Govt moves to tighten regulation of co-op banks

The Banking Regulation (Amendment) Bill 2020 to empower the Reserve Bank of India (RBI) to effectively handle the mishaps in private banks without allowing any loss of public confidence and disruption in the financial system was introduced in the Lok Sabha on Monday.

The Bill, which seeks to replace an ordinance issued by the Government in last week of June, will allow the RBI to prepare a reconstruction scheme (for failed banks) without having to first make an order of moratorium on barring deposit withdrawals. This will enable the RBI to find suitors for a stressed bank. It is understood that the recent YES Bank debacle and its subsequent rescue episode had prompted the Government to strengthen the hands of the RBI on this front.

Besides, the Bill also brings certain cooperative banks — urban cooperative banks (UCBs) and multi-state cooperative banks (MSCBs) — under the RBI supervision process applicable to commercial banks as part of efforts to protect the depositors of such cooperative banks.

Replying to objections raised to the introduction of the Bill in the Lower House on Monday, Finance Minister Nirmala Sitharaman said the Bill is primarily aimed at protecting depositors of cooperative banks and is focused only on those cooperatives that use the word ‘bank’ and therefore receiving and dealing with deposits.

Congress’ objection

On the issue of Congress MP Shashi Tharoor’s point that there has been a legal challenge in some court and therefore the Lok Sabha cannot go ahead with the introduction of the Bill, Sitharaman said there is no interlocutory relief that has been provided in the court and also there are no directions given by the court in the matter against the operation of the ordinance.

She highlighted that cooperative banks in the country have been regulated by the RBI since 1965 and the Bill only seeks to extend the applicability so that some of the banking regulation laws are also going to be applicable to them.

She asserted that State Cooperative laws are not being proposed to be amended. “State cooperative laws are not being touched in this proposed amendment”, she said.

This is being necessitated because cooperative banks are in a weak financial position and depositors are suffering. As many as 277 Urban cooperative banks are reporting losses; 105 UCBs are unable to meet minimum regulatory capital requirements; 47 are having negative net worth and 328 UCB having more than 15 per cent Gross NPA ratio as of March 2019. “To protect depositors and in public interest, early legislation is required”, she said.

Two other Bills

In a separate move, the Finance Minister also introduced in the Lok Sabha the Factoring Regulation (Amendment) Bill 2020, which will pave the way for certain non-banking finance companies to undertake factoring business as well and also participate as a financier in the TReDS platform. The Bill will also pave the way for the RBI to frame regulations on ‘factoring’ business.

The Bilateral Netting of Qualified Financial Contracts Bill 2020 to help further develop the financial markets was also introduced. The proposed law on bilateral netting will be a significant enabler for efficient margining and the capital saving would enable banks to provide efficiency in offering hedging instruments to businesses in India. It would also help catalyse the corporate bond market through developing the credit default swap market.

Netting enables two counter parties in a bilateral financial contract to offset claims against each other to determine a single net payment obligation due from one counter party to other in the event of default.