Banking Regulation (Amendment) Bill — Safeguarding All Stakeholders

The Re-Beginnan | Vol.2 | Issue 16

What’s the Deal?

A new Bill (№114 of 2020) has been now introduced, replacing the Banking Regulation (Amendment) Bill 2020 (No 56 of 2020). This bill aims to facilitate restructuring/amalgamation scheme in the interest of the depositors by ensuring better management and sound regulation of cooperative banks. On June 26th 2020, the amendments (in section 3 and 56) that were a part of Banking Regulation (Amendment) Ordinance were promulgated with an aim to bring urban and multi-state cooperative banks under the confines of the Reserve Bank of India (RBI) regulation. Approximately 1,482 urban and 58 multi-state co-operative banks will now come under the supervision of the central bank.

Amendments made under section 45 of the act will help RBI envisage a scheme to ensure the interest of the public, banking system, account holders in the bank and banking company’s proper management, without obstructing any banking operations.

“Due to the pandemic, the stress in cooperative banks increased and the gross NPA ratio increased from 7.27% in March 2019 to over 10% in March 2020. Therefore, it was felt that to protect depositors’ interest we should have the ordinance brought in….” said the Finance Minister, Nirmala Sitharaman.

Impact of the Amendments

For Banks: Keeping in mind the interest of the public and depositors, RBI now has the power to overthrow the board of directors of multi-state cooperative banks. It also allows cooperatives to raise capital via issuance of equity shares and other instruments with RBIs’ approval.

For Customers: The Bill aims to protect the interest of the depositors, keeping in mind the deteriorating financial position of cooperative banks.

For RBI: It will enable the RBI to undertake the scheme of amalgamation/restructuring of banks without placing them under moratorium. Earlier, the depositor’s withdrawals would be capped along with bank’s lending operations being barred, if the lender was put under moratorium.

Non-Applicability

Amendments won’t be applicable to Primary Agriculture Credit Societies (PACS) and co-operative societies whose chief objective providing long-term finance for agricultural development and that don’t use words like “bank”, “banker” or “banking”.

The Way Forward…

These amendments will play an important role in terms of customer’s confidence in the cooperative banks and safeguard the interests of all the stakeholders. With increased control by the RBI, the amendments will also prevent mishaps like the one with Punjab-Maharashtra Co-operative Bank, wherein due to a non-performing asset crisis, depositors were handicapped and could not withdraw money beyond a threshold as the RBI had imposed a moratorium in last September.