Banking Regulation act, 1949 regulates commercial banking in India.
The Act gives power to RBI in licensing of banks, voting rights of shareholders, appointment of boards and management. RBI also conducts the audits, mergers, gives liquidation directives to banks and imposing penalties.
It was amended in 1965 to bring cooperative societies under its preview but not all provision are applicable to them as they do on commercial banks.
Banking related function of cooperative societies are undertaken by RBI whereas management related functions are carried out by the centre and states together.
Issue: Co-operative banks provide banking facilities to people of small means. However, absence of regulatory oversight by RBI on par with commercial banks has lead to poor performance of co-operative banks. For example, Punjab & Maharashtra Cooperative Bank scam.
Banking Regulation Amendment Act, 2020: Provisions
- Cooperatives bank are now regulated by RBI similar to that of commercial banks. They are not subject to any exemptions.
- Co-operative banks may raise equity or unsecured debt capital from the public subject to prior RBI approval.
- RBI may prescribe qualifications for appointment and removal of Chairman and other management.
- RBI can reconstitute the Board of Directors in order to ensure sufficient number of qualified members. It can also supersede the Board of directors after consultation with the state government.
- Formulation of scheme for reconstruction or amalgamation of banks can be done by RBI without moratorium.
Banking Regulation Amendment Act, 2020: Issues
- Increase in burden of RBI supervisory work which now extended to Urban Cooperative Banks, district (central) co-operative banks and state co-operative banks.
- Issue of federalism as ‘Banking’ is in the Union List subject where as ‘incorporation, regulation and winding up’ of co-operative societies’ is in the State List.
- Provisions on capital may violate principles of co-operative societies as co-operative societies raise capital from members. The amendment is unclear about what it means to raise equity capital from the public.
Banking Regulation Amendment Act, 2020: Rationale
- To provide for better management and proper regulation of co-operative banks
- To protect the interests of the depositors of cooperative banks.
- To increase professionalism, enabling access to capital, improving governance and ensuring sound banking through the Reserve Bank of India.
