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Supervision of Co-operative Banks by RBI

Ashish M. Shaji

| Updated: Jul 26, 2020 | Category: Credit Co-operative Society

Supervision of Co-operative Banks

In one of the massive developments in the finance sector, the Government of India has decided to bring all co-operative banks under the supervision of RBI. It is set to bring comfort to the depositors of these banks. The supervision of co-operative banks by RBI is also expected to prevent colossal bank frauds.  

What are the Co-operative banks?

A Co-operative bank is a financial entity that belongs to its members who are owners as well as the customers of the bank. Co-operative banks are registered under the States Cooperative Societies Act. It is a jointly-owned and democratically-controlled enterprise. It is designed on the principles of mutual help and democratic decision making.

What is the reason for the supervision of co-operative banks by RBI?

The decision to bring co-operative banks under the supervision of RBI comes after several cases of fraud and severe financial irregularities not to forget the major scam at the Punjab and Maharashtra Co-operative Bank in 2019.

Another reason for this change can be that, till now, the co-operative banks came under the dual regulation of the RBI and the registrar of co-operative societies. It created regulatory as well as supervisory lapses at many of these banks. The RBI had no power to draw up an enforceable scheme of reconstruction of a co-operative bank. However, this is set to see an overhaul as the urban and multi-state co-operative banks will come under the supervision of RBI.

Another fact of the matter is that many urban co-operative banks work at the behest of politicians and many vested interest people, and as a result, they lack good governance, financial discipline, credit monitoring, etc. Bank failures among the co-operative banks have derailed the confidence of the public on banks due to which the market share of co-operative banks has shown a sharp decline.

What are the benefits of the supervision of co-operative banks by RBI?

There are multiple benefits from this move as it will empower the Reserve Bank to regulate all urban and multi-state co-operative banks on the lines of commercial banks. It gives RBI the power to have control over their affairs and performance and especially the lending portfolios of the urban co-operative banks.

The new regulatory structure is expected to strengthen co-operative banks, which play an essential role in financial inclusion and cater to both rural as well as urban areas.

It will also provide added security to depositors where the depositors can be assured of the safety of their hard-earned money.  In India, there are 1482 urban co-operative banks and 58 multi-state co-operative banks. These banks have a depositor base of 8.6 crores and have deposited close to 4.84 lakh crore rupees with these banks.

What are the potential changes that we will see due to the supervision of co-operative banks by RBI?

The changes that we may see in urban co-operative banks due to the supervision of co-operative banks by RBI would be:

  • The accounts of urban co-operative banks will now be audited as per RBI norms;
  • It also means that the RBI can now carry out on-site inspections which will help in curbing the malpractices;
  •  Appointment of CEOs will now require RBI’s approval;
  • The board will come under the supervision of the RBI; and
  • It also gives RBI the power to remove the management for any failure in the governance.

What are the future prospects of the move to bring co-operative banks under RBI?

The introduction of RBI regulatory powers to co-operative banks may cause the Reserve Bank to introduce new technologies to upgrade its supervision and deploy smart technology that will help in strengthening the oversight. Artificial Intelligence enabled transaction monitoring will permit the supervisor to see patterns of interconnected transactions among the shadow banks and multiple banks.

By introducing various measures such as core banking solutions, enhancing professionalism, improving good governance, proper credit monitoring, and supervision, these urban co-operative banks can bring the confidence and the trust back of the public. It will cause their dwindling market share to improve.

The success of the co-operative banks also depends on the quality of human resources. Favorable economic results cannot be achieved by mere technologies but also by people involved behind these technologies with leadership qualities.  Therefore it is essential that steps are formulated to re-engineer the entire human resources, which involve the board of directors and monitoring systems, and they must be held responsible and accountable to customers and RBI.

The Reserve Bank of India was issuing notifications and circulars to commercial banks and to urban co-operative banks separately until now. This created a doubt whether the multi-state co-operative banks and urban co-operative banks come within the purview of the Banking Regulation Act. This move from the government bringing the multi-state co-operative banks and urban co-operative banks under the purview of Banking Regulation Act, the RBI just needs to issue notifications and circulars through common circulars addressing the commercial banks, the multi-state co-operative banks, and urban co-operative banks. It eliminates the need for separate notifications and circulars.

Conclusion

One can expect that the supervision of co-operative banks by RBI and the Banking Regulation Act will bring a significant change in the working of co-operative banks. Co-operative banks were considered as a weak link in the financial system due to lack of adequate oversight, but this trend is going to change as the union cabinet approved the amendment to the Banking Regulation Act to bring the Co-operative banks under the RBI. The depositors of these banks are also set to benefit from the change in terms of immunity and protection of the deposit insurance.
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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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