RBI’s new norms on UCBs raise eyebrows

K Ram Kumar | | | Updated on: Jan 30, 2020

NAFCUB asks central bank to reconsider its directive

Has the Reserve Bank of India (RBI) jumped the gun in putting together guidelines on constitution of the Board of Management (BoM) for Urban Co-operative Banks (UCBs) without ensuring that the existing statutes are suitably amended to incorporate the same?

A perusal of a letter written by the National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB) to the RBI seems to suggest so. The federation has urged the RBI to reconsider its directive asking UCBs to constitute a BoM under the Board of Directors (BoD) citing several reasons, including it being contrary to the extant provisions of the Banking Regulation Act, 1949 (as applicable to co-operative societies), lack of clarity on the accountability of BoM members, and conflict of interest involved in a BoM member being allowed to take up similar positions in two more UCBs.

Underscoring that there are no provisions in the Banking Regulation (BR) Act, 1949 (AACS) to constitute a BoM in addition to the BoD, NAFCUB President Jyotindra Mehta, in the letter to Reserve Bank Governor Shaktikanta Das, suggested that the more appropriate way forward would have been by amending the Act, vesting specific powers on the central bank in this regard.

Mehta reasoned that under the RBI guidelines issued on December 31, 2019, constitution of the BoM, in addition to the BoD, can be made applicable as a licensing condition only to new entities applying to the RBI for a UCB licence.

In a bid to separate the executive and supervisory roles of BoD in UCBs (with deposit size of ₹100 crore and above) and protect depositors’ interest, the RBI has asked these banks to make a provision in their by-laws for setting up a BoM before December 31, 2020. Regulatory approvals, such as expansion of area of operation and opening of new branches, will be allowed only for UCBs that have made such a provision in their by-laws.

No BoM provision in statutes

NAFCUB highlighted that the provisions in the Multi-State Co-operative Societies Act, 2002 and in the State Co-operative Societies Act do not provide for the constitution of a BoM. Even the model by-laws applicable to UCBs do not provide for constitution of BoM, in addition to the BoD. Referring to the above mentioned provisions and by-laws, Mehta wondered how UCBs can make amendments in their by-laws (which are inconsistent with the applicable statutes) is not clear and such amendments may be void ab initio .

Pointing out that the powers regarding appointment and removal of CEO and members of the BoM have not been replicated while amending Section 36 of the BR Act, the federation president opined that the exercise of these powers may not stand the scrutiny of law.

He expressed concern that the prior approval of appointment of CEO by the RBI for 650 UCBs will be a time-consuming exercise, leading to disruption in their normal functioning.

Flagging the accountability of BoM members as a serious issue, the federation observed that there is no clarity with regard to their status in the bank vis-a-vis delegation of powers to the BoM. The federation noted that as BoM members will not be in the employment of the bank and will be operating under the expert committees constituted by the BoD in different functional areas of banking, it is not clear as to what type of accountability can be fixed for their acts of omission and commission and malfeasance. “Whether the accountability will be joint and several in cases where decisions are taken by the top management on the recommendation of the BoM is also a moot question at this stage,” said Mehta.

Conflict of interest

Referring to the RBI instructions that a BoM member can be appointed in more than one bank, subject to a maximum of three, provided that there is no overlap in area of operations, the federation emphasised that this will tantamount to conflict of interest.

The federation said it may not always be possible to maintain confidentiality of information by all the BoM members, and their role in one bank may be in conflict with the other UCB in matters of different banking functions – deposits, investments, fund management – which are permitted to be undertaken even beyond the area of operation of the bank.

Published on January 30, 2020
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