Parliament passes Banking Regulation (Amendment) Bill, 2020

The Parliament on September 22, 2020 passed the Banking Regulation (Amendment) Bill, 2020 with the Rajya Sabha approving it. The Lok Sabha had passed the amendment bill earlier on September 16, 2020.

The Banking Regulation (Amendment) Bill, 2020 seeks to amend the Banking Regulation Act, 1949  to bring cooperative banks under the supervision of the RBI. The bill replaces an ordinance that was issued on June 26, 2020. The Banking Regulation Act, 1949 regulates the functioning of banks and provides details on various aspects such as licensing, management and operations of banks.

Speaking on the bill's provisions, Union Finance Minister Nirmala Sitharaman said that the legislation is for depositors' safety and not for undermining powers of the Registrar of Cooperative Societies. She further clarified that powers of the Registrar of Cooperative Societies have not been encroached upon but the banking activity of cooperatives will be regulated by the Reserve Bank of India (RBI).

Objective

The Banking Regulation (Amendment) Bill, 2020 was passed in a bid to protect the interest of the depositors. Under the amendment bill, multi-state cooperative banks and urban cooperative banks will be brought under the supervision of the Reserve Bank of India. 

Banking Regulation (Amendment) Bill, 2020: Key Highlights

Under the Act, RBI may, after placing a bank under moratorium, prepare a scheme for reconstruction or amalgamation of the bank to secure its proper management, or in the interest of depositors, the general public or the banking system.

The Amendment Bill allows RBI to initiate a scheme for reconstruction or amalgamation without imposing a moratorium. If a moratorium is imposed, the Bill adds that banks cannot grant any loans or make investments in any credit instruments during the moratorium. 

Further, the bill provides that a co-operative bank may issue equity, preference, or special shares on face value or at a premium to its members or to any other person residing within its area of operation. It may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. Such issuance will be subject to the prior approval of the RBI.

Under the bill, no person will be entitled to demand payment towards surrender of shares issued to him by a co-operative bank. Further a co-operative bank cannot reduce or withdraw its share capital, except as specified by the RBI.

Under the bill's provisions, RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification. These provisions relate to restrictions of certain types of employment, qualifications of the Board of Directors and, the appointment of a chairman. The time period and conditions for the exemption will be specified by RBI.

Under the bill, co-operative banks cannot employ someone who is insolvent or has been convicted of a crime involving moral turpitude as Chairman. RBI will have the power to remove the Chairman if he is not fit and proper and appoint a suitable person if the bank does not do so.
 
Further, the Board of Directors must have at least 51% of members with special knowledge or experience in areas such as accountancy, banking, economics or law. The RBI may direct a bank to reconstitute its Board if it does not conform to the requirements. If the bank does not comply, RBI may remove individual directors and appoint suitable persons.

The Act states that RBI may supersede the Board of Directors of a multi-state co-operative bank for up to five years under certain conditions.  The Bill adds that in case of a co-operative bank registered with the Registrar of Co-operative Societies of a state, RBI may supersede the Board of Directors after consultation with the concerned state government, seeking their comments within such period as specified by it.

The bill further omits certain provisions from the Act, one of them relates to a restriction on a co-operative bank from making loans or advances on the security of its own shares. 

The bill prohibits the banks from granting unsecured loans or advances to its directors and private companies where the bank’s directors or chairman are an interested party. 

The act had specified conditions under which unsecured loans or advances may be granted as well as the manner in which the loans may be reported to RBI. The Bill omits this provision from the Act.  

Background

The Banking Regulation (Amendment) Bill, 2020 was first introduced in March during the Budget session. However, it could not be passed due to the COVID-19 pandemic. In June 2020, the Union Cabinet chaired by Prime Minister Narendra Modi approved the ordinance to bring 1,482 urban and 58 multi-state cooperative banks under the supervision of the central bank.

In total, there are about 1,482 urban cooperative banks and 58 multi-state co-operative banks with a depositor base of about 8.6 crores in India.

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