Cooperative Banks

Cooperative Banks

Subject: Economy

Context:

The Bombay High Court (HC) has suspended the operation of the Reserve Bank of India (RBI) order cancelling the banking license of the 110-year old Rupee Co-op Bank Ltd till next month –as the appeal to the order is pending before the Appellate Authority, Department of Financial Service (Banking Division) Ministry of Finance.

Details:

The Task Force for Co-operative Urban Banks (TAFCUB) recommended cancellation of licence of the bank.

Why did RBI cancel the licence of Rupee Cooperative Bank?

• The bank does not have adequate capital and earning prospects as per  Section 11(1), Section 22 (3) (d) and Section 56 of the Banking Regulation Act, 1949.
  • Section 11 deals with requirements as to minimum paid-up capital and reserves.
  • Section 22  deals with licensing of banking companies.
  • Section 56 is about the applicability of the Act to cooperative societies, subject to modifications
• The bank has failed to comply with certain other provisions of the Banking Regulation Act, 1949.
• The continuance of the bank is prejudicial to the interests of its depositors.
• It  would be unable to pay its present depositors in full given the present financial condition.
• Adverse to the public interest if further allowed to do business.

What will happen to the depositors’ money in Rupee Cooperative Bank?

• Depositors with Rs 5 lakh or less in the bank would get back all of their money through the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Depositors with more than Rs 5 lakh would not get back their money beyond 5 lakh.

What is a banking licence?

• The RBI issues the licence under the Banking Regulation Act of 1949 for banking operations such as accepting deposits or lending .
• Parameters–The 1949 Act focuses on adequate capital and protection of the public interest before the licence is granted.
  • Capital Adequacy Ratio (CAR) — the ratio of a bank’s available capital to its risk weighted credit exposure.
  • Loan to Deposit Ratio (LDR) — the ratio of a bank’s total loans to total deposits in the same period.
• No company other than one that has been issued a banking licence is allowed to use the word bank in its name while doing business.
• The RBI audits banks every year, and can take action if it notes an increase in bad debts or other suspicious activities in their books.
  • For example –if a bank does not have enough capital to cover its exposure and pay its depositors, its licence can be cancelled by the RBI.

Options other than cancellation:

• All banking activities like withdrawal can be suspended
• The  board of directors can be superseded
• Appointment of administrator to revive the bank, including merging the bank with a financially stable bank, filing of criminal cases against defaulting directors, employees, and seizing of their properties.

Cooperative Banking

• A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
• Co-operative banks in India are registered under the States Cooperative Societies Act.
• The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949, Banking Laws (Co-operative Societies) Act, 1955.
• The rural co-operative credit system in India is primarily mandated to ensure flow of credit to the agriculture sector.
  • It comprises short-term and long-term co-operative credit structures.
    • The short-term co-operative credit structure operates with a three-tier system –

• Primary Agricultural Credit Societies (PACS) at the village level and the are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India. ,
• Central Cooperative Banks (CCBs) at the district level and
• State Cooperative Banks (StCBs) at the State level.
  • StCBs/DCCBs are registered under the provisions of State Cooperative Societies Act of the State concerned and are regulated by the Reserve Bank.
• Powers have been delegated to National Bank for Agricultural and Rural Development (NABARD) to conduct inspection of State and Central Cooperative Banks.

• Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the financial needs of customers in urban and semi-urban areas.
  • UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries of one state.
  • There is duality of control over these banks with  banking related functions being regulated by the Reserve Bank of India and management related functions regulated by respective State Governments/ Central Government.