DR.

RAM MANOHAR LOHIA NATIONAL LAW

UNIVERSITY

LUCKNOW

2020

BANKING & INSURANCE LAW

FINAL DRAFT

‘CO-OPERATIVE BANKS AND THE RESERVE BANK OF INDIA: THE REGULATORY

FRAMEWORK’

UNDER THE SUPERVISION OF: SUBMITTED BY:

Dr. Aparna Singh SIMRAN YADAV

ASSISTANT PROFESSOR (LAW) ENROLL NO. – 180101136

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 ACKNOWLEDGEMENT
I would like to use this opportunity to extend my heartiest gratitude to all the people who have
helped me develop this project.
First and foremost, I would like to thank my professor, Dr. Aparna Singh- Assistant Professor
(Law), who has been constantly supporting me, guiding me and helping me with all queries and
difficulties regarding this project since its fledging stage. Without her enthusiasm, inspiration and
efforts to explain even the toughest of jargons in the most lucid manner, the successful inception of
this project would have been a Herculean task. 
Next, I would like thank the librariarns of Dr. Madhu Limaye library for helping me find the correct
resources for my research and for helping me enrich my knowledge.
Finally, I would like to extend my gratitude to my batch mates and seniors for providing me some
unique ideas and insights which helped me make this project even better.
I know that despite my sincerest efforts some discrepancies might have crept in, I hope and believe
that I would be pardoned for the same.
Thanking You
Simran Yadav

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 INTRODUCTION

The Banking Regulation Act, 1949 vests the Reserve Bank with various statutory powers of control
and supervision over co-operative banks. The powers in regard to incorporation, management, etc.,
of these banks, however continue to vest in the Registrars of co-operative Societies of the States
concerned. Further, the provisions of the Banking Regulation Act, 1949 (as applicable to Co-
operative Societies) shall be in addition to, and not, save as expressly provided in the Act, in
derogation of any other law for the time being in force. This means that the co-operative Banks are
required not only to comply with the provisions of the Banking Regulation Act, but also other laws
applicable to them. In respect of matters specifically provided in the Banking Regulation Act, the
provisions of the said Act will prevail over the provisions of the Co-operative Societies Act. In 1966,
the Act was made applicable to cooperative banks by incorporating Section 56 therein.

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. Co-operative banks are often created by persons belonging
to the same local or professional community or sharing a common interest. Co-operative banks
generally provide their members with a wide range of banking and financial services (loans,
deposits, banking accounts etc.). Co-operative banks differ from stockholder banks by their
organization, their goals, their values and their governance. In most countries, they are supervised
and controlled by banking authorities and have to respect prudential banking regulations, which put
them at a level playing field with stockholder banks. Depending on countries, this control and
supervision can be implemented directly by state entities or delegated to a co-operative federation or
central body. Co-operative banking is retail and commercial banking organized on a co-operative
basis. Co-operative banking institutions take deposits and lend money in most parts of the world.
Co-operative banking, includes retail banking, as carried out by credit unions, mutual savings and
loan associations, building societies and co-operatives, as well as commercial banking services
provided by manual organizations (such as co-operative federations) to co-operative businesses. The
structure of commercial banking is of branch-banking type; while the co-operative banking structure
is a three tier federal one.

-A State Co-operative Bank works at the apex level (ie. works at state level).

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-The Central Co-operative Bank works at the Intermediate Level. (ie. District Co-operative Banks
ltd. works at district level)

-Primary co-operative credit societies at base level (At village level)

FEATURES OF CO-OPERATIVE BANKS:

Even if co-operative banks organizational rules can vary according to their respective national
legislations, co-operative banks share common features as follows:

Customer-owned entities: In a co-operative bank, the needs of the customers meet the needs of the
owners, as co-operative bank members are both. As a consequence, the first aim of a co-operative
bank is not to maximize profit but to provide the best possible products and services to its members.
Some co-operative banks only operate with their members but most of them also admit non-member
clients to benefit from their banking and financial services.

Democratic member control: Co-operative banks are owned and controlled by their members, who
democratically elect the board of directors. Members usually have equal voting rights, according to
the co-operative principle of “one person, one vote”.

Profit allocation: In a co-operative bank, a significant part of the yearly profit, benefits or surplus is
usually allocated to constitute reserves. A part of this profit can also be distributed to the co-
operative members, with legal or statutory limitations in most cases. Profit is usually allocated to
members either through a patronage dividend, which is related to the use of the co-operative’s
products and services by each member, or through an interest or a dividend, which is related to the
number of shares subscribed by each member.

Co-operative banks are deeply rooted inside local areas and communities. They are involved in local
development and contribute to the sustainable development of their communities, as their members
and management board usually belong to the communities in which they exercise their activities. By
increasing banking access in areas or markets where other banks are less present, farmers in rural
areas, middle or low income households in urban areas - co-operative banks reduce banking
exclusion and foster the economic ability of millions of people. They play an influential role on the
economic growth in the countries in which they work in and increase the efficiency of the

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international financial system. Their specific form of enterprise has proven successful both in
developed and developing countries.

TYPES OF CO-OPERATIVE BANKS

The Co-operative banking structure in India comprises of:

1. Urban Co-operative Banks

2. Rural Co-operatives

Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance,
State Co-operative banks and some Urban Co-operative banks are scheduled banks but other co-

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operative banks are non-scheduled banks. Scheduled banks are those banks which have been
included in the second schedule of the Reserve bank of India act of 1934. 

The banks included in this schedule list should fulfil two conditions:  

• The paid capital and collected funds of bank should not be less than Rs. 5 lac. 

• Any activity of the bank will not adversely affect the interests of depositors.

Every Scheduled bank enjoys the following facilities:

• Such bank becomes eligible for debts/loans on bank rate from the RBI

• Such bank automatically acquires the membership of clearing house.

1. Urban Co-operative Banks:

Urban Co-operative Banks is also referred as Primary Co-operative banks by the Reserve Bank of
India. Among the non-agricultural credit societies urban co-operative banks occupy an important
place. This bank started in India with the object of catering to the banking and credit requirements of
the urban middle classes. The term Urban Co-operative Banks (UCBs), though not formally defined,
refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996,
were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
These banks were traditionally centred around communities, localities work place groups. They
essentially lent to small borrowers and businesses. Today, their scope of operations has widened
considerably.

The RBI defines Urban Co-operative banks as “small sized co-operatively organized banking units
which operate in metropolitan, urban and semi-urban centers to cater mainly to the needs of small
borrowers, viz. owners of small scale industrial units, retail traders, professional and salaries
classes.”

Urban Co-operative banks mobilize savings from the middle and lower income groups and purvey
credit to small borrowers, including weaker sections of the society. These banks organize on a
limited liability basis, generally extend their area of operation over a town. The main functions of
these banks are to promote thrift by attracting deposits from members and non-members and to
advance loans to the members. It is registered under Co-operatives Societies Act of the respective
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state Governments. Prior to1966, Urban Co-operative banks were exclusively under the purview of
State Government.

From March 1, 1966 certain provisions of Banking Regulation Act have been made applicable to
these banks. Consequently, the RBI became the regulatory and supervisory authority of Urban Co-
operative Banks for their related operations. Managerial aspects of such banks continue to remain
with State Governments under the respective Co-operative Societies Act. These banks with multi-
presence are regulated by the Central Governments and registered under Multi-State Co-operative
Societies Act. The RBI extends refinance to Urban Co-operative Banks against their advances to tiny
and cottage industrial units. These banks grants sizeable loans and advances under priority sector for
lending to small business enterprises, retail trade, road and water transport operators and
professional and self-employed persons. Urban Co-operative banks are mostly located in towns and
cities and cater to the credit requirement of the urban clientele.

• The objectives and functions of the Urban Co-operative banks:

• Primarily, to raise funds for lending money to its members.

• To attract deposits from members as well as non-members.

• To encourage thrift, self-help ad mutual aid among members.

• To draw, make, accept, discount, buy, sell, collect and deal in bills of exchange, drafts,
certificates and other securities.

• To provide safe-deposit vaults.

Area of Operation:
The area of operation of these banks is usually restricted by its byelaws to a municipal area or a
town. In some occasions it exceeds this limit. The study group on Credit Co-operatives in Non
Agricultural Sectors has recommended that normally, it would be advisable for an urban co-
operative bank to restrict its area of operation to the municipality or the taluka town where it
operates.

2. Rural Co-operatives:

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Rural Cooperative Banking plays an important role in meeting the growing credit needs of rural
population of India. It provides institutional credit to the agricultural and rural sector. The
inadequacy of rural credit engaged the attention of RBI and Government throughout the 1950s
and1960s. One important feature of providing agriculture credit in India has been the existence of a
widespread network of rural financial institutions. The rural credit structure consists of many types
of financial institutions as large scale branch expansion was undertaken to create a strong institution
based in rural area. It has served as an important instrument of credit delivery in rural and
agricultural areas. The separate structure of rural Co-operative sector for long-term and short-term
loans has enabled these institutions to develop a specialized institution for rural credit delivery. The
volume of credit flowing through these institutions has increased. The Rural Co-operative structure
has traditionally been bifurcated into two parallel wings, i.e. Short-term Rural Co-operatives,
& Long-term Rural Co-operatives.

 I. Short-term Rural Co-operatives:

The short-term rural co-operatives provide crop and other working capital loans to farmers and rural
artisans primarily for short-term purpose. These institutions have federal three-tier structure.

 At the Apex of the system is a State Co-operative bank in each state.

At the middle (or district) level, there are Central Co-operativeBanks also known as District Co-

operative banks.

At the lowest (or village) level, are the Primary Agricultural Credit Societies.

II. Long-term Rural Co-operatives:

 The long-term rural co-operative provide typically medium and long-term loans for making
investments in agriculture, rural industries and, in the recent period, housing. Generally, these co-
operatives have two tiers, i.e. State Co-operative Agriculture and Development Banks (SCARBDs)
at the state level and Primary Co-operative Agriculture and Rural Development Banks (PCARDBs)
at the taluka or tehsil level. However, some States have a unitary structure with the state level banks
operating through their own branches

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 FUNCTIONS OF CO-OPERATIVE BANKS

Co-operative banks also perform the basic banking functions of banking but they differ from
commercial banks in the following respects

• Commercial banks are joint-stock companies under the companies’ act of 1956, or public sector
bank under a separate act of a parliament whereas co-operative banks were established under the co-
operative society’s acts of different states.

• Commercial bank structure is branch banking structure whereas co-operative banks have a three
tier setup, with state co-operative bank at apex level, central / district co-operative bank at district
level, and primary co-operative societies at rural level.

• Only some of the sections of banking regulation act of 1949 (fully applicable to commercial
banks), are applicable to co-operative banks, resulting only in partial control by RBI of co-operative
banks and

• Co-operative banks function on the principle of cooperation and not entirely on commercial
parameters.

The cooperative banks also perform basic functions of banking but differ from commercial banks in the
following respects:

• Commercial banks are joint-stock companies under the Companies Act of 1956, or public
sector banks under a separate Act of the Parliament. Co-operative banks were established
under the Cooperative Societies Acts of different states;

• cooperative banks have a three-tier setup, with state cooperative bank at the apex,

central/district cooperative banks at district level, and primary cooperative societies at rural
level;

• Only some of the sections of the Banking Regulation Act of 1949 (fully applicable to
commercial banks), are applicable to cooperative banks, resulting in only partial control by
RBI of cooperative banks; and

• Cooperative banks function on the principle of cooperation and not entirely on commercial
parameters.

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 REGULATORY FUNCTIONS OF RBI

RBI: An Introduction

The Reserve Bank of India as the Central Bank of our country was established on 1 st April, 1935
under the Reserve Bank of India Act, 1934. The Bank was started originally as a shareholders’ bank
and its paid up capital was Rs. 5 crores. The Bank took over the function of currency issue from the
Government of India and the power of credit control from the then Imperial Bank of India. The Bank
was nationalised in the year 1948, soon after independence, following a post war trend towards
nationalisation of Central Banks all over the world. The Bank of England was nationalised in 1946.
Secondly, a centrally administered system had then become necessary to control a runaway inflation
raging in India since 1939, control inflation in the country effectively. Thirdly, as India had to
embark upon a programme of economic development and growth, it was necessary to have a
complete control over the activities of banking so that a Central Bank could be used effectively as an
instrument of economic change in the country.

General Role of RBI:

The Reserve Bank of India is largely concerned with organisation of a sound and healthy
commercial banking system, ensuring effective co-ordination and control over credit through
appropriate monetary and credit policies followed from time to time. It is also however, concerned
with development of rural banking, promotion of financial institutions and development of rural
banking, promotion of financial institutions and development of money and capital market in India.

Control by RBI over co-operative banks:

The Banking Regulation Act, 1949 empowers the Reserve Bank to issue directions, to co-operative
banks in general and to any co-operative bank in particular, regarding any aspect of the working of
the co-operative banks/bank concerned. While Sec. 21 confers powers to issue directions in regard to
advances by co-operative banks, or a group of co-operative banks, Sec. 35A covers all aspects of the
functions of co-operative banks. These two sections together have given powers to the Reserve Bank
to issue all directions on all matters concerning the operations of a co-operative bank in particular, or
all co-operative banks, or a group of co-operative bank, in general.

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In addition to conducting regular inspection under this section, the Reserve Bank is also empowered
to carry out a scrutiny of the affairs of the co-operative bank, at any time it is considered necessary
to do so.

Significantly, the NABARD has also been statutorily empowered to carry out the inspection of co-
operative banks other than, however primary co-operative banks but such power has been given,
without prejudice to the powers of RBI, to conduct such inspection. (Sec. 35)

The Reserve Bank is empowered to depute, in case it is considered essential to do so, for the
reorganisation or expansion of co-operative credit on sound lines, one or more of its officers to
watch the proceedings at any meeting of the Board of Directors of any co-operative banks or any
other body constituted by it and require such bank to give an opportunity to the officers, so deputed,
to be heard at such meeting(s). The Reserve Bank may appoint one or more of its officers to observe
the manner in which the affairs of the co-operative bank or its offices or branches are being
conducted, requiring such officers to make a report thereon.

Other relevant provisions include:

Section 22(4):
• Cancellation/rejection of license
Section 23 (4A):
• any cooperative bank seeking permission of RBI for branch opening is required to forward
applications to RBI through NABARD;
• NABARD shall give its comments on the merit of the cases and send to RBI an advance copy of
the application shall be sent by the Cooperative bank directly to the RBI.
Section 24-A:
• RBI has power to exempt any cooperative bank from the whole of or any part of the provisions
of Section 18 or Section 24 of the Act.
Section 35 A:
• Powers of RBI to give directions: RBI is empowered to issue directions to cooperative banks in
general or to any cooperative bank in particular on any aspect of working of such banks.
Section 45:

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• Under this section, the Reserve Bank can recommend to the Central Government, to order a
moratorium in respect of a cooperative Bank. The power to issue such a moratorium however
rests with the Central Government.
Section 46:
• In this section, various penalties that may be imposed on cooperative banks, for non-compliance
with the various provisions of the B.R. Act, have been specified.
Section 53:
• Power to exempt; The Central Govt. may, on the recommendation of RBI, exempt any banking
company or any class of banking companies from any or all provisions of this Act.

KEY POINTS
• primary agricultural societies are excluded from the scope of the banking regulation act 1949;
• the minimum capital requirement is only Rs. 1 lakh for banks;
• a cooperative bank can not engage in any trading activity (except of government and approved
securities);
• Cooperative banks have to maintain a cash reserve ratio of 3% of NDTL in cash and current
accounts with RBI and other notified banks. Scheduled cooperative banks have to maintain CRR
under the RBI act in an account with RBI. Overall the cash reserve ratio requirements are lower
than that for commercial banks;
• cooperative banks need to maintain statutory liquidity ratio of 25% of NDTL in the form of gold,
balances with state cooperative banks and in unencumbered approved securities;
• cooperative banks cannot hold more than 5% of private capital of any other cooperative society;
• RBI can determine the banking policy for the advances to be made by cooperative banks;
• cooperative banks should have applied for a license from RBI to carry on banking business;
• cooperative banks and societies have to submit various returns to RBI regarding CRR/SLR,
assets and liabilities, unsecured loans to directors, advances to priority and weaker sector,
shareholding in cooperative societies, non-performing assets and audited balance sheet, profit
and loss account of statutory audit report as per the periodicity prescribed for different
statements.

REFORMS IN THE BANKING REGULATION ACT, 1949:

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Consequent upon the implementation of the recommendations of the Committee on Revival of the
Cooperatives, certain amendments to the BR Act would be required and these would include the
following aspects:
• all cooperative banks would be on par with the commercial banks as far as regulatory norms are
concerned;
• RBI will prescribe fit and proper criteria for election to Boards of cooperative banks. Such
criteria would however not be at variance with the nature of membership of primary cooperatives
which constitute the membership of the DCCBs and SCBs;
• However, as financial institutions, these Boards would need minimum support at the Board level.
Hence, the RBI will prescribe criteria for professionals to be on the Boards of cooperative banks.
In case members with such professional qualifications or experience do not get elected in the
normal electoral process, then the board will be required to co-opt such professionals to the
board and they would have full voting rights;
• The CEOs of the cooperative banks would be appointed by the respective banks themselves and
not by the State government. However, as these are banking institutions, RBI will prescribe the
minimum qualifications of the CEO to be appointed and the name proposed by the cooperative
bank for the position of CEO would have to be approved by RBI;
• Cooperatives other than cooperative banks as approved by the RBI shall not accept non-voting
member deposits. Such cooperatives would also not use words like “bank”, “banking”, “banker”
or any other derivative of the word “bank” in their registered name.

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 RBI POLICIES FOR CO-OPERATIVE BANKS

The RBI appointed a high power committee in May 1999 under the chairmanship of Shri. K.
Madhava Rao, Ex-Chief Secretary, Government of Andhra Pradesh to review the performance of
Urban Co-operative Banks (UCBs) and to suggest necessary measures to strengthen this sector. With
reference to the terms given to the committee, the committee identified five broad objectives:

• To preserve the co-operative character of UCBs

• To protect the depositors’ interest

• To reduce financial risk

• To put in place strong regulatory norms at the entry level to sustain the operational efficiency of
UCBs in a competitive environment and evolve measures to strengthen the existing UCB structure
particularly in the context of ever increasing number of weak banks

• To align urban banking sector with the other segments of banking sector in the context of
application or prudential norms in to and removing the irritants of dual control regime

• RBI has extended the Off-Site Surveillance System (OSS) to all non-scheduled urban co-operative
banks (UCBs) having deposit size of Rs. 100 Crores and above.

CHANGES MADE TO BRING COOPERATIVE BANKS UNDER THE SUPERVISION OF RBI

Urban co-operative banks (UCBs) cater to the financial needs of the local community, serving
persons belonging to lower income groups in urban and semi-urban areas.   RBI (2013) had
considered the commercialization of UCBs by converting them into local area banks.  However, they
observed the importance of the cooperative spirit in the banking sector in channelling credit to
people of small means.   The High Powered Committee (HPC) on UCBs, in 2015 recommended that
RBI issue fresh licenses to UCBs to serve in unbanked/ underbanked districts, noting the role these
banks play in facilitating financial inclusion.  

However, RBI (2013) had also noted that UCBs have performed poorly due to challenges such as
low capital base, lack of sources to raise capital (UCBs raise equity capital only from members),
poor credit management and lack of professional management. 6  The 2013 paper had suggested that

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converting UCBs into local area banks to free them from dual control (of RBI and RCS) and
improve their ability to raise capital could improve their performance.  Several RBI reports have
highlighted the absence of certain regulatory and supervisory powers of RBI over UCBs as one of
the reasons for their poor performance.

While RBI regulates licensing and loan policy, prescribes prudential norms and conducts inspection
of UCBs, it requires the assistance of RCS to act against the management, or undertake restructuring
or liquidation of these banks.  For effective regulation of UCBs, the HPC (2015) had suggested that
RBI be given powers to constitute and supersede the Board of Directors, remove the Chairman,
conduct audits, and wind up UCBs.  RBI exercises these powers with regard to all other banks
regulated under the BR Act.

The Centre passed the BANKING REGULATION (AMENDMENT) ORDINANCE, 2020.

The ordinance gave the RBI more regulatory powers over urban co-operative banks (UCBs) and
multi-State co-operative societies.

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 -

 supersede boards
 restructure managements
 formulate resolution plans

The change subjected to 1,544 co-operative banks to greater RBI supervision.It also partly addressed
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.
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.

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Approach - Banking correspondents, Mudra loans and Jan Dhan accounts, apart from microfinance
NBFCs and small finance banks are active in the banking landscape. It is perhaps for this reason that
the RBI has refrained from granting new UCB licences in recent years.
RBI has tried to implement the recommendations that UCBs be actively encouraged to convert into
small finance banks.
THE BANKING REGULATION (AMENDMENT) BILL, 2020, introduced by the Minister of
Finance, Smt.Nirmala Sitaram, on September 14th ,2020,and passed on September 16,2020, was
brought up to amend the Banking regulation Act,1949
The amendment, which was brought up in the backdrop of the PMC Bank scam, seeks to strengthen
co-operative banks by increasing professionalism, enabling access to capital, improving governance
and ensuring sound banking through the Reserve Bank of India. The developments in the economy
as a whole, and the banking sector, has paved its way to modify the parent act. The amendment was
necessary, according to the minister, considering the deteriorating condition of cooperative banks in
the country. It is claimed by the central government that, by amending the principle act, it aims to
bring the cooperative banks under the supervision of the central bank. The object of this amendment
is to protect the interests of the depositors as in some cases they are being put to hardships.
FEATURES OF THE BILL
(i) substitution of Section 3 to provide that the Act shall not apply to— (a) a primary agricultural
credit society; or (b) a co-operative society whose primary object and principal business is providing
of long term finance for agricultural development, if such society does not use as part of its name, or
in connection with its business, the words “bank”, “banker” or “banking” and does not act as drawee
of cheques;
(ii) amendment of Section 45 to address the potential disruptions in the financial system by
providing for the Reserve Bank of India to prepare a scheme for the reconstruction or amalgamation
of the banking company without the necessity of first making an order of moratorium;
(iii) amendment of Section 56 to provide that notwithstanding anything contained in any other law
for the time being in force, the provisions of the Act shall apply to co-operative societies, subject to
the modifications specified therein.
The bill provides that a cooperative bank may issue equity, preference, or special shares on face
value or at premium to its member or to any person residing within its area of operation. Further, it
may issue unsecured debentures or bonds or similar securities with maturity of ten or more years to

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such persons. Such issuance will be subject to the prior approval of the RBI, and any other
conditions as may be specified by RBI.
No person is allowed to demand payment towards surrender of shares issued to him by a cooperative
bank and a cooperative bank also should not withdraw or reduce its share capital, except on the
reserve bank’s specification.
The Amendment empowers the RBI to supersede the Board of Directors of a multi-state cooperative
bank for up to five years under certain conditions. These conditions include cases where it is in the
public interest for RBI to supersede the Board, and to protect depositors.
Exemption of cooperative banks
The amendment gives powers to the reserve bank to exempt the cooperative banks from certain
provisions of the act. These provisions relate to the restrictions of certain types of employment,
qualifications of the board of directors and appointment of chairman. The principal act gives power
to the RBI to remove the employees whose remuneration, in the opinion of the RBI, is excessive, but
the amendment exempts te cooperative banks from this provision also.
The Banking Regulation (Amendment) Ordinance, 2020, promulgated on June 26, 2020, stands
repealed and has been replaced by the amendment bill.

WHY WAS THE AMENDMENT NECESSARY?

The recent Punjab and Maharashtra cooperative (PMC) bank crisis is the torch that led the light to
the bringing of the amendment. According to the media reports, the financial state of affairs of 277
urban cooperative banks is weak and they are reporting loss. 105 cooperative banks are unable to
meet the minimum regulatory capital requirement. 47 banks have net worth is negative. 328 urban
cooperative banks have more than 15 per cent gross NPA ratio.
The statement of objects and reasons of the bill mentions poor economic situation arising from the
COVID-19 pandemic that had increased the stress in both cooperative banks and banking
companies,and hence there was an immediate need for the legislation.
The bill empowers the Reserve Bank of India to deal with stressed assets in the banking sector.
Primarily, the amendment bill allows RBI to initiate insolvency and bankruptcy against willful loan
defaulters. The object of the amendment, i.e., to bring the cooperative societies under the umbrella of
the central bank has been very well achieved since the RBI is empowered with more powers to
reconstruct the weaker bank even without a prior order of moratorium from the central government.

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THE BILL RECEIVED PREDENTIAL ASSENT ON 29TH SEPTEMBER 2020 AND BECAME
THE BANKING AND REGULATION AMENDMENT ACT 2020.

Recently The Reserve Bank of India (RBI) on February 15 announced setting up of an expert
committee on Primary Urban Co-operative Banks (UCBs) that will review rules to examine the
issues in the sector and provide a future roadmap. The eight-member committee is chaired by
Deputy Governor NS Vishwanathan.
The Indian banking system has witnessed a number of co-operative bank failures in recent years on
account of worsening financials and corporate governance issues. In 2020 alone, the RBI cancelled
permits of three co-operative banks and imposed restrictions on a number of banks.

The committee will take stock of the regulatory measures taken by the Reserve Bank and other
authorities in respect of UCBs and assess their impact over the last five years to identify key
constraints, the RBI said. The RBI had first mentioned the plan to review rules of UCBs during the
announcement of the last monetary policy.
The panel will review the current regulations and recommend suitable measures and changes to
strengthen the sector, taking into account recent amendments to the Banking Regulation Act, 1949, it
said.
Besides, the panel will also suggest effective measures for faster rehabilitation and resolution of
UCBs and assess the potential for consolidation in the sector and consider the need for differential
regulations, the RBI said.

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 CO-OPERATIVE BANKS AND NABARD

As an apex bank involved in refinancing credit needs of major financial institutions in the country

engaged in offering financial assistance to agriculture and rural development operations and
programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory
functions in respect of co-operative banks and Regional Rural Banks (RRBs).

 As part of these functions, it

• Undertakes inspection of Regional Rural Banks (RRBs) and co-operative banks (other than
urban/primary co-operative banks) under the provisions of Banking Regulation Act, 1949.

• Undertakes inspection of State Co-operative Agriculture and Rural Development Banks

(SCARDBs) and apex non-credit co-operative societies on a voluntary basis

• Undertakes portfolio inspections, systems study, besides off-site surveillance of co-operative

banks.

• Provides recommendations to Reserve Bank of India on opening of new branches by State

Co-operative Banks. 

• Administering the Credit Monitoring Arrangements in Co-operative banks.

Core Functions of NABARD for Co-operative Banks:

NABARD has been entrusted with the statutory responsibility of conducting inspections of State Co-
operative Banks (SCBs), District Central Co-operative Banks (DCCBs) and Regional Rural Banks
(RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also
been conducting periodic inspections of state level co-operative institutions such as State Co-
operative Agriculture and Rural Development Banks (SCARDBs), on a voluntary basis.

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 CHALLENGES POSED BEFORE CO-OPERATIVE BANKS

Apart from the inherent weaknesses pertaining to the sector such as politicization dominance of
bureaucracy and state interference, lack of member participation, lack of commitment, wrong
perception; the co-operative banking sector is facing the following serious issues:

• Lack of committed and dynamic leadership from the young generation.

• Lack of professionalism in management.

• Impairment in governance; on the financial and managerial fronts.

• Absence of or inadequate technology adoption by much banks-low competitiveness.

• Very few banks have strong MIS in place.

• Not many banks have HRD policies which are conducive to the growth of institution in the
context of emerging managerial challenges.

• Lack of customer intelligence and data base.

• Poor risk management practices.

• Lack of customer orientation and marketing initiatives.

• Low share of non fund based income.

• Higher cost of funds and the management cost-low margin.

• Generation gap in membership and customer base.

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CONCLUSION AND SUGGESTIONS

Co-operative banks take active part in local communities and local development with a stronger
commitment and social responsibilities. These banks are best vehicles for taking banking to
doorsteps of common men, unbanked people in urban and rural areas. Their presence in the social,
economic and democratic structure of the country is essential to bring about harmonious
development and that perhaps is the best justification for nurturing them and strengthening their
base. These banks are sure to win in the race because they are from the people, by the people and of
the people.

Competence, operational efficiency and professionalism are the key factors that cooperative banks

must acquire and maintain in the present condition. The prevailing economic order, supervisory and
regulatory (legal) environment and the political climate calls for re-structuring of bank’s framework.
The degree of competition is assorted and the entry of new generation banks is stimulating
them. Changing profile of Indian consumer and the emerging new market segments magnetize the
product and process innovation by the players in the industry. The pressures from all the way compel
the firms to become more competent and the future for them is “Survival of the Fittest.”

The future vision of cooperative banks should be oriented towards promotion of excellence and
increased productivity along with customer orientation and image building.

The Banking and Regulation amendment act 2020, empowers the Reserve Bank of India to deal with
stressed assets in the banking sector. Primarily, the amendment bill allows RBI to initiate insolvency
and bankruptcy against willful loan defaulters. The object of the amendment, i.e., to bring the
cooperative societies under the umbrella of the central bank has been very well achieved since the
RBI is empowered with more powers to reconstruct the weaker bank even without a prior order of
moratorium from the central government.

The powers vested on the RBI are rationale as it is not merely a regulator, but also performs other
functions like public debt management. The act would enable banks to start realizing the money, and
assets to be utilized more efficiently.

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 BIBLIOGRAPHY

BOOKS:

• M.L. Tannan, “Tannan’s Banking Law and Practice in India”, Wadhwa and Company
Nagpur, 21st Edn., Reprint 2007.

• S.N. Gupta, “The Banking Law”, Vol. II, Universal Law Publishing Co. Pvt. Ltd., 5th Edn.,
2010.

• M.L. Jhingan, “Money, Banking, International Trade and Public Finance”, Vrinda
Publication Pvt. Ltd., 7th Edn., Reprint 2007.

WEBSITES:

 https://www.rbi.org.in/scripts/fun_urban.aspx

 http://shodhganga.inflibnet.ac.in/bitstream/10603/2031/11/11_chapter%202.pdf

 http://www.prsindia.org/uploads/media/vikas_doc/docs/bills/1167469384/bill54_200701035
4_ReportoftheTaskForceonRevivalofRuralCooperative_Credit_Institutions_NABARD.pdf

 https://www.rbi.org.in/scripts/fun_urban.aspx

 http://www.scribd.com/doc/8361020/india-banking-sector

 https://www.moneycontrol.com/news/business/rbi-sets-up-expert-panel-to-review-urban-co-
operative-banks-regulations-6512881.html
 https://www.prsindia.org/billtrack/banking-regulation-amendment-bill-2020-0#:~:text=The
%20Banking%20Regulation%20%28Amendment%29%20Bill%2C%202020%20amends
%20the,introduced%20in%20Lok%20Sabha%20on%20September%2014%2C%202020.

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