Supervision of co-operative banks by RBI

The Government ordinance to empower Reserve Bank of India to supervise the Urban Co-operative Banks is a welcome step in the right direction so that they have control over the affairs and performance and particularly the lending portfolios of the Urban Co-operative Banks. Many of them are already under RBI watch list with some of them under moratorium also.  

In this connection Supreme Court of India judgment under CIVIL APPELLATE/ORIGINAL JURISDICTION CIVIL APPEAL NO. 5674 OF 2009 in the matter of PANDURANG GANPATI CHAUGULE VERSUS VISHWASRAO PATIL MURGUD SAHAKARI BANK LIMITED and many other such Civil Petitions filed between 2009 to 2020 delivered on 05.05.2020 by 5 judges’ bench may be referred. The operative part of the judgment pertaining to status of urban co-operative banks and multi-state co-operative banks as far as Banking Regulations Act and the entitlement of Co-operative banks to make use of the provisions of SARFAESI Act for the recovery of bank dues are as follows.

“(2) The co-operative banks involved in the activities related to banking are covered within the meaning of 'Banking Company' defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of co-operative banks run by the co-operative societies. The co-operative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking' in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India”.

“(3)(a) The co-operative banks under the State legislation and multi-state co-operative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.

“(3)(b) The Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with respect to co¬ operative banks. The provisions of Section 2(1)(c)(iva), of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, adding “ex abundanti cautela”, ‘a multi-state co-operative bank’ is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the co¬ operative banks registered under the State legislation. The civil appeals, writ petitions and the pending applications, if any, are disposed of accordingly.”

The co-operative banks run by the co-operative societies registered under the State legislation with respect to the aspects of 'incorporation, regulation and winding up', in particular, with respect to the matters which are outside the purview of Entry 45 of List I of the Seventh Schedule of the Constitution of India, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution of India and hence, RBI could not exercise effective control over them. Besides, State Government arereluctant to dilute their control and allow RBI to exert their regulatory powers. Many of the urban co-operative banks are under the control of politicians and certain vested interest people with the result they completely lack good governance, financial discipline, effective credit monitoring and prudential norms applicable to lending by commercial banks. The knowledge about law and practice of banking is very much limited among all category of employees from top to bottom. The many bank failures among the co-operative banks has created a crisis of confidence and faith among the public because of which the market share of co-operative banks shows a sharp decline. 

With the induction of RBI regulatory powers applicable to urban co-operative banks also, it is expected that the Apex Bank would introduce latest technology and particularly to beef up its supervising wing and deploy smart technology to strengthen oversight. “Artificial Intelligence-enabled monitoring of transactions will allow the supervisor to see patterns of interconnected transactions among multiple banks and shadow banks that today escape scrutiny”. By introducing core banking solutions, enhancing robust professionalism, improving good governance, introducing effective credit monitoring, supervision and also a strong and healthy audit system, these urban co-operative banks could bring back the confidence and trust of the public back to improve their dwindling market share. 

The success and performance of urban co-operative banks depend not only on the introduction of technology but the quality of human resources. The economic results are produced not by machines and technology but people behind the machines and technology coupled with quality of leadership. Hence, it is imperative that steps are to be taken to re-engineer the entire human resources including the Board of Directors governing the co-operative banks with delegated powers and monitoring systems as prevailingamong the commercial banks and they should be made accountable and responsible to the customers, shareholders, stakeholders, RBI and the government.  

Till now Reserve Bank of India has been issuing notifications and circulars addressed to commercial banks and urban co-operative banks separately which created doubt whether multi-state co-operative banks and urban co-operative banks are coming under the purview of Banking Regulation Act. With the introduction of the ordinance bringing the urban co-operative banks and multi-state co-operative banks under the purview of Banking Regulation Act to be implemented through RBI, henceforth RBI need issue notifications and circulars through common circulars addressing to commercial banks, multi-state co-operative banks and urban co-operative banks instead of separate notifications and circulars. It is expected that bringing the urban co-operative banks under the RBI supervision and the Banking Regulation Act would usher in a dynamic paradigm change in the working of Co-operative banks.