Finance Minister, Nirmala Sitharaman introduced the Banking Regulation (Amendment), Bill 2020 in Lok Sabha.
What is the Amendment?
The new law will aim at bringing the co-operative banks under the regulation of the RBI (Reserve Bank of India). As per previous law, if a bank was put under moratorium it limited the withdrawals by depositors and also disrupted the lending operations of the bank. As per the new amendments, RBI will get to manage a scheme of amalgamation without placing it under moratorium.
“Further amendments were proposed to be made in section 45 of the Act to enable the Reserve Bank of India to make a scheme to protect the interests of the public, the banking system, depositors or to secure the banking company’s proper management, without first making an order of moratorium so as to avoid disruptions in the financial system,”as stated in the introduced bill
As per the new law, the banking regulations by RBI will be applied on co-operative banks as well, this step is taken to minimise the growing scandals. The amendments will neither interfere with the authority of state registrars of co-operatives societies under state laws nor with the primary farm credit societies or the cooperative societies, whose chief business is long-term finance for agricultural development.
The amendment will further provide a green flag to raise money by public issue or private placement of equity or preference shares or unsecured debentures if RBI agrees.
Why did Amendment come to plan?
In September 2019 the bubble of PMC Bank (Punjab & Maharashtra Co-operative Bank Limited) burst, it had allegedly created fictitious accounts to hide Rs. 4,355 crore (approx.) of loans extended to HDIL (Housing Development and Infrastructure Ltd.) which is now bankrupt.
The attention has also been drawn towards the condition of co-operative banks in India. The financial status of 277 urban cooperative banks has been weak, 105 cooperative banks have been unable to meet the minimum regulatory capital requirement, he net worth of 47 banks is in negative and 328 urban cooperative banks have more than 15% gross NPA (Non-Performing Assets) ratio.
“For the last two years, depositors of cooperative banks and small banks are facing problems. We are trying to bring this amendment in order to protect the depositors. Because these banks have fallen into hard days requiring therefore the regulator to bring a moratorium and to solve the problem seems to consume all the time. During the budget session in March, we introduced this bill in order to have the amendments brought in so that depositors’ interest will be taken care of. But unfortunately, during the budget session, we could not have this bill passed”, voiced the Finance Minister.
“As the economic situation arising from the COVID-19 pandemic had increased the stress in both co-operative banks and banking companies, there was an immediate need for legislation in this regard. As Parliament was not in session, the Banking Regulation (Amendment) Ordinance, 2020 was promulgated by the President of India”was mentioned in the bill