The Banking Regulation Act was amended to allow the RBI to regulate cooperative banks

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NEW DELHI: India on Saturday brought cooperative banks under the regulatory framework of the Reserve Bank of India (RBI) by amending the seven-decade-old banking regulation law through a presidential decree.

An amendment to the Banking Regulation Act will now allow bank mergers and restructurings in the public interest, without having to impose a moratorium, which not only limits withdrawals by depositors, but also disrupts the bank’s lending operations. . In addition, cooperative banks will now be allowed to raise funds through public issuance and private placement, of stocks or preferred shares as well as unsecured bonds, with the green light from the central bank. Currently, access to the capital of cooperative banks is limited.

“The ordinance aims to protect the interests of depositors and to strengthen cooperative banks by improving governance and supervision by extending the powers already available with the RBI over other banks to cooperative banks as well as with a view to ‘sound banking regulations,’ the statement said. regulations will also improve their professionalism and access to capital, the statement said.

The changes to the banking law, however, do not affect the existing powers of state registrars of cooperative societies under state laws. The changes also do not apply to primary agricultural credit societies or cooperative societies, whose main activity is the long-term financing of agricultural development.

Earlier this week, the Union Cabinet approved the order to place 1,482 urban cooperative banks and 58 multi-state cooperative banks under the supervision of the RBI, a move to strengthen the oversight of lenders, to strengthen depositors’ confidence and prevent a cooperative in Punjab and Maharashtra (PMC) Bank-type fraud.

The cooperative banks are currently under the dual control of the cooperative societies and the RBI. While the role of the cooperative society includes constitution, registration, management, audit, board change and liquidation, RBI is responsible for regulatory functions.

Government move follows PMC Bank collapse, allegedly creating fictitious accounts for hiding ??4,355 crore in loans granted to the now bankrupt Housing Development and Infrastructure Ltd (HDIL). The fraud, which was discovered by RBI in September, trapped millions of depositors.

In March, Finance Minister Nirmala Sitharaman tabled amendments to the 1949 Banking Regulation Act in Lok Sabha to give the central bank more power over cooperative banks. However, due to the outbreak of covid-19, Parliament could not approve the changes.

“The government has allowed cooperative banks to raise funds through public issues and private placements. This is a big step as it will increase their (cooperative banks’) access to capital, which has been limited until now. “, Veena Sivaramakrishnan, partner, Shardul Amarchand Magaldas & Co.

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