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Bringing co-operative banks under RBI could create challenges for state governments


MUMBAI: The government’s ordinance to amend the Banking Regulation Act empowering RBI more control over co-operative banks marks a turning point for these financially weak lenders, but it throws up a set of challenges that could lead to states challenging the regulator when interests clash.

The central bank and state governments may often end up in courts over the powers of the RBI in overruling the managements of the lenders if the veto power vested with the regulator through the amendments to the Act clashes with the interests of local politicians who mostly control co-operative banks, analysts said.

Maharashtra, a state which has numerous co-operative banks and has been witness to many going belly-up in recent years is opposing the legislation that it sees trespasses on its regulatory role.

State Minister for Co-operation and Marketing Balasaheb Patil told ET that some stray incidents could not be a basis for regulatory changes.

“Barring a few co-operative banks, Maharashtra is doing quite well in the Co operative sector,’’ Patil told ET. “They are claiming now that they will take over the management of the banks only if there is some irregularity, but it can be misused tomorrow say for political purposes. This will hurt the co-operative movement which is doing well. We have made our views clear that we are not okay with it.”

The central government last week promulgated an ordinance giving additional powers to the RBI to supervise and effect changes in management of Co-operative banks. These came up after a series of co-operative banks failed including the Punjab and Maharashtra Co-operative Bank with thousands of crores in deposits. Historically, the central bank did not enforce supervision and inspection strictly since it came under the dual regulation of the RBI as well as the state governments.

“Allowing RBI the power to change the management of these banks is a step in the right direction. It will help the central bank manage co-operatives better. However, how the state governments will take it will be the real test. RBI still has to consult state registrars and they will have to tread carefully while dealing with them,” said Sanjay Agarwal, senior director, Care Ratings.

The ordinance gives RBI more powers but it still says that the central bank has to issue orders in consultation with the state government after seeking comments from it. With the co op banks coming under the concurrent list of the constitution states may not be willing to give up their powers.

“The powers of RBI in suspending management has been extended to co-operative banks. These measures are very strong and will be used in extraordinary circumstances. The approval of registrar in my sense is used just because these banks have a very special purpose and objectives and hence state government should remain participative,” said Prakash Agarwal, head financial institutions at India Ratings & Research.

Lack of powers with the central bank to supersede the management of these banks was considered a key impediment in regulation of these banks. Though RBI regulates co-operative banks from the financial aspects the management supervision is done by state and central governments.

RBI can prescribe the best practices to run a bank but cannot make any changes in the bank management unless in an emergency situation like it happened with the Punjab Mumbai Co-operative Bank last year. This ordinance could alter the state-RBI balance.

Another interesting thing about the ordinance is that it allows co-operative banks to raise capital from the market by issuing shares or bonds The capital raising is however restricted to the banks’ area of operations.

Last year the RBI allowed co-operative banks to convert to small finance banks. In January UP based Shivalik Mercantile Co-operative Bank, became the first co-operative to get an in principal approval to convert to a small finance bank.

Analysts hope that stronger RBI oversight and an opportunity for change could help these banks grow and prosper.


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