Introduction
An Indian banking system was already in the state of Sturm und Drang before the outbreak of the global pandemic, the COVID-19. Indian companies are worried about the stability of the banks and their access to funding and liquidity; a few months ago Yes Bank debacle hit Non- Performing Assets and Adjusted Gross Revenue hard both in terms of sentiment and loss in market valuations. During the lockdown, RBI permitted a moratorium on loans which puts greater stress on the banking sector a few days ago Industries found it difficult to get a waiver of interest so they requested the Supreme Court to direct center and RBI to substantially lower the rate of interest on loans for the period of the freeze. But it is impossible as 7.7% of bank loans (non-corporate only 1.9%) needed reconstruction otherwise loans worth Rs 5 lakh crore would slip into NPA. The businesses which were doing well before lockdown and now facing trouble will be entertained only. Bankers said that a large portion of this stress can only be handled by Insolvency and Bankruptcy Code. Interest Rate is always a great factor to drive the economy but along with that saving also affects equally but COVID 19 situation created a tragic and alarming situation as banks have low saving rates to adjust the mismatch in assets and liabilities due to inflation. If inflation persists above the upper tolerance band for one more quarter then monetary policy will get constrained that would build up inflation pressure and prevent it from getting generalize. RBI is the regulatory body in all aforesaid situations, even after that pandemic is affecting the banks at a larger scale. The Covid-19 pandemic acted like a drop bombshell for cooperative banks also. RBI has issued circulars that hindered the progress of Cooperative Banks. Lakhs of Customers were not able to withdraw their money due to the restrictions imposed by RBI in the Punjab and Maharashtra Cooperative (PMC) Bank. It leads to the amendment in the Banking Regulation Act.
Banking Regulation Act 1949
The Banking Regulation Act came into existence in 1949; the main aim of this Act is to protect the interest of the depositor and to attune the monetary and credit system to the longer interests and priorities of the nation. It aimed to develop uniform norms and social control for all banking institutions. The Act empowers the Reserve Bank of India (RBI) to regulate the shareholding and voting rights of shareholders, lays down the instruction for audits, regulates the operation of banks, etc. The Banking and Regulation Act was earlier amended in 2017 where RBI was given the power to initiate insolvency regulation and thereafter the RBI identified 12 accounts each having more than Rs 5,000 crore of outstanding loans and accounting for 25 percent of total NPAs. Even after the implementation of this Act, the financial position of the bank is highly adverse and indefensible as it excluded Agricultural Credit Society and Cooperative Land Mortgage banks. Earlier co-operative banks were facing lots of problems as they were not regulated under the Banking Regulation Act. These banks lent huge amounts to the debtors which turned into bad debts or became insolvent. Recently RBI had canceled the license of Mumbai’s oldest CKP Co-operative bank, PKC bank, and Bengaluru-based Sri Guru Raghvendra co-operative bank as their financial position was highly unpropitious and unsustainable there was no chance of merging with other banks so the decision was taken by RBI to shut down these banks.
Banking Regulation (Amendment) Act, 2020
Due to the pandemic situation in the country, it was believed that like these much more such cases would come, so President Promulgates Banking Regulation (Amendment) Ordinance, 2020 where the main aim was to ensure sound management and regulation of Cooperative banks. It also seeks to protect the interest of depositors by improving governance. It ensures better management & sound regulation of Cooperative banks.
It aimed in strengthening the cooperative banks by improving surveillance by extending powers of RBI in respect to Co-operative Banks. The main focus of this amendment is on cooperative banks; it doesn’t apply to Primary Agricultural Credit Societies (PACS) or Co-operative Societies whose primary object is long-term finance for agricultural development. Before this amendment Cooperative banks had resources constraints, raising working capital was a major hurdle in their effective functioning. This bill gave the facility to cooperative banks to issue equity shares, preference shares, or special shares to the person residing within its area of operation to fulfill the capital requirements. Further, it may issue unsecured debentures or bonds with a maturity of ten or more years to such persons. The Act also specifies conditions related to the issue of unsecured loans or advances. But for all these purposes prior approval of RBI is necessary. The co-operative bank has no right to withdraw or reduce its share capital without the prior permission of RBI. RBI can exempt cooperative banks from some restrictions which may include provisions related to employment, qualifications of the Board of Directors and, the appointment of a chairman. RBI may usurp the Board of Directors after consultation with the concerned state government and within such a period. The appointment of CEO of the cooperative bank will require prior permission from the banking regulator earlier this appointment was done by the State government which increased the cases of corruption. A serious problem faced by the cooperative bank was overdue loans which were increasing day by day so, through amendment, a special provision is made where an audit of the cooperative bank will be done as per the guidelines of RBI RBI has given the power to supersede the regulatory board of such banks if later is under stress, provided that RBI has to consult state government before taking such step. The Ordinance also amends Section 45 of the Banking Regulation Act, for protecting the interest of the public, depositors, and the banking system and to ensure proper management, even without making an order of moratorium to avoid disruption of the financial system. It was very much important to make such an amendment as Urban Cooperative banks reported nearly 1000 cases of fraud in the past five fiscal years. The amendment is done to ensure professionalism and to enable cooperative banks to access their capital. Through this amendment, RBI is empowered to undertake revival plans for banks without imposing a moratorium to avoid disruption of the financial system. The main thing that bothers every citizen of India is the proper implementation of the amendment. This pandemic has created pressure on RBI related to higher government borrowings, fiscal deficit, GDP, etc; it is difficult to conjecture that Amended Act would be properly implemented.
