Stress In Urban Cooperative Banks Amid Covid-19 Prompted Banking Regulation Ordinance: Nirmala Sitharaman

Finance Minister Nirmala Sitharaman said the stress in urban cooperative banks due to the Covid-19 disruption urgently required an ordinance in the Banking Regulation Act to protect depositors’ interest.

Financial position of 277 urban cooperative banks is very weak and they have been reporting losses, Sitharaman said in Lok Sabha, which passed the Banking Regulation (Amendment) Bill, 2020 bringing such lenders under the ambit of the Reserve Bank of India. Other 105 urban cooperative banks are unable to meet minimum regulatory capital requirements, and 47 UCBs have a negative net worth, she said.

In June, the President had promulgated the Banking Regulation Amendment Ordinance 2020 that gave Reserve Bank of India the power to prepare a scheme of reconstruction or amalgamation of a bank without placing it under moratorium. The ordinance, now replaced by the bill, brings urban and multi-state cooperative banks under the RBI’s ambit.

Some lawmakers had raised concerns that the ordinance route is being misused to override the parliamentary democracy procedure of waiting for Parliament to convene in order to get a law passed.

Sitharaman pointed out that 328 stressed urban cooperative banks had a gross non-performing asset ratio of 15% as on March 2019. Overall, stress increased for this segment with gross NPAs of about 1,540 urban and multi-state cooperative banks increasing from 7.2% as of March 2019 to more than 10% in March 2020.

While moving the amendments to Banking Regulation Act, the finance minister said an ordinance was necessary as the financial health of cooperative societies, also working as banks, was becoming “very delicate”. This had made the government introduce an ordinance during the lockdown. With data showing an increase in bad loans of such lenders, “we thought more cooperative banks will become fragile” due to stress on account of Covid-19, Sitharaman said.

Co-operative banks will now be subjected to same provisions applicable to commercial banks so that they are better governed through the RBI, she said.

While tabling the bill on Monday, Sitharaman had said depositors should not face any difficulty if banks are put under moratorium. She had applauded RBI’s efforts that helped rescue private lender Yes Bank Ltd.

Member of Parliament Asaduddin Owaisi asked why a “step-motherly” treatment was being given to Punjab and Maharashtra Co-operative Bank depositors. Owaisi, in discussion on the bill, said while State Bank of India immediately infused funds in Yes Bank, and why wasn’t a similar fund infusion happened in PMC Bank. He asked, “What is the interest that government had with Yes Bank, and the same love is not shown towards PMC Bank?”