Promulgated on June 26, 2020, The Banking Regulation (Amendment) Ordinance, 2020 seeks to amend the Banking Regulation Act, 1949, which regulates the functioning of banks and provides details on various aspects such as licensing management, and operations of banks.
The Act does not apply to certain cooperative societies such as primary agricultural credit societies and cooperative land mortgage banks. The Ordinance amends this provision to state that the Act will not apply to: (i) primary agricultural credit societies, and (ii) cooperative societies whose principal business is long term financing for agricultural development. Further, these societies must not: (i) use the words ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business, and (ii) act as an entity that clears cheques.
The Ordinance amends the Banking Regulation Act, 1949 as applicable to Cooperative Banks. Under the ordinance, it is sought to safeguard the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to Co-operative Banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital.
No effect under the amendment has been made to the existing powers of the State Registrars of Co-operative Societies under state co-operative laws. The Primary Agricultural Credit Societies (PACS) or co-operative societies whose primary object and principal business is long-term finance for agricultural development, and which do not use the word “bank” or “banker” or “banking” and do not act as drawees of cheques are excluded from the scope of the ordinance.
Section 45 of the Banking Regulation Act has also been amended, to enable making of a scheme of reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system and for securing its proper management, even without making an order of moratorium, so as to avoid disruption of the financial system.
- Salient Features:
- The Reserve Bank of India (RBI) may apply to the central government to place a banking company under moratorium. During the moratorium, no legal action can be initiated or continued against the bank for a period of up to six months. The bank cannot make any payment or discharge liabilities during this period. The Ordinance adds that during the moratorium, the bank cannot grant any loans or make investments in any credit instruments.
- Further, during the moratorium, RBI may prepare a scheme for reconstruction or amalgamation of the bank, if it is satisfied that such an order is needed to secure proper management of the bank, or in the interest of depositors, general public, or the banking system. The Ordinance allows RBI to initiate such a scheme without imposing a moratorium.
- The Ordinance enables a cooperative bank to issue equity shares, preference shares, or special shares on face value or at a premium to its members or to any other person residing within its area of operation. Moreover, it may issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. Such issuance will be subject to the prior approval of the RBI, and any other conditions as may be specified by RBI.
- The RBI has been given the power to supersede the Board of Directors of a multi-state cooperative bank for up to five years under certain conditions. These conditions include cases where it is in the public interest for RBI to supersede the Board, and to protect depositors. The Ordinance adds that in case of a co-operative bank registered with the Registrar of Co-operative Societies of a state, the RBI will supersede the Board of Directors after consultation with the concerned state government, and within such period as specified by it.
- Certain provisions have been omitted from the Act. Some of these provisions are listed below:
- The Act restricts cooperative banks from making loans or advances on the security of its own shares. Further, it prohibits the grant of unsecured loans or advances to its directors, and to private companies where the bank’s directors or chairman is an interested party. The Act also specifies conditions when unsecured loans or advances may be granted and specifies the manner in which the loans may be reported to RBI. The Ordinance omits this provision from the Act.
- The Act states that cooperative banks cannot open a new place of business or change its location outside the city, town or village in which it is currently located, without permission from RBI. The Ordinance omits this provision. The Ordinance also omits a provision requiring a scheduled cooperative bank to maintain assets with a value not exceeding 40% of the its total demand and time liabilities, within India.
- The Act restricts cooperative banks from making loans or advances on the security of its own shares. Further, it prohibits the grant of unsecured loans or advances to its directors, and to private companies where the bank’s directors or chairman is an interested party. The Act also specifies conditions when unsecured loans or advances may be granted and specifies the manner in which the loans may be reported to RBI. The Ordinance omits this provision from the Act.
