On September 16, 2020, Lok Sabha passed the Banking Regulation (Amendment) bill, 2020. The bill aims to bring cooperative banks under the supervision of Reserve Bank of India.

Highlights

The bill replaced the Banking Regulation (Amendment) Ordinance, 2020. The ordinance was promulgated in June 2020. It amends the Banking Regulation Act, 1949. It will regulate functioning of banks on aspects such as management, licensing, and operation of banks. It will help safeguard the interests of cooperative banks. The act is being amended to prevent PMC bank like scenarios in the future.

Exclusions

The amendment is not applicable to cooperative societies such as primary agricultural credit societies and land mortgage banks. The bill restricts the cooperative banks from making loans or advances of its own shares. It also prohibits grant of unsecured loans to its directors.

Key Features

  • The amendment allows RBI to initiate a scheme to reconstruct or amalgamate without imposing moratorium. The RBI shall prepare a scheme to secure proper management in the interest of depositors, banking system or general public.
  • The bill allows the cooperative banks to issue equity and special shares to its members or any other person residing within the area of operation. The cooperative bank shall not reduce or withdraw its capital except as specified by RBI. Also, no person shall be entitled to demand payment towards surrender of shares that are issued to him by the cooperative bank.
  • A person who is insolvent cannot be employed as Chairman of a cooperative bank. The bill empowers RBI to remove the chairman is he is found unfit and appoint a suitable person.
  • The board of directors appointed by RBI should have at least 51% of members with special knowledge or experience in areas such as banking, accounting, economics or law. The bill empowers RBI to direct a cooperative bank to reconstitute its board.
  • RBI under the amendment, shall exempt cooperative bank from certain provisions through notification. The provisions can be related to appointment of chairman, qualification of board of directors or types of employment.

What is PMC bank crisis?

A 35 year old Punjab and Maharashtra Cooperative Bank faced severe distress in 2019. The Reserve Bank of India interfered and imposed a ruling that the customers of PMC cannot withdraw more than Rs 1,000 from their accounts for six months. The apex bank was greatly criticised for this step. The Banking Regulation act is being amended to prevent these situations where cooperative banks face huge distress especially due to bad loans.

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