The Union cabinet on Wednesday approved changes to the Banking Regulation Act to give the Reserve Bank of India wider powers to regulate cooperative lenders and prevent frauds such as the one seen at Punjab and Maharashtra Co-operative Bank Ltd.
Once the amendment is cleared by Parliament, cooperative banks will be audited according to RBI’s norms and the central bank can supersede the board, in consultation with the state government, if any cooperative bank is under stress, information and broadcasting minister Prakash Javadekar said after the Cabinet meeting. Appointments of chief executives will also require permission from the banking regulator, as is the case for commercial banks, the minister said.
Cooperative banks are currently under the dual control of the Registrar of Cooperative Societies and RBI. While the role of registrar of cooperative societies includes incorporation, registration, management, audit, supersession of board and liquidation, RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.
The administrative role will continue to be done by the Registrar of Cooperative Societies, Javadekar said. The amendments will apply to all urban co-operative banks and multi-state cooperative banks.
Javadekar said the proposed amendment is aimed at protecting the interests of 86 million depositors who have put money totalling around ₹5 trillion in 1,540 cooperative banks in the country. The government’s move to strengthen oversight of cooperative banks comes after the collapse of PMC Bank.
The finance ministry will introduce the bill in the Parliament in the next few days, Javadekar said.
In September, the RBI superseded PMC Bank’s board after uncovering several irregularities. Cash withdrawals were capped at ₹1,000 per account for six months, but subsequently relaxed to ₹50,000 as panic spread among depositors. The minister also said audit of such banks will be as per RBI guidelines and recruitment for banks’ management will be based on certain qualifications. All these steps will be implemented by RBI in a phased manner.
Urban cooperative banks reported nearly 1,000 cases of fraud worth more than ₹220 crore in past five fiscal years, a Press Trust of India report said, citing the RBI.