{"id":52819,"date":"2019-10-04T19:00:34","date_gmt":"2019-10-04T13:30:34","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=52819"},"modified":"2019-10-04T17:25:58","modified_gmt":"2019-10-04T11:55:58","slug":"7-pm-co-operative-banks-is-dual-regulation-the-problem-4th-october-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-co-operative-banks-is-dual-regulation-the-problem-4th-october-2019\/","title":{"rendered":"7 PM | Co-operative banks: Is dual regulation the problem? | 4th October, 2019"},"content":{"rendered":"\n<p><strong>Context:\n<\/strong>Cooperative\nbanking in India and the recent Punjab and Maharashtra Cooperative (PMC) Bank\ncrisis.<\/p>\n\n\n\n<p><strong>More\nin news:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>In late September, the Reserve Bank of\nIndia (RBI) imposed restrictions on withdrawals from the Punjab and Maharashtra\nCooperative (PMC) Bank, one of the largest urban cooperative lenders.&nbsp;<\/li><li>The RBI has imposed lending restrictions\non PMC Bank, at Rs 10,000 per customer for six months, creating panic among\ndepositors.&nbsp;<\/li><\/ul>\n\n\n\n<p><strong>Co-operative\nMovement in India: <\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The co-operative movement in India is\ncentury old which was primarily for dealing with the problem of rural credit. <\/li><li>It was aimed at concentrating the efforts\nin releasing the exploited classes out of the clutches of the money lenders. <\/li><li>During British rule, based on the\nrecommendations of Sir Frederick Nicholson (1899) and Sir Edward Law (1901),\nthe Co-operative Credit Societies Act was passed in 1904, paving the way for\nthe establishment of co-operative credit societies in rural and urban areas.<\/li><li>Under this Act, only primary credit\nsocieties were permitted to register and non-credit and federal organisations\nof primary co-operative credit societies were left out. <\/li><li>The first urban co-operative credit\nsociety was registered in October 1904 at Kanjeepuram now in Tamil Nadu State. <\/li><li>This Act was amended in 1912 to facilitate\nthe establishment of central co-operative banks at the district level, thereby\ngiving it a three tier federal character.<\/li><\/ul>\n\n\n\n<p><strong>Co-operative\nBanks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>A co-operative bank is a financial entity\nwhich belongs to its members, who are at the same time the owners and the\ncustomers of their bank.<\/li><li>Co-operative banks are often created by\npersons belonging to the same local or professional community of sharing a\ncommon interest. <\/li><li>Cooperative banks generally provide their\nmembers with a wide range of banking and financial services (loans, deposits,\nbanking accounts, etc.). <\/li><li>Co-operative banks differ from\nstockholders bank by their organization, their goals, their values and their\ngovernance. <\/li><li>In most countries, they are supervised and\ncontrolled by banking authorities and have to respect prudential banking\nregulations, which put them at a level playing field with stockholders banks. <\/li><li>The co-operative banks in India are\nregulated by the Reserve Bank of India (RBI) and governed by Banking\nRegulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.<\/li><\/ul>\n\n\n\n<p><strong>Types of Co-operative Banks: <\/strong>The\nco-operative banking structure in India is divided into following 5 categories:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Primary Co-operative Credit Society:<\/strong> The\nprimary co-operative credit society is an association of borrowers and\nnon-borrowers residing in a particular locality. The funds of the society are\nderived from the share capital and deposits of members and loans from central\nco-operative banks. The borrowing powers of the members as well as of the\nsociety are fixed. The loans are given to members for the purchase of cattle,\nfodder, fertilizers and pesticides. <\/li><li><strong>Central Co-operative Banks: <\/strong>These\nare the federations of primary credit societies in a district and are of two\ntypes-those having a membership of primary societies only and those having a\nmembership of societies as well as individuals. The funds of the bank consist\nof share capital, deposits, loans and overdrafts from state co-operative banks\nand joint stocks. These banks provide finance to member societies within the\nlimits of the borrowing capacity of societies. <\/li><li><strong>State Co-operative Banks: <\/strong>The\nstate co-operative bank is a federation of central co-operative bank and acts\nas a watchdog of the co-operative banking structure in the state. Its funds are\nobtained from share capital, deposits, loans and overdrafts from the Reserve\nBank of India. The state co-operative banks lend money to central co-operative\nbanks and primary societies and not directly to the farmers. <\/li><li><strong>Land Development Banks: <\/strong>The\nLand development banks are organized in 3 tiers namely; state, central, and\nprimary level and they meet the long term credit requirements of the farmers\nfor developmental purposes. They are governed both by the state government and\nReserve Bank of India. Recently, the supervision of land development banks has\nbeen assumed by National Bank for Agriculture and Rural development (NABARD).\nThese banks do not accept deposits from the general public. <\/li><li><strong>Urban Co-operative Banks: <\/strong>The\nterm Urban Co-operative Banks (UCBs), though not formally defined, refers to\nprimary co-operative banks located in urban and semiurban areas. These banks,\ntill 1996, were allowed to lend money only for non-agricultural purposes. This\ndistinction does not hold today. These banks were traditionally centered on\ncommunities, localities, work place groups. They essentially lend to small\nborrowers and businesses. Today, their scope of operations has widened\nconsiderably.<\/li><\/ol>\n\n\n\n<p><strong>Functions\nof Co-operative Banks: <\/strong>Co-operative banks also perform the basic\nbanking functions of banking but they differ from commercial banks in the\nfollowing ways: <\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>Commercial banks are joint-stock companies\nunder the companies\u2019 act of 1956, or public sector bank under a separate act of\na parliament whereas co-operative banks were established under the co-operative\nsocieties acts of different states. <\/li><li>Commercial bank structure is branch\nbanking structure whereas Cooperative banks have a three tier setup, with State\nCo-operative Bank at Apex level, Central \/ District Co-operative Bank at\ndistrict level, and Primary Co-operative Societies at rural level.<\/li><li>Only some of the sections of Banking\nRegulation Act of 1949 (fully applicable to commercial banks), are applicable\nto co-operative banks, resulting only in partial control by RBI of co-operative\nbanks.<\/li><li>Co-operative banks function on the\nprinciple of cooperation and not entirely on commercial parameters.<\/li><\/ol>\n\n\n\n<p><strong>Regulation\nof Urban Co-operative Banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The urban co-operative banks are regulated\nand supervised by State Registrars of Co-operative Societies, Central Registrar\nof Co-operative Societies in case of Multi-state co-operative banks and by\nReserve Bank. <\/li><li>The Registrars of Co-operative Societies\nof the States exercise powers under the respective Co-operative Societies Act\nof the States in regard to incorporation, registration, management,\namalgamation, reconstruction or liquidation. <\/li><li>In case of the urban co-operative banks\nhaving multi-state presence, the Central Registrar of Co-operative Societies,\nNew Delhi, exercises such powers. <\/li><li>The banking related functions, such as\nissue of license to start new banks \/ branches, matters relating to interest\nrates, loan policies, investments, prudential exposure norms etc. are regulated\nand supervised by the Reserve Bank of India under the provisions of the Banking\nRegulation Act, 1949(AACS).<\/li><\/ul>\n\n\n\n<p><strong>Vision\nDocument for Urban Co-operative Banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>There was a proliferation of licences\nissued between 1991 and 1998.&nbsp;RBI to deal with the problems of cooperative\nbanks issued a vision document in 2004-05 and stopped all licences of new\nbranches and new bank entities.<\/li><li>Under the vision document, a Memorandum of\nAgreement was entered into by the RBI with each of the States, where the State\naccepted an audit by professional auditors, and constituted a Task Force for\nurban cooperative banks which was co-chaired by the RCS and the RBI Regional\nDirector. <\/li><li>This worked very well and a number of\ncooperative banks were delicensed, merged or liquidated. As per the RBI\nFinancial Stability Report (2017-18), there were only four urban cooperative\nbanks with capital adequacy ratios below the regulated threshold.<\/li><\/ul>\n\n\n\n<p><strong>Is\nthe PMC Bank crisis, a problem of dual regulation?<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>In a sense, urban cooperative banks have\nbeen under the radar of the RBI, but because of dual regulation, one always had\na feeling that one did not have as much control over these banks in terms of\nsupercession of boards or removal of directors, as the RBI has over private\nsector banks.<\/li><li>In the case of PMC Bank, as per RBI, there\nare three problems: major financial irregularities, failure of internal control\nand systems, and underreporting of exposures.&nbsp;<\/li><li>It is well known that PMC Bank has\nextended 73% of its assets to HDIL, which has created a panicky situation for\ndepositors.<\/li><li>The State governments also play a role and\npolitics sometimes enter the space. The management, Board and auditors are\nresponsible. <\/li><li>It\u2019s a governance and transparency issue\nthat also affects public sector banks, private banks, and NBFCs.<\/li><\/ul>\n\n\n\n<p><strong>Steps\ntaken by RBI: <\/strong>The RBI has announced a scheme for voluntary\ntransition of urban cooperative banks into small finance banks, in line with\nthe recommendations of a high-powered committee chaired by former Deputy\nGovernor of the RBI, R. Gandhi.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>H. Malegam recommended&nbsp;having a board\nof management in actual control of operations as opposed to elected\ndirectors.&nbsp;There must be a push for a fit and proper management, otherwise\nthe elected director can get away with fraud.&nbsp;<\/li><li>RBI has given the choice to urban\ncooperative banks to convert to small finance banks. That option is there for\nthose players with more than \u20b950 crore capital and 15% capital adequacy. This\nis an incentive as they will then be able to grow their capital by issuing\nshares at a premium.&nbsp;<\/li><li>RBI has also said that for urban\ncooperative banks there could be an umbrella organisation promoted by the banks\nthemselves to raise capital as a joint stock company can from the markets.<\/li><\/ul>\n\n\n\n<p><strong>Source:\n<\/strong><a href=\"https:\/\/www.thehindu.com\/opinion\/op-ed\/co-operative-banks-is-dual-regulation-the-problem\/article29587375.ece\">https:\/\/www.thehindu.com\/opinion\/op-ed\/co-operative-banks-is-dual-regulation-the-problem\/article29587375.ece<\/a><strong><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: Cooperative banking in India and the recent Punjab and Maharashtra Cooperative (PMC) Bank crisis. More in news: In late September, the Reserve Bank of India (RBI) imposed restrictions on withdrawals from the Punjab and Maharashtra Cooperative (PMC) Bank, one of the largest urban cooperative lenders.&nbsp; The RBI has imposed lending restrictions on PMC Bank,&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-co-operative-banks-is-dual-regulation-the-problem-4th-october-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | Co-operative banks: Is dual regulation the problem? | 4th October, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":49370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-52819","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2019\/07\/7-PM.png?fit=1000%2C500&ssl=1","views":{"total":0,"cached_at":1700775338,"cached_date":1704764297},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/52819","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=52819"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/52819\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/49370"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=52819"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=52819"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=52819"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}