Banking regulation Bill: Revival of banks sans moratorium on withdrawal of deposits

Finance minister Nirmala Sitharaman on Monday introduced a Bill that seeks to enable the Reserve Bank of India (RBI) to make a scheme for restructuring a stressed bank without imposing a moratorium on the withdrawal of deposits. The Banking Regulation (Amendment ) Bill also aims to bring urban and multi-state co-operative banks under the RBI regulation and make it easier for them to access capital. The idea is to protect the interests of depositors and better scrutinise the affairs of these co-operative banks following the Punjab Maharashtra Co-operative (PMC) Bank crisis.

The minister also introduced the Factoring Regulation (Amendment) Bill, 2020. The Bill aims to offer relief to the cash-strapped MSMEs, whose payments against supplies are stuck for more than 90 days, by allowing all non-banking financial companies to participate in the trade receivables discounting system, instead of limiting it to only select shadow lenders.

Sitharaman introduced the new Banking Regulation (Amendment ) Bill after withdrawing an earlier one that didn’t contain the provision to allow the central bank to frame a reconstruction or amalgamation scheme for all banks “even without making an order of moratorium, so as to avoid disruption of the financial system”.

The government had come out with an ordinance in June for this purpose, which, of course, incorporated the change. Once cleared, the new Bill will replace the ordinance.

Sitharaman cited the case of 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 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.

The Bill enables cooperative banks to raise money via public issue and private placement, of equity or preference shares and unsecured debentures, subject to the central’s bank’s approval. Prior to the Ordinance, cooperative banks’ access to capital was limited.

There are 1,540 urban cooperative and multi-state co-opoperative banks in the country with 8.60 crore depositors, having total savings of close to Rs 5 lakh crore.

The Ordinance will add to the central bank’s power to regulate these entities. However, administrative issues at these co-operatives will still continue to be guided by the Registrar of Cooperative. Also, the changes do not affect the existing powers of the state registrars of co-operative societies under state laws. The amednment also doesn’t apply to primary farm credit societies or cooperative societies, the main business of which is long-term finance for agricultural development.

PMC Bank was found to have given over Rs 6,700-crore loan to a single realty company HDIL through alleged fraudulent means and also hid the stress from the RBI by creating separate books of accounts. The crisis hit millions of its depositors, mostly small ones.