Politics vs governance: on Urban Cooperative Banks

Synopsis: The Madhya Pradesh High Court’s decision to stay the Reserve Bank of India’s circular may delay the shift towards better governance in Urban Cooperative Banks (UCBs).

Introduction

The RBI had in June this year said that Members of Parliament, Assemblies, municipal corporations, municipalities, or other local bodies could not hold the corner-room post, or be a whole-time director on UCBs. Thus, the circular barred elected representatives from being appointed to the boards of urban cooperative banks (UCBs).

The persons engaged in any other business or vocation; directors of companies and partners of firms that carry on any trade, business or industry, having a substantial interest in any company or working as a director, manager, managing agent, partner, or proprietor of any trading, commercial or industrial concern will not be eligible to be on the board of a UCB.

Why such circular by RBI?

Prevent misuse: This was done to prevent political interference in banks and the possible abuse of governance standards. It has extracted a heavy cost. For example, Punjab and Maharashtra Urban Co-operative Bank.

To cut down the room for regulatory arbitrage: The amendment to the Banking Regulation Act, notified, was to give more muscle to the banking regulator for the oversight of UCBs.

What are some associated issues?

Friction between Centre and states: The states have held the view that some of the RBI’s moves were in conflict with the provisions of the State Co-operative Societies Act.

Concentration of power: The powers bestowed on the RBI to deal with matters pertaining to the issuance and refund of share capital, appointment, or disqualification of directors, the constitution of the board of management, the appointment of CEOs, and audit obligations were excessive in nature.

Source: This post is based on the article “Politics vs governance” published in Business Standard” on 9th September 2021.