Recently, the Central government approved an Ordinance to bring all urban and multi-state co-operative banks under the direct supervision of the Reserve Bank of India (RBI).
The decision comes after several instances of fraud and serious financial irregularities, including the major scam at the Punjab and Maharashtra Co-operative (PMC) Bank in 2019.
Till now, all the co-operative banks came under dual regulation of the RBI and the Registrar of Co-operative Societies, resulting in regulatory and supervisory lapses at many of these banks.
The RBI had no powers to draw up an enforceable scheme of reconstruction of a co-operative bank.
However, from now onwards the urban and multi-state co-operative will come under the direct supervision of RBI.
The move will empower the RBI to regulate all urban and multi-state co-operative banks on the lines of commercial banks.
Earlier, the Supreme Court pronounced that co-operative banks come within the definition of ‘Banks’ under the Banking Regulation Act, 1949 for the purposes of the Sarfaesi Act, 2002.
The Sarfaesi Act is an effective tool for bad loans (Non-Performing Assets) recovery.
It will also provide more security to depositors.
In India, there are 1482 urban co-operatives banks and 58 multi-state co-operative banks.
These banks have a depositor base of 8.6 crores, who have saved a huge amount of Rs. 4.84 lakh crore with these banks.
The rural co-operative banks will continue to remain under the dual regulation of RBI and Registrar of Co-operative Societies.
The rural co-operative banks face the same issue of misgovernance and fraud, like urban co-operatives banks.
A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. It is distinct from commercial banks.
They are broadly classified into Urban and Rural co-operative banks based on their region of operation.
They are registered under the Co-operative Societies Act of the State concerned or under the Multi-State Co-operative Societies Act, 2002.
The Co-operative banks are also governed by the
Banking Regulations Act, 1949.
Banking Laws (Co-operative Societies) Act, 1955.
Features of Co-operative Banks:
Customer Owned Entities: Co-operative bank members are both customer and owner of the bank.
Democratic Member Control: These banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to masses in rural areas.