Key Provisions of the Banking Regulation (Amendment) Ordinance, 2020

Ashish M. Shaji

15 Oct, 2022

The Banking Regulation (Amendment) Ordinance was promulgated on 26^th June 2020 in furtherance of the commitment to maintain the safety of depositors across banks. The ordinance seeks to change the Banking Regulation Act and make it applicable to co-operative banks.

 What is the main objective of the Banking Regulation (Amendment) Ordinance 2020?

The amendments intend to ensure better management and sound regulation of co-operative banks. Through this ordinance the interest of depositors is protected. Apart from this, the ordinance will strengthen co-operative banks by improving governance.

What is excluded from the amendments?

This regulation does not apply to co-operative societies whose principal business is long term financing for agricultural development. Moreover, these societies should not use the term ‘bank,’ ‘banker’, or ‘banking’ in their name or connection with their business.  It also should not act as an entity that clears cheques.

From when does the ordinance take effect?

This ordinance allows the removal of exclusions for certain co-operative societies. It carries out activities such as reconstruction and amalgamation without moratorium shall take effect from the date of its issuance.

Scheme for reconstruction or amalgamation with the imposition of the moratorium: Banking Regulation (Amendment) Ordinance

The ordinance provides that the bank cannot grant loans or make investments in any credit instruments during the moratorium. Further, during the moratorium, the Reserve Bank of India can prepare a scheme for reconstruction or amalgamation of the bank if it thinks that such order is required to secure the bank’s proper management or in the interest of depositors, the general public or the banking system. The ordinance provides that the RBI can initiate such a scheme without imposing a moratorium.

Issuance of shares and securities by co-operative banks: Banking Regulation (Amendment) Ordinance

With the prior approval of the RBI, the co-operative banks can issue securities such as equity and preference shares to its members or any person residing in its area.  These shares are issued at face value.subject to such conditions as may be specified by the RBI in this behalf.

Moreover, it can issue unsecured debentures, bonds, or similar securities with maturity of ten years or more to such a person. Further, the ordinance provides that no one would be entitled to demand payment towards the surrender of shares issued to him by the co-operative bank. Except as provided by RBI, a co-operative bank cannot withdraw or reduce its share capital.

Board of Directors to be superseded by RBI.

The Banking Regulation Act, 1949, states that the RBI can supersede the Board of Directors of a Multi-State Co-operative bank under certain conditions for up to five years. Such conditions involve cases wherein the public interest RBI supersedes the Board of Directors and to protect depositors.

The ordinance provides that where a Co-operative bank is registered with the Registrar of Co-operative societies of a state, the RBI^[1] will supersede the Board of Directors after consulting with the relevant state government and in such a period as specified by it.

Exemption of co-operative banks in some instances: Banking Regulation (Amendment) Ordinance

The ordinance provides that the RBI can, from time to time and on being satisfied that it is necessary to do, exempt a co-operative bank or a class of co-operative banks from certain provisions of the Act by notification in the official gazette.

The provisions mentioned above include restriction with respect to certain types of employment, qualifications of the Board directors, and appointment of a chairman. RBI shall specify the period and the conditions for such exemption

The omission of provisions: Banking Regulation (Amendment) Ordinance

 The ordinance omits several provisions from the Act (Banking Regulation Act, 1949). The details of which are specified below.

• Section 8 and 9 of the Act deals with the prohibition of trading and disposal of non-banking assets. Section 56 of the Act states that clause fi and fii of the section substitutes sections 8 and 9. This has been omitted in the new amendment.
• The ordinance has also omitted the provision from the Act. It prohibited the grant of unsecured loans or advances to its directors and private companies wherein the bank’s chairman or its director is an interested party. The Act provides for the conditions in which the unsecured loans or advances may be granted and further provides how the loans shall be reported to the RBI.
• The Act provides that co-operative banks cannot open a new place of business or change their location to a place outside the city, town, or village where it is currently located without RBI’s permission. The ordinance has omitted this provision of the Act.
• There is a provision that requires a scheduled co-operative bank to maintain assets with a value not exceeding 40% of its total demand and time liabilities within India. This also has been omitted by the ordinance.

Conclusion

Read our article:No More PMC Bank-Like Crisis: Government Introduces Banking Regulation Bill 2020 in Lok Sabha for Cooperative Banks