Explained: Why is the NCP opposing RBI supervision of cooperative banks?

The changes to The Banking Regulation Act approved by Parliament in September 2020, brought cooperative banks under the direct supervision of the RBI. Why is the NCP opposing the new laws?

During a meeting with his party on Wednesday (June 2), NCP chief Sharad Pawar approved a plan to set up a task force to prepare an action plan against a recent change in the law that has brought cooperative banks under the supervision of the Reserve Bank of India (RBI).

The proposed task force will be headed by Balasaheb Patil, NCP leader and Cooperation Minister in Maharashtra’s Maha Vikas Aghadi (MVA) government.

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NCP spokesperson Nawab Malik said the Centre was trying to weaken the cooperative banking sector through changes to The Banking Regulation Act, 1949, and the NCP would stop its “game”.

Malik said Pawar had worked to boost cooperative banks, but the central government was now taking away its rights, and making private banks powerful instead.

How has The Banking Regulation Act been amended?

Cooperative banks have long been under dual regulation by the state Registrar of Societies and the RBI. As a result, these banks have escaped scrutiny despite failures and frauds.

The changes to The Banking Regulation Act approved by Parliament in September 2020, brought cooperative banks under the direct supervision of the RBI.

The amended law has given RBI the power to supersede the board of directors of cooperative banks after consultations with the concerned state government. Earlier, it could issue such directions only to multi-state cooperative banks.

Also, urban cooperative banks will now be treated on a par with commercial banks.

And a cooperative bank can, with prior approval of the RBI, issue equity shares, preference shares, or special shares to its members or to any other person residing within its area of operation, by way of public issue or private placements.

It can also issue unsecured debentures or bonds with maturity of not less than 10 years. This essentially means non-members can become shareholders of the bank, and this will allow the RBI to merge failing banks quickly.

What triggered the need for the changes in the law?

India has some 1,540 urban cooperative banks, with a depositor base of 8.6 crore and deposits of at least Rs 5 lakh crore.

Finance Minister Nirmala Sitharaman told Lok Sabha last year that the financial status of at least 277 urban cooperative banks was weak, and around 105 cooperative banks were unable to meet the minimum regulatory capital requirement.

Also, Sitharaman said, the net worth of 47 banks was in the negative, and as many as 328 urban cooperative banks had gross non-performing assets of more than 15 per cent.

According to RBI’s latest financial stability report, the gross non-performing asset ratio of urban cooperative banks deteriorated from 9.89 per cent in March 2020 to 10.36 per cent in September 2020.

Not only do these banks have high levels of bad loans, they also have a small capital base — something that the changes in the law has tried to address by allowing these banks to issue shares with RBI’s approval.

Political interference in staff appointments is also a problem with these banks, which has added to inefficiencies.

But why is the NCP opposing the new laws?

Almost a third of India’s 1,500-plus urban cooperative banks are in Maharashtra — the state has 497 operational urban cooperative banks and 31 district central cooperative banks, with total deposits of Rs 2.93 lakh crore.

A large number of these banks are controlled by NCP leaders. The new law brings them under the direct regulation of the RBI, which will increase their accountability and put them under scrutiny that they have so far escaped.

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