To remove the propensity of cooperative banks to follow borrower-oriented policies rather than policies that protect the interests of the depositors, it is necessary to have new a organisational structure of the Board of Management and Board of Directors
The Working Group (WG) set up by Banking Financial Sector Legislative Reforms Commission (FSLRC), has endorsed policy recommendations of the Malegam Committee for creating a new organisation structure for urban cooperative banks (UCBs) to deal with the issue of dual control.
The WG headed by Kishori Udeshi, former deputy governor of the Reserve Bank of India said, “any cooperative society accepting deposits exceeding a specified value must fall within the regulator purview of the banking regulator (Reserve Bank of India-RBI).”
At present, cooperative banks are regulated under Part V of the Banking Regulations Act, 1949, but several provisions in the Act are not applicable to them. For example, collection of deposits from members or shareholders is not treated as accepting public deposits. Deposits are accepted by enrolling members on tap and by collecting nominal amounts from them, exposing such depositors to serious risks, the report said.
According to the WG report, only borrowers of co-operative societies are eligible to be its members and thus contribute to its share capital. “The members of the board of these societies are elected by the borrowers, resulting in policies which are not always in the interests of depositors. This necessitates regulatory intervention to remove the propensity of these societies to follow borrower-oriented policies rather than policies that protect the interests of the depositors,” it added.
RBI has powers over banking companies and their management under BR Act, 1949, but does not have similar powers over co-operative banks under the Act. This issue of unequal treatment has also been highlighted by the Committee on Financial Sector Assessment (CFSA). This dual regulation cannot be addressed completely without amending the Constitution of India. However, a partial solution to the problem is to address the issue within the overall limits of the Constitution, by separating the boards of the co-operative society and separating the regulation of banking business from the co-operative business. The banking business should be brought fully within the purview of the RBI, the WG said in its report.
The WG says such exclusions should be removed and cooperative banks must be treated at par with banking companies.
The Malegam Committee, in its report has recommended creation of new organisation structure for UCBs consisting of a Board of Management (BoM) in addition to the Board of Directors. It said, the Boards would be elected in accordance with the provisions of the respective State Co-operative Societies Acts or the Multi-State Co-operative Act, 2002 and would be regulated and controlled by the Registrar of Co-operative Societies.
“The Boards would establish a BOM, which shall be entrusted with the responsibility for the control and direction of the affairs of the bank assisted by a chief executive officer (CEO) who shall have the responsibility for the management of the bank. The RBI would have powers to control and regulate the functioning of the Bank and of its BOM and of the CEO in exactly the same way as it controls and regulates the functioning of the board and the chief executive in the case of a commercial bank,” the WG report said.
This panel, which was set up in March 2011, had in October 2012 released an approach paper.
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