Govt steps in to avoid another PMC Bank like fiasco, aims to ensure proper regulation of co-op banks

The government on Wednesday fast-tracked its plan to protect the interest of small depositors by deciding to bring urban as well as multi-state co-operative banks under regulations of the Reserve Bank of India (RBI) through an ordinance.

Briefing the media after the Cabinet meeting on Wednesday, information and broadcasting minister Prakash Javadekar said there are 1,540 urban cooperative and multi-state co-operative banks with 8.60 crore depositors, having total savings of about Rs 5 lakh crore. “Depositors will feel a lot safer after this move,” the minister said.

The Cabinet has also approved a proposal to extend an interest subsidy of 2% for 12 months through May 31, 2021 to small-time entrepreneurs in the vulnerable sections of the society under the Mudra (Sishu) scheme. The move will cost the government Rs 1,542 crore.

Under the Mudra scheme, loans for income-generating activities of up to Rs 50,000 are termed as Shishu loans. However, NPA account holders won’t be eligible for this subsidy. As of March 31, the Sishu category had about 9.37 crore loan accounts with a total outstanding amount of about Rs 1.62 Lakh crore.

“The interest subvention would be payable for months in which accounts are not in the NPA category, including for the months when the accounts become performing assets again, after turning NPA. The scheme will incentivise people who will make regular repayments of loans,” the government said in a statement.

As for the ordinance on the amendment to the Banking Regulation Act, it will add to the central bank’s power to regulate these entities. However, administrative issues may still continue to be guided by the Registrar of Cooperative.

Nevertheless, the move aims at ensuring better management and proper regulation of cooperative banks so that their affairs are conducted in a transparent manner and depositors’ interest is protected.

Finance minister Nirmala Sitharaman had in March introduced a Bill to amend the Banking Regulation Act for ensuring tighter scrutiny of the affairs of such co-operatives by the RBI, saying the step was required to avoid PMC Bank-like crisis in future.

However, given the uncertainties over convening Parliament session in times of the pandemic, the government probably thought it fit to bring in an ordinance to implement the plan urgently, a senior banker told FE.