Cabinet Clears Amendments To Ensure Greater RBI Control Over Cooperative Banks 

The Union Cabinet on Wednesday approved amendments to the Banking Regulation Act to give the Reserve Bank of India greater control over cooperative banks .

According to Information and Broadcasting Minister Prakash Javadekar, who briefed the media after a cabinet meeting:

• Cooperative banks will be brought under the regulation of the RBI.
• The RBI will have the power to supersede and take control of the cooperative banks if the bank’s financial health deteriorates.
• Cooperative banks will need RBI permission to appoint a CEO
• Cooperative bank audits will have to be done as per RBI guidelines

The changes will cover nearly 1,500 cooperative banks and will be implemented in a phased manner, Javadekar said. The RBI will soon come out with a blueprint, he said.

There are a number of different categories of cooperative banks, each being subject to different regulations.

As per the RBI’s Trends and Progress In Banking report, there are 1,544 urban cooperative banks and 96,248 rural co-operative banks (March-end 2018), with the latter accounting for 64.7 percent of the total assets of cooperatives.

The RBI has considerable control over urban cooperative bank but has a limited control over the rural cooperative banks which are guided by state-level policies.

A copy of the amendments is not yet available. According to a senior government official, who spoke on the condition of anonymity, the changes will impact only urban cooperative banks and multi-state cooperate banks. They will not be applicable to rural cooperatives. The amendments will add to the RBI’s existing powers by allowing greater control over audit standards, among other things, the person added.

The decision is in the interest of the depositors as the management control and governance of urban cooperative banks will rest with the RBI, said DK Mittal, former financial services secretary.

In December, the RBI had issued an administrative directive to urban cooperative banks, but that could be challenged whether RBI had the legal authority to appoint the CEO, and suspend the banks’ board, Mittal said. The amendments will now give legislative powers to the central bank, he added.

In 2012, the Banking Regulation Act was amended to give RBI the powers to suspend the board of a multi-state cooperative bank, and now the central bank will get similar powers to regulate urban cooperative banks that come under state cooperative societies Act, Mittal told BloombergQuint.

RBI’s Recent Moves

Since the collapse of the Punjab and Maharashtra Cooperative Bank, the RBI has been toughening its stance.

In January, the regulator introduced a new supervisory action framework for urban cooperative banks, akin to the prompt corrective action programme used for weak scheduled commercial banks.

On Dec. 31, the regulator issued final rules for constituting the Board of Management for UCBs with a deposit base of more than Rs 100 crore. These rules included a mandatory RBI clearance for CEO appointments by urban cooperative banks.

In a separate draft circular on Dec. 30, the regulator proposed changes in the single and group borrower limits for UCBs.

On Dec. 27, the regulator mandated that urban cooperative banks with a loan book of over Rs 500 crore will be required to report large exposure information, including the classification of special mention accounts, to the RBI’s central repository for information on large credit.