Banking Bill gets RS nod; FM Nirmala Sitharaman says depositors’ interest to be better protected

With the Covid-19 pandemic further straining the financial position of many urban-cooperatives, the government brought in the Banking Regulation (Amendment) Bill to safeguard the interest of depostitors, finance minister Nirmala Sitharaman said on Tuesday, as the Rajya Sabha passed the Bill.

The Banking Regulation (Amendment) Bill, 2020, was already approved by the Lok Sabha last week. It seeks to bring urban and multi-state co-operative banks under the central bank’s regulations to better protect the interests of depositors and avoid a PMC Bank-like crisis in future.

The Bill also empowers the Reserve Bank of India (RBI) to make a scheme for restructuring a stressed bank without imposing a moratorium on the withdrawal of deposits. It will also help the central bank better scrutinise the affairs of these co-operative banks. Once made into a law with the Presidential assent, it will replace an Ordinance, which was promulagated in June in the wake of the pandemic.

The financial status of 277 urban cooperative banks (almost a fifth of the total) is weak and 105 cooperative banks are unable to meet the minimum regulatory capital requirement, according to Sitharaman. Similarly, 47 co-operative banks have net worth in negative. As many as 328 urban cooperative banks have gross non-performing asset of more than 15%, the minister had told the Lok Sabha last week. The Covid-19 pandemic has hit most of the co-operatives much harder than the commercial banks.

There are 1,482 urban and 58 multi-state cooperative banks in the country with 8.60 crore depositors, having total savings of close to Rs 5 lakh crore. Last week, Sitharaman cited the case of the PMC Bank where depositors couldn’t withdraw their money beyond a limit for months, as the central bank had to impose a moratorium in September 2019 due to a non-performing asset crisis there.

The minister has said the government had to promulgate an ordinance for a “timely intervention” because the financial health of many of the cooperative societies that were performing as banks was becoming “very delicate”.
The crisis in the co-operative banking sector flared up last year, when PMC Bank was found to have given over Rs 6,700-crore loan to a single realty company HDIL through alleged fraudulent means.

It also hid the stress from the RBI by creating separate books of accounts. The crisis hit millions of its depositors, mostly small ones.

The proposed amendments, however, are not applicable to primary agricultural credit societies, cooperative land mortgage banks and any entities which did not use the terms ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business.