BY
Aditi Patel, III Year, University of Petroleum and Energy Studies, Dehradun
Background
The Banking Regulation Act 1949 is a legislation which is created to supervise all the commercial banks in India. The legislation was passed in the year 1949 and came into force from 16th March 1949 and changed to Banking Regulation Act 1949 from 1st March 1966 and amended in 1965 and has made the legislation applicable to all commercial and co-operative banks in India. This act is applicable in Jammu and Kashmir from 1956. The Banking Regulation Act 1949 was introduced because the Banking business in India was very indeterminate during the 1940s as the government was not able to superintend or synchronise the banks which were only based on the Indian Companies Act 1913. As, the banks of India were able to run successfully and were not able to maintain the minimum amount of capital, therefore the legislation was introduced. Thus, it helped in diminishing the competition among the banks and helped them in maintaining the minimum capital amount. In 2020 this Act provides the Reserve Bank of India (RBI) with the power of giving license to any bank and to take the license from the same. This Act or legislation helped the banks to open new branches across the states or country through a conventional process proposed by the RBI and develops the bank according to the economy stage. Thus this act helps the Reserve Bank of India to appoint new directors in case of an emergency which certifies that the Banking sectors will now never run in crisis. This Act also helped in many cases where they put unreasonable interest rates and cash reserve ratio to customers across the world, hence this act helped in maintaining a certain fixed rate and ratio so that the customers now won’t have to go through more troubles like borrowing a huge amount of money from shark loaners and other illegal sources. Hence, the Bill replaces the Banking Regulation (Amendment) Ordinance, 2020 propagated on 26th June 2020.
Highlights of the act
The Banking Regulation (Amendment) Ordinance, 2020 was introduced in Lok Sabha by the Minister of Finance Ms. Nirmala Sitharaman on March 3, 2020. This bill seeks to amend the Banking Regulation Act 1949, concerning co-operative banks. The act modulates the functioning of banks and provides details on various aspects such as licensing, management, and operations of banks.
The Bill hereby allows the central bank to initiate a scheme for the reconstruction and the merging of a bank without placing it under moratorium.
According to the Bill, if the central bank obstructed a moratorium on a bank then the lender cannot grant any loans or make investments in any credit instruments during the moratorium tenure.
The Bill states that no individual will be entitled to demand any payment towards surrender of shares issued to him/her by any co-operative bank.
RBI may override the governing body of a multi-state co-operative bank for as long as five years under specific conditions. These conditions incorporate situations where it is in the public enthusiasm for the RBI to supplant the Board and to ensure contributors.
The co-operative banks will be permitted to give value, inclination, or uncommon offers on face value or at a higher cost than normal to its individuals, or some other individual living inside their territory of activities. The bank may likewise issue unstable debentures or bonds or similar securities with a maturity period of ten or more years to such persons. Nonetheless, an earlier endorsement from RBI is obligatory for such issuance.
Exclusions: The Act does not apply to certain cooperative societies some of which are:
(I) primary agricultural credit societies
(ii) any other cooperative societies (except those specified in the Act)
(iii) cooperative land mortgage banks.
Role of Reserve Bank of India (RBI)
1. Power to make a scheme for reconstruction or amalgamation without imposing moratorium: Under this Act RBI after placing the bank under moratorium they prepare a scheme for reconstruction or amalgamation of the bank to ensure its accurate management, or in light of a legitimate concern for contributors, overall population or the financial framework. Banks put under moratorium don’t confront any lawful activity for six months. Further, banks cannot make any payment or release any liabilities during the moratorium.
2. Issuance of shares and securities by co-operative banks: The bill gives that a co- employable bank may give value, inclination, or exceptional offers on face value or at a higher cost than normal to its individuals or some other individual dwelling inside its region of activity. Further, it might give unstable debentures or bonds or similar securities with the maturity period of ten or more years. Such issuance will be dependent upon earlier endorsement of the RBI, and some other conditions as might indicated by RBI. Though, a co-operative bank can’t pull back or lessen its share capital, aside from as determined by the RBI.
3. Qualifications for management: The Bill applies certain arrangements of the Act to co-operative banks corresponding to its administration. Under the Bill, co-operative banks cannot appoint as Chairman, somebody who is insolvent or has been sentenced for wrongdoing including moral turpitude, among different limitations. RBI may eliminate the Chairman if he isn't fit and appropriate and designate a reasonable individual if the bank doesn't do as such. Further, the Board of Directors must have at any rate 51% of individuals with special knowledge or having some special knowledge and experiences in areas, for example, accountancy, banking, economics, or the law. RBI may guide a bank to reconstitute its Board if it doesn't adjust to the necessities. On the off chance that the bank doesn't consent, RBI may eliminate individual directors and appoint appropriate people.
4. Power to exempt co-operative banks: The Bill expresses that RBI may absolve co-operative banks or a class of co-operative banks from specific arrangements of the Act through notice. These arrangements identify limitations of particular sorts of work, capabilities of the Board of Directors and the appointment of a chairman. The timeframe and conditions for the exclusion will be indicated by RBI.
The need for amendment
The bill expects to bring multi-state co-operative banks under the radar of the RBI and forestall the reiteration of a PMC-like emergency. It likewise plans to carry co-operative banks at standard with the business banks. The progressions proposed by this Bill are important to ensure the interest of distributors currently; there are 1,540 co-operative banks in India, with about 8.60 investors having reserve funds worth roughly Rs.5 lakh crore. In the previous five monetary years, there were almost 1,000 fraud cases among metropolitan co-operative banks worth more than Rs.220 crore. The PMC bank scam had provoked the requirement for improved law which can ensure better management and governance of these banks.
Critical analysis
It tends to be analyzed that amendment is made based on the character of the PMC Bank scam and crisis. Education and awareness arrangement is saluting, which opens an extension to incorporate more clients from the rural sector. Prior, the dual-powered RBI and state were managing at the same time without appropriate recognizable proof as to exercise of forces, yet the change has acquired lucidity for this. Presently the Registrar will control the administrative part though the Reserve bank manages the functional side of the co-operative banks.
Because of the amendment people now don’t have to give unnecessary, huge interests to the money lenders. There are many advantages and disadvantages of regulating the banking sector across the country. These advantages and limitations depend upon the financial conditions, economic policies, and existing legal framework of the country on the subject. Directing the financial business can bring reasonableness through government control. It can go far in shielding the interests of the investors. In any case, in particular, it can help construct the certainty and trust of general society in banks. Be that as it may, then again, superfluous control and weighty guideline can likewise limit the banks. It can keep them from playing out their errands unreservedly and eventually prevent them from procuring satisfactory benefits. However, the ground reality is different. The newly introduced provisions fail to solve the underlying issues. As per an RBI official, the Banking Regulation Act does not wholly apply to state-owned banks as much as it does on private banks. It lacks the essential powers that render it helpless when it comes to dealing with certain errant banks and bankers.
Views on amendment
The government must ensure distributors' interests and forestall fraud and corruption inside banks. This bill tries to give the equivalent. The legislature must make strides in extending Bill's ambit to rural co-operative banks to improve the country economy's development and advancement. Co-operative banks assume a crucial part in channelizing money related administrations to country borrowers. In this way, an update in the administrative structure administering these banks will be instrumental in financial development. The Ordinance plans to ensure the interests of the contributors and improve administration. In any case, to state that this Ordinance will guarantee that PMC-like crisis can never happen again would be an exaggeration. The facts confirm that the RBI is presently given more teeth to control co-operative banks, notwithstanding, it is appropriate to take note of that the RBI had consistently had adequate forces for the management of co-operative banks, for example, the ability to direct off-site and on-location observation, calling for statutory returns and so forth. However, it neglected to identify the warnings on schedule. Indeed, in any event, when the RBI has unlimited authority over business banks, it stepped past the point of no return in the Yes Bank imbroglio. Presently, with 1540 co-operative banks brought under the RBIs umbrella, it is yet to be checked whether it has adequate transmission capacity to guarantee sound guidelines. Even though this Ordinance is certifiably not a one-stop answer for the bombing banking segment, it denotes the start of steps taken the correct way