In a bid to protect the interest of depositors, the Lok Sabha on Wednesday passed an amendment to the Banking Regulation Act to bring cooperative banks under the supervision of the RBI.
The Banking Regulation (Amendment) Bill, 2020 replaces an ordinance that was promulgated on June 26.
The bill, which comes in the backdrop of the PMC Bank scam, seeks to strengthen cooperative banks by increasing their professionalism, enabling access to capital, improving governance and ensuring sound banking through the RBI.
Replying to the debate on the bill in the Lok Sabha, Finance Minister Nirmala Sitharaman said this legislation is for depositors' safety and not for undermining powers of the Registrar of Cooperative Societies.
Powers of the Registrar of Cooperative Societies have not been encroached upon but banking activity of cooperatives will be regulated by the Reserve Bank of India (RBI), she said.
"I want to make it very clear that this bill does not provide for regulation of cooperative banks by the central government.. We are not doing anything new, we are working in the interest of depositors," she added.
The amendment is not for the central bank to take over control of cooperative banks, she said.
Clarifying on the need for the ordinance, the finance minister said, "Absolutely there was a need for it. One was not sure when will be the next session of Parliament because of COVID-19 pandemic, and in the meanwhile, the protection of depositors is of critical importance."
Moreover, there was rise in non-performing assets (NPAs) of the cooperative banks, Sitharaman said.
As per the annual financial data made available before June, there was an increase in gross NPA ratio of urban cooperative banks to 10 per cent in 2019-20 as against 7 per cent in 2018-19, she added.
The finance minister emphasised that the government has not forgotten the success of the cooperative movement, but added if cooperatives are providing banking services, then several committees have recommended that there is a need to regulate them.
"It's not as if we have forgotten the success of the cooperative movement. We are not undermining, but we must face the truth that in the last two decades, 430 cooperative banks have been delicensed and they have gone into liquidation," she said.
"In contrast, not a single commercial bank in the same period whose depositors are protected by the banking laws have gone into liquidation...so it should not be construed as we are stepping into the terrains of the states," she added.
Opposition parties had protested against the bill, saying it infringed upon the states' rights.
"We don't undermine anybody, but if depositors are suffering we have to stand with them...We are bringing this law to safeguard interest of depositors," Sitharaman added.
The proposed law seeks to enforce banking regulation guidelines of the RBI in cooperative banks, while administrative issues will still be guided by the Registrar of Cooperatives.
It is aimed at bringing cooperative banks on par with developments in the banking sector through better management and proper regulation which protects the interest of depositors.
The bill assumes significance in the wake of a scam in the Punjab and Maharashtra Cooperative (PMC) Bank affecting lakhs of customers who have been facing difficulty in withdrawing their money due to restrictions imposed by the RBI.
The PMC Bank was found to have given over Rs 6,700 crore loan to a single realty company HDIL through allegedly fraudulent means and also hid the exposure from the RBI by creating separate books of accounts.
There are about 1,540 cooperative banks with depositor base of 8.60 crore having total savings of around Rs 5 lakh crore.