There will no longer be bank scams like the PMC Bank scam

The primary objective of cooperative banks in India has been to provide small loans to rural and remote areas as well as to economically vulnerable urban populations, thereby protecting them from usurers and middlemen. Owing to this distinct nature of cooperative banks, their regulation differed from that of commercial banks. People generally hold the faith that their money in a bank is secure. This faith has been further reinforced by the measures undertaken by the Reserve Bank of India during crises faced by commercial banks. A recent example is the Yes Bank crisis, wherein depositors' interests were safeguarded through RBI intervention. Bank scam bank scam

Despite being governed by rules distinct from commercial banks and remaining exempt from RBI regulation even during financial crises, cooperative societies utilize the word 'Bank' in their name and conduct banking operations. Since most people who deposit their funds in them hail from economically weaker sections, they operate under the belief that their money is just as secure as it is in commercial banks.

However, this confidence was shaken by the recent Punjab and Maharashtra Co-operative (PMC) Bank scam. Since the regulation of cooperative banks did not fall under the jurisdiction of the Reserve Bank of India, swift measures such as those undertaken during the Yes Bank crisis could not be initiated. In 2019, the financial condition of 277 urban cooperative banks was precarious; 105 urban cooperative banks were unable to maintain even the minimum required regulatory capital, 47 urban cooperative banks had negative net worth, and 328 urban cooperative banks had gross NPAs exceeding 15%. In March 2020, this gross NPA rose to 10% from 7.2% in March 2019. In the wake of such developments, safeguarding the interests of depositors in cooperative banks was deemed imperative. As an immediate measure, on 26 June 2020, the government promulgated the Banking Regulation (Amendment) Ordinance, 2020, which has been enacted into law during this session of Parliament.

Under this new law:

The provisions applicable to banking companies (commercial banks) have been extended to cooperative banks, so that through the RBI, better governance and sustainable banking regulation of cooperative banks may be ensured and depositors' interests secured.

The RBI has been empowered to initiate measures such as reconstruction and amalgamation without issuing an order of moratorium, with a view to protecting depositors' interests and ensuring the proper management of the banking company, thereby preventing any financial instability.

The central bank will now have the authority to approve the appointment of auditors and recommend the removal of an auditor, with the objective of improving the governance of these cooperative banks and timely identifying any financial vulnerabilities to avert future crises.

To protect the interests of depositors, the RBI will possess the authority to supersede the board of cooperative banks. Such a provision was previously applicable only to commercial banks.

The bill also provides that the autonomy of Primary Agricultural Credit Societies and State Cooperative Societies remains intact and that they continue to function as before. Furthermore, the bill stipulates that before superseding the board of a cooperative bank, the RBI shall consult the concerned state government.

Following the implementation of this legislation, depositors' interests can be secured through RBI intervention during any financial crisis in cooperative banks, just as has been done in the case of commercial banks. A bank scam like that of PMC Bank will no longer be possible in the future.

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