Banking Regulation (Amendment) Ordinance, 2020 - Co-operative Banks

Why in news?

The Centre recently passed the Banking Regulation (Amendment) Ordinance, 2020.
It gives the RBI more regulatory powers over urban co-operative banks (UCBs) and multi-State co-operative societies.

What does the amendment mean in practice?

The Ordinance amends the Banking Regulation Act, 1949 as applicable to cooperative banks.
With respect to UCBs and multi-State co-operative societies, the RBI will now have powers to -
1. supersede boards
2. restructure managements
3. formulate resolution plans
The change will subject 1,544 co-operative banks to greater RBI supervision.
It will also partly address the problem of dual regulation by registrars of co-operative societies.
Notably, the dual regulation is often cited as the reason for the string of co-operative bank failures.
The Centre has expressed hope that this decision would reassure the 8.6 crore depositors in these banks about the safety of their money.

What are the concerns though?

RBI - The RBI already has enough responsibilities in monitoring regulatory compliance by the following under its watch:

So, the addition of over 1,500 new constituents is unlikely to make its task easier.
Role of UCBs - The UCBs were originally conceptualised to further financial inclusion.
But it is questionable if the UCBs are faithfully fulfilling this mandate.
A 2014 study in this regard shed some light.
It finds that smaller, unscheduled UCBs were indeed focussed on sub-Rs.10-lakh loans
The larger scheduled UCBs actually make up for the bulk of the deposit and asset base of the co-operative banking sector.
But these have stayed quite far from their original mandates.
These were actively vying with commercial banks in extending non-priority sector loans to commercial borrowers.
In the process, they have availed themselves of numerous regulatory concessions.
UCBs do cater to smaller depositors ignored by commercial banks.
But the failure of players such as PMC Bank shows that their lax lending practices can put depositors’ money at risk.
Approach - Banking correspondents, Mudra loans and Jan Dhan accounts, apart from microfinance NBFCs and small finance banks are active in the banking landscape.
Given this, the UCBs seem less relevant.
There are better alternatives to balance macro financial inclusion objectives with depositor interests.
It is perhaps for this reason that the RBI has refrained from granting new UCB licences in recent years.

How has RBI dealt with it?

RBI has tried to implement the recommendations that UCBs be actively encouraged to convert into small finance banks.
By doing so, the regulatory arbitrage can be bridged.
Since the PMC Bank failure, the RBI has ushered in several new rules to tighten governance structures at UCBs.
It has sought more disclosures of loan books and constituted new boards of management.
However, given the deep-rooted issues at many UCBs, it is doubtful if they will be able to manage the transition.

Source: BusinessLine