 45 of the Banking Regulation Act, has to first place a bank under a moratorium, which restricts withdrawals by depositors, and then prepare a scheme.

The RBI had earlier this year placed Yes Bank under a moratorium and then worked out a scheme to secure its functioning. Punjab and Maharashtra Cooperative Bank was placed under a moratorium last year following a fraud.

Many industry experts had criticised the delay in the process at that time, preferring immediate suspension

ENDS

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Regards,
Gaurav Noronha
The Economic Times

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