RBI Notification

Cooperative societies are prohibited from using the word “Bank” in their names

The Reserve Bank of India (RBI) has warned the public against dealing with cooperative societies that have added the word “bank” to their names in order to do banking activities. The public is thus advised by the RBI that such societies have neither been granted a license under the Banking Regulation Act, 1949 nor have they been authorized to do banking operations by the RBI.

RBI wants the public to be cautious before engaging with cooperative societies

The RBI has issued a warning to cooperative societies that use the word “bank” in their titles and accept deposits from non-members. The RBI said that co-operative societies may not use the words “bank,” “banker,” or “banking” in their names unless specifically authorized by the Banking Regulations Act of 1949 or the RBI. It further stated that cooperative societies have not been granted a license under the Banking Regulations Act of 1949, nor have they been permitted by the RBI to do banking activities. The Banking Regulation Act of 1949 was revised through the Banking Regulation (Amendment) Act 2020, which came into effect on September 29, 2020.

According to Section 7 of the Banking Regulation Act of 1949, the Reserve Bank of India discovered that certain cooperative societies were using the word “bank” in their names in contravention of the Banking Regulation Act. Section 7 states that no firm other than a banking company shall make use of the words: “bank”, “banker”, or “banking” as part of its name [or in connection with its operation], and no company shall engage in the business of banking in India unless it uses at least one of such phrases as part of its name. No corporation, individual, or group of individuals shall make use of the phrases: “bank”, “banking”, or “banking company” as part of its or his name for the purpose of carrying on any activity.

It has also come to the RBI’s attention that certain co-operative societies are accepting deposits from non-members, nominal members, and associate members, which is comparable to doing banking operations in contravention of the legal rules and regulations.

A Co-operative Society is a society that has been registered or is presumed to have been registered by any Central Act that is currently in effect pertaining to multi-State Cooperative Societies, or any other Central or State law that is currently in force related to Co-operative Societies. Co-operative Societies do not have banking licenses and are created with the goal of promoting the economic interests of their members. As a result, cooperative organizations can only keep accounts and strictly collect deposits from their members only.

Thus, cooperative societies are established to promote their members’ economic and social interests. It can only keep accounts for its members and receive deposits from them, not from non-members.

Furthermore, insurance coverage from the Deposit Insurance and Credit Guarantee Corporation (DICGC)^[1] is not provided for deposits made with these societies.

According to the RBI, members of the public are recommended to exercise caution and due diligence when dealing with such co-operative societies that claim to be banks and to check for a banking license issued by the RBI before associating with them.

In the meantime, the Reserve Bank of India (RBI) has approved a new proposal for the takeover/acquisition of Punjab and Maharashtra Cooperative (PMC) Bank by Delhi-based Unity Small Finance Bank (USFB). Under the proposed merger proposal, the central bank stated on record that USFB Bank will acquire PMC Bank’s assets and liabilities, including deposits. This will provide stronger protections for the bank’s depositors. The Unity Small Finance Bank was established with Rs. 1,100 crore capital. The statutory prerequisite for establishing such a bank, however, is merely Rs. 200 crore. Centrum Group and Bharat Pe have partnered to form Unity Small Finance Bank Ltd. On November 1, 2021, this joint venture began its operations as a small finance bank.

Conclusion

The RBI recently discovered that several cooperative societies are breaking the rules of the Banking Regulation Act by taking deposits from non-members / nominal members/ associate members, which is the same as doing banking activity on their behalf. As a result, the RBI informed the public in a press release that such societies have not been awarded a license under the Banking Regulation Act and are not permitted by the RBI to do any sort of banking operations. The RBI further advises the public to be cautious and do due diligence on such Co-operative Societies before doing any kind of business with them.

Read our article:RBI issues Guidelines to manage Risk in Outsourcing of Financial Services by Co-operative Banks