To what extent govt can amend co-op banks' laws

Finance Minister Nirmala Sitharaman's announcement to bring legislation in the winter session of Parliament to regulate cooperative banks sounds too good to be true. Co-op banks in India have one of the most opaque structures of governance, including their recruitment process that is never advertised.

The cooperative banks are guided by the Cooperative Societies Act of respective states where they are set up. At the state level, the Registrar of Cooperative Societies (RCS) of the states exercises control over them. For banking functions, they are regulated by RBI under the Banking Regulation Act of 1949. This duel supervision and control by the RBI and the state government makes them the weakest link in the financial system.

Further, there is a little outside scanner on monies parked in them, which is evident from the fact that post-demonetisation, money exchange from cooperatives was enormous. They are yet to shift to a web-based reporting system, which means they cannot access the RBI's central information system for banking infrastructure.

The overhauling of cooperative banks is the need of the hour but does the Centre have all the powers to do that? The plain answer is no. A change in the cooperative bank structure has to begin from the states and their consent and cooperation are needed for the needle to move. In that case, even if the Centre moves legislation in the upcoming session of Parliament, it can help only to the extent of enhancing the RBI's powers vis-a-vis the cooperative banks.

“The other half of the control over the cooperative banks, which is exercised by the state governments, is not in the hands of the Centre,” a public sector bank official told DH.

In the wake of the recent Punjab and Maharashtra Cooperative Bank scam involving over Rs 4,000 crore, Sitharaman had promised she would move a bill in the Winter Session of Parliament to amend the Act governing cooperative banks.

India has more than 1,500 small urban co-operative banks, which were originally meant to service small borrowers and local communities in the districts. But their depositors' base is high due to the rate of return they offer on the money parked with them. Though there are not many instances of cooperative banks going into liquidation in India, their financial stability is not always guaranteed.

From 2017-2019, eight cooperative banks were put under RBI scanner. The state government audits cooperative banks while RBI inspects their books once a year. The central banks also do not have powers to supersede the board or remove directors of a cooperative bank. A committee led by former RBI Governor R Gandhi had suggested among other things that Section 56 of the Banking Regulation Act should be amended to give RBI more powers over cooperative banks.

It had also sought powers for RBI to liquidate cooperative banks all by itself, if need be, without involving other regulators.