Co-op banks under RBI: Ordinance Passed

The government took an important decision last week to bring the country’s co-operative banks under the supervision of the Reserve Bank of India (RBI). It is a welcome, though belated, step. The ordinance brought 1,482 urban co-operative banks and 58 multi-state co-operative banks under the scrutiny of the RBI, which will now have the same powers of supervision over them as on scheduled banks. The government's ordinance marks a turning point for these financially weak lenders, but it throws up a set of challenges that could lead to states challenging the regulator when interests clash. The central bank and state governments may often end up in courts over the powers of the RBI in overruling the managements of the lenders if the veto power vested with the regulator through the amendments to the Act clashes with the interests of local politicians who mostly control co-operative banks, analysts said. Most co-operative banks are controlled by politicians who use them for power, pelf and patronage. That is why the supervision is lax, and it has been difficult to improve their functioning. Maharashtra, a state which has numerous co-operative banks and has been witness to many going belly-up in recent years is opposing the legislation that it sees trespasses on its regulatory role. Maharashtra govt are claiming that they will take over the management of the banks only if there is some irregularity, but it can be misused tomorrow say for political purposes. This will hurt the co-operative movement which is doing well. We have made our views clear that we are not okay with it. However, with the supervisory powers shifting from state governments to the RBI, the banks’ functioning can be expected to improve. Doubts have been expressed whether politicians would give up their control easily. The ordinance will have to be regularised with the legislation in Parliament within the next six months.