Two years ago, the government increased the Reserve Bank of India’s (RBI) jurisdiction to supervise cooperative banks. Since then, the regulator has tightened the noose around the lenders and frequently takes strict action for non-compliance.
The government revised the Banking Regulation Act to apply to cooperative societies in the wake of the crisis at the former Punjab and Maharashtra Cooperative (PMC) Bank, which had its headquarters in Mumbai. The modification granted RBI supervisory authority over such banks and was first published as an ordinance in June 2020. According to data, RBI has penalised 100 cooperative banks so far in 2022, compared to 124 in 2021 and 22 in 2020.
The penalties imposed on these banks include, among others, 37.5 lakh for failing to follow the rules for reporting fraud, 25 lakh for failing to follow the rules for housing finance, 15 lakh for deviating from the RBI’s income recognition, asset classification, and provisioning rules, and 10 lakh for failing to follow the rules for exposure.
“RBI is surely tightening the leash on corrupt and mismanaged cooperative banks. Main reasons for corruption are state government interference, mismanagement and lack of proper corporate governance,” said Anshul Gupta, managing partner at law firm ANG Partners Advocates & Solicitors.
Prior to the 2020 amendment, the RBI’s ability to regulate cooperative banks was severely constrained, making it difficult for it to quickly take corrective action. While the change took effect with retroactive effect for urban cooperative banks on June 29, 2020, it did so with immediate effect for state cooperative banks and district central cooperative banks on April 1, 2021.
“With the financial sector becoming more digitalised, there is an urgent need for fraud detection systems, and systematic arrangement of data, of the debtors and the members,” said Bharat Chugh, an advocate at the Supreme Court.
According to data from the RBI, there were 98,042 cooperative banks as of March 31, 2021, of which 96,508 were rural cooperative banks and the remainder were urban cooperative banks. In FY21, urban cooperative banks had a combined loanbook of 3.13 trillion and 5.27 trillion in deposits.
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Urban cooperative banks proliferated in the 1990s as a result of the liberalisation of financial services, which was in part made possible by the deregulation of interest rates and a lax licencing policy. When the RBI intervened to drive consolidation, which caused a decrease in the number of such banks, the numbers increased from 1,307 in 1991 to 2,105 in 2004.