The Centre is planning to amend the Banking Regulation (BR) Act, 1949, so that there is no distinction in the regulatory regime governing co-operative banks and the mainstream commercial banks.
This move will also fulfil the central bank's key demand that it be given teeth to get more 'involved' in the direct regulation/ supervision of the co-operative banking sector.
The Reserve Bank of India is to be empowered to supersede the board of an urban co-operative bank in order to prevent its affairs from being conducted in a manner detrimental to the interests of depositors or prejudicial to the interests of the bank and to secure proper management of the bank.
As the situation obtains now, the control and management of a UCB is vested in the registrar of co-operative societies. In case the RBI finds something seriously amiss in the functioning of an UCB, it can do little else than to recommend to the registrar to supersede the bank's board. Hence, the central bank is at the mercy of the RCS, who could be swayed by directives from his/ her political masters.
Another change envisaged in the BR Act aims to usher in corporate governance whereby the central bank will have a say in the appointment of qualified, experienced and independent chief executives to head urban co-operative banks. This will infuse professionalism in the functioning of the banks.
In the backdrop of co-operative banks getting embroiled in various financial misdemeanours in the last couple of years, it is felt that once the RBI comes into the picture the problem of rampant insider/connected borrowing will be eliminated to a large extent.
Currently, the RBI has no control over selection of the chief executives, resulting in mediocre and pliable candidates occupying top positions in some UCBs. This despite the office of the RCS giving its seal of approval.
The outcome of this is that poor credit decisions are taken, which in turn jacks up the credit-deposit ratio to dangerous levels (sometimes as high as 95 per cent as against the ideal level of 60 per cent), thereby jeopardising the depositor as well as the bank's interest.
According to sources, thinking on these lines has been triggered as the same set of prudential norms being made applicable to both mainstream commercial banks and co-operative banks.
The separate section of the BR Act (Section 56: as applicable to co-operative societies) governing co-operative banks may be done away with completely.