Lok Sabha passes Banking Regulation Amendment Bill, 2020
19 September 2020
Lok Sabha on Wednesday passed the Banking Regulation (Amendment) Bill, 2020 aimed at empowering the Reserve Bank of India (RBI) to effectively supervise the banking companies, including commercial banks and cooperative banks.
The Bill, which replaces an ordinance issued by the government in the last week of June, will allow the RBI to prepare a reconstruction scheme for failed banks without having to first make an order of moratorium on barring deposit withdrawals.
The ordinance amending the Banking Regulation Act, 1949 was introduced in the wake of deteriorating conditions of cooperative banks in the country.
The changes in the Act that bring cooperative banks under the supervision of the Reserve Bank of India, however, will not affect the existing powers of the state registrars of co-operative societies under state laws.
Co-operative banks which enjoy some regulatory concessions compared to commercial banks were found wanting in self regulation, resulting in mismanagement of peoples’ deposits.
The Banking Regulation (Amendment) Bill 2020 will empower the Reserve Bank of India (RBI) to effectively handle mismanagement of funds haps in private banks without allowing any loss of public confidence and disruption in the financial system.
It will also enable RBI to find suitors for a stressed bank.
"For the last two years, depositors of cooperative banks and small banks are facing problems. We are trying to bring this amendment in order to protect the depositors," finance minister Nirmala Sitharaman said on Thursday in the Lok Sabha.
The Bill will replace the Banking Regulation (Amendment) Ordinance, 2020. In June, the union cabinet approved the ordinance to bring 1,482 urban and 58 multi-state cooperative banks under the supervision of the central bank.
Banking Regulation (Amendment) Bill provides for:
- RBI to initiate a scheme of reconstruction or amalgamation of a bank without placing it under moratorium;
- In case of a moratorium, the lender cannot grant any loans or make investments in any credit instruments during the moratorium tenure;
- Co-operative banks will be allowed to raise funds either through equity/ preference/special shares to members or any other person residing within their area of operations. The banks may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons, with prior approval from RBI;
- No person will be entitled to demand payment towards surrender of shares issued to him by a co-operative bank;
- RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification. These provisions are related to employment, the qualification of the board of directors and, the appointment of a chairman;
- RBI may supersede the board of directors of a multi-state co-operative bank for up to five years under certain conditions. These conditions include cases where it is in the public interest for RBI to supersede the Board, and to protect depositors.
- Amends the provision of Banking Regulation Act, 1949 that cooperative banks cannot open a new place of business or change the location of the banks outside of the village, town, or city in which it is currently located without permission from RBI.
- The changes will not affect the existing powers of the state registrars of co-operative societies under state laws.
- The Banking Regulation Amendment Bill, 2020 will not be applicable to:
- Primary agricultural credit societies,
- Cooperative societies whose principal business is long term financing for agricultural development.
Finance minister Nirmala Sitharaman said the bill is primarily aimed at protecting depositors of cooperative banks and is focused only on those cooperatives that use the word ‘bank’ and therefore receiving and dealing with deposits.
"This Bill does not regulate cooperative banks. The amendment is not for central govt to take over the cooperative banks," Sitharaman added.
These two societies must not use the term ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business, or act as an entity that clears cheque.
She highlighted that cooperative banks in the country have been regulated by the RBI since 1965 and the Bill only seeks to extend the applicability so that some of the banking regulation laws are also going to be applicable to them.
She asserted that State Cooperative laws are not being proposed to be amended. “State cooperative laws are not being touched in this proposed amendment”, she said.
This is being necessitated because cooperative banks are in a weak financial position and depositors are suffering. As many as 277 Urban cooperative banks are reporting losses; 105 UCBs are unable to meet minimum regulatory capital requirements; 47 are having negative net worth and 328 UCB having more than 15 per cent Gross NPA ratio as of March 2019. “To protect depositors and in public interest, early legislation is required”, she said.