Bringing co-operative banks under RBI vigil is the right step

Acceding to the Central government submission that as long as a law is not declared ultra vires it cannot be stayed and interfered with, the Madras High Court on July 20 refused to grant any interim stay on the select provisions of Banking Regulation (Amendment) Ordinance 2020, which brings cooperative banks under the supervision of the RBI.

Two co-operative banks in Tamil Nadu challenged the ordinance promulgated by the Centre, bringing all co-op banks under the supervision of the RBI. The petitions were filed by Big Kanchipuram Cooperative Town Bank Ltd and the Velur Cooperative Urban Bank Ltd.

The RBI and the Centre have rightly averred that merely because cooperative societies come under the State list — that is, List 2 of the Seventh Schedule to the Constitution of India — they cannot remain impervious to the RBI’s oversight and regulations to the extent they carry on banking activities.

The Punjab and Maharashtra Cooperative Bank (PMC) fiasco in which thousands of depositors lost their precious savings was the eye-opener for the RBI. Gullible middle class investors allow themselves to be swept off their feet by regional cooperative banks’ offer of a slightly higher rate of interest and freedom from the tentacles of TDS (tax deducted at source). Many of them had placed lakhs of rupees under its fixed deposit schemes both for rainy days and for safekeeping. PMC wasn’t the first cooperative bank scandal to rock the nation.

It redounds to the Narendra Modi government’s credit that it bestirred to act to save the poor depositors from the avarice of their own as well as that of the cooperative banks, which have the habit of venturing into uncharted territories taking considerable risks in extending loans as well as in feathering the nests of their promoters. Cooperative banks are the favourite instruments of politicians to amass wealth and dispense favours.

The RBI obviously cannot continue to wring its hands helplessly citing lack of powers to rein in cooperative banks. These powers have now been given by the ordinance. It is an unadulterated hogwash to say that regulating cooperative banks is an assault on federalism and a colourable legislation that seeks to disturb the areas reserved for the Centre and States to legislate upon. When cooperative societies don the robes of banks, they have to be regulated like any other bank, period.

One has heard of shadow banking. That appellation was earlier reserved for NBFCs (non-banking finance companies). But in hindsight, one would have been perfectly justified in labelling regional cooperative banks as well with that description. When public interest is involved, no player should be allowed to operate outside the mainstream and cocooned.

There are around 1,937 such cooperative banks which handle over ₹7.27 lakh crore of loans, primarily provided to agriculturists and middle-class people from out of deposits placed by the public.

The Bench incidentally wondered why the RBI was granting licences to such societies all along to do banking activity if they believed public interests are not protected. While the RBI and government will file a comprehensive reply to the two petitioners challenging the ordinance as well as to the Bench’s above observation, it must be said that as the law stood before the ordinance, the RBI was in an unenviable position of having to grant licence sans the powers to regulate. This anomalous situation is what is being righted through the ordinance.

It must be conceded that cooperative banks are perceived as catering to local interests and hence as ‘local boys’ so to speak. Since they are more often than not region-specific, they understand the local requirements better. Moreover, they are more nimble-footed vis-à-vis public sector banks hamstrung by bureaucracy and red tape. But when you turn around these very qualities egg them to bend rules and resort to adventurism at considerable peril to the depositors.

The writer is a Chennai-based chartered accountant