Author: Vishakha Jaiprakash Thanvi, TMV Lokmanya Tilak Law College
INTRODUCTION TO BANKING REGULATION ACT, 1949
The Banking Regulation Act, 1949 is legislation that governs the functioning of all the banking firms in India and provides details on various facets of the banking sector including the operation, management, and licensing of banks in India. It was legislated as Banking Companies Act, 1949 which came into force on from 16th March 1949, and later on the Banking Companies Act, 1949 was changed to Banking Regulation Act, 1949 from 1st March 1966 which was more comprehensive and pertained to cooperative banks too. It extends to the entire India. This act even included the provisions right down to the definition of the word banking.
OBJECTIVES OF THE BANKING REGULATION ACT, 1949
1)The Act provides a structure for the regulation and supervision of commercial banking in India.
2)The purpose of the Act is to ensure that banks confine their activities only to banking and also establish a smooth countrywide banking system.
3)This Act also aspires to effectively regulate bank credit and securing the interest of the depositors, the general public, and the banking firms.
4)With this Act, the Reserve Bank of India has the authority to exercise its control and regulate banks under its supervision.
A cooperative is a jointly owned enterprise in which the same people are its customers who are also its owners. It is a setup that provides finances to the agricultural, rural industries, and also to trade and industry of urban areas but to a limited extent in this case. Cooperative banks are regulated by the Cooperative Societies Act, 1965. The aim of cooperative banks is not profit maximization but provides aid to a large number of people for their welfare. A cooperative bank accepts deposits from the members and the public and grant loans to farmers & small businessman. Further, the interest rate on deposits in cooperative banks is slightly more than that of commercial banks.
INTRODUCTION TO BANKING REGULATION AMENDMENT BILL, 2020
In view of the declining conditions of the cooperative and commercial banks in the country, the government of India took all possible measures to improve the circumstances. Working in this direction the government passed an ordinance to modify the Banking Regulation Act 1949 through the Banking Regulation Amendment Bill, 2020.
Banking Regulation Amendment Bill 2020 was introduced in Lok Sabha by the Finance Minister of India, Smt. Nirmala Sitharaman on 3rd March 2020. President of India Shri Ram Nath Kovind approved the Banking Regulation Amendment Bill on 27 June 2020 to bring all 1,482 urban cooperative banks and 58 multi-state cooperative banks under the supervision of Reserve Bank of India for it’s better management and regulations and to safeguard the interest of the depositors adequately. The amendment has also proposed to consolidate the cooperative banks by enabling access to capital, enhancing professionalism, boosting governance, and ensuring rational banking through RBI. This bill also seeks to ensure that fraud like the PMC bank scam doesn’t happen in near future.
What Exactly Is Banking Regulation Amendment Bill 2020?
1)The Banking Regulation Amendment Bill aimed to amend the Banking Regulation Act, 1949.
2) This Bill seeks to give the Reserve Bank of India powers to regulate the cooperative banks.
3) It also looks to enforce the banking regulation guidelines of the RBI in cooperative banks, while the registrar of the cooperative banks deals with administrative issues.
4) This Bill came in response to the PMC bank & Yes Bank crisis.
SALIENT FEATURES OF THE AMENDMENT BILL
The amendment applies only to multi-state cooperative banks and urban cooperative banks and does not apply to certain cooperative societies such as primary agricultural credit societies and cooperative land mortgage banks. As per this amendment, these societies should not use the words banks, banking, or bankers in their names.
The Bill allows the cooperative banks to issue equity shares, special shares.
The Bill also states that no person shall be permitted to charge a payment for the surrender of shares allocated to him by the cooperative bank. Moreover, the cooperative bank cannot curtail or withdraw share capital without the direction of the RBI.
The cooperative banks are under the twofold control of both the RBI and Registrar of Cooperative societies.
If this Amendment Bill is enforced then the Reserve bank of India will have certain auxiliary powers apart from its regulatory functions. However, the Registrar of the cooperative societies will continue to deal with the administrative issues of these banks.
This bill aims to enforce the Reserve Bank of India banking regulation guidelines in cooperative banks also as per the bill cooperative banks will be audited according to the RBI rules.
This bill mandates RBI’s approval for the CEO appointments in cooperative banks similar to that of commercial banks.
The bill states that the Reserve Bank of India can supersede the board of directors of the multi-state cooperative bank for up to 5 years with certain conditions for the welfare of the public. Recruitment will also be based on certain qualifications.
The central bank as per this amendment has the authority to replace the board of directors with a board of management consisting of professionals if any cooperative banks are facing stress, this can be done after consultation with the state government. This is to be done to increase professionalism and to ensure better management and regulation in cooperative banks without any kind of hurdles.
The bill states that the Reserve Bank of India may exempt cooperative banks from the certain provision of the act, through notifications. These provisions are related to employment, qualification of the board of directors, and appointment of chairman thus RBI will decide who will get relaxation in employment.
The Banking Regulation Act, 1949 states 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. However, this provision is discarded by the banking regulation amendment bill, 2020.
The Bill allows the Reserve Bank of India to commence a scheme for the reconstruction of amalgamation without imposing a moratorium. This Bill also stated that during the moratorium period banks will not be allowed to grant loans or make any investments.
NEED FOR AMENDMENT
The main motive or the main aim of the Bill is to bring the multi-state cooperative banks under the inspection of the Reserve Bank of India and prevent the repetition of crises like the Punjab and Maharashtra Bank Scam & Yes Bank crisis. It also aims to bring the cooperative banks at par with commercial banks. The changes proposed in the bill are for safeguarding the interest of the depositors. Currently, there are 1540 Cooperative banks in India with about 860 depositors having savings worth Rs. 5 lakh Crore. In the past five fiscal years, there were nearly more than 1000 fraud cases reported among urban cooperative banks worth more than Rs. 220 Crore. The PMC Bank Scam had prompted the need for improved laws that can ensure better management and governance of these banks.
Every bill that is introduced has its pros and cons. The Bill has been greatly criticized by some eminent political personalities including Shashi Tharoor, Saugata Roy, and quite recently the Chief Minister of Rajasthan Mr. Ashok Gehlot wrote a letter to the Prime Minister of India Shri. Narendra Modi to reconsider the Banking Regulation Amendment Bill 2020, putting forward the following issues:
1) This Bill will adversely affect the basic spirit of the cooperative banks and the cooperative movement in the system and have requested to restore the earlier system.
2) According to the Bill, the Banking Regulation Act will be amended and Section 10 and Section 10 A of the Act will be made operational which means that in cooperative banks it will be compulsory for 51 % of board members to have some professional experience but this is quite impractical.
3) As per the new Bill, allocation of shareholding and right to issue shares by the shareholders of the cooperative societies will be determined by the policies of the Reserve Bank of India under Section 12 of the Banking Regulation Act but this provision of keeping cooperative bank at par with commercial bank goes against the cooperative principle of ‘one person – one vote’
4) In the new system, the cooperative departments of the State government will have no control over the cooperative banks which again goes contrary to the basic principles of cooperative as prior to the amendment, the Registrar of the cooperative societies had the authority to dissolve the board of directors on the recommendation of RBI if they found any financial irregularity in cooperative banks but with the new amendment, this power is vested with RBI.
It can be thus said that the government must protect the interest of the depositors and ensure that there is no fraud or corruption in the banking sector This Bill surely tends to fulfill the above needs. The foremost important feature of this amendment is it will allow the cooperative banks to raise capital money via public issues or private placement of equity with the RBI concurrence. Also, this bill tends to bring cooperative banks under the regulation of RBI thus the control of RBI over the banks will lead to the smooth and proper functioning of the banks without any malpractice emanating in the banking sector. Also, this bill won’t affect the primary cooperative societies which finance agricultural activities in rural areas rather this bill will encourage the merger of weak cooperative banks with that of stronger one’s which will help the rural banking system and ultimately this whole amendment will lead to bolstering the banking system of India.