July 12, 2020

The Ordinance Has to Go

C P Krishnan & T Thamilarasu

BANKING Regulation (Amendment) Ordinance, 2020 was promulgated on June 26, 2020.  The ordinance seeks to amend the Banking Regulation Act, 1949, which regulates the functioning of banks and provides details on various aspects such as licensing, management, and operations of banks.  This ordinance comes in continuation of the Banking Regulation (Amendment) Bill, 2020 introduced in the parliament in March 2020 by the finance minister.

The act shall not apply to primary agricultural credit society or cooperative societies whose principal business is long-term financing for agricultural development if such society does not use as part of its name or in connection with its business the words ‘bank’, ‘banker’ or ‘banking’ and  act as drawee of cheques.

Thus all the co-operative banks -33 state co-operative banks,  364 district central co-operative banks, 1,482 single-state urban co-operative banks, 58 multi-state co-operative banks; will be under the sole control of the Reserve Bank of India (RBI)according to this ordinance.

The press statement of government of India in this regard reads as: “The ordinance seeks to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to co-operative banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital.”

The item “cooperative societies” is a state subject in the 7th schedule via entry 32 of the state list in the Constitution of India. The cabinet decision to promulgate this ordinance to take complete control of all the co-operative banks by RBI has been taken on June 24, 2020 without consulting the state governments. This is clearly an assault on the federal structure of our country and a blow to the Constitution of India. The NDA government’s (I and II), have been continuously usurping the powers of the states and attempting to centralise all powers.  This is yet another attempt in that direction.

Even today RBI is empowered to give licence to and cancel licence of an urban co-operative bank. RBI only decides the lending and recovery policies of the co-operative banks and also regulates them besides the central/state registrar.  Now it is proposed that RBI will take them over completely. This is totally unwarranted. The ordinance reads: “Provided that in the case of a co-operative bank registered with the registrar of co-operative societies of a state, the reserve bank shall issue such order in consultation with the concerned state government seeking its comments, if any, within such period as the reserve bank may specify.” It is very clear that the absolute power rests with the RBI.  Before issuance of an order of any nature – superseding the board of the co-operative banks, partial privatisation, total privatisation, cancelling licence etc., - the RBI will specify a time-frame to seek comments of the state government concerned - it may be one day or 10 days – within which the state government has to offer its comments. There is no guarantee that the views of the state government would be considered. Such is the status to which the state governments would be reduced with regard to governance of co-operative banks. The recently started Kerala Bank, by merging the state co-operative bank with the district central co-operative banks with a two-tier system, is a model bank to be emulated by all the state governments. This is an eyesore for the central government which may be one of the reasons why hurriedly this ordinance is brought during this pandemic period.

The press statement of the government of India claims that they want to extend powers already available with RBI in respect of other commercial banks to co-operative banks. What did RBI do using its powers in respect of other commercial banks?

RBI could not check bank frauds rising by leaps and bounds. For instance, the Nirav Modi scam has been allowed to perpetuate for almost a decade in a single branch of the Punjab National Bank to the extent of Rs 14,000 crores without any check.  As per reports, in 2015-16, the total amount of reported frauds was Rs 18,699 crore. Since then, it is rising sharply every year. In 2018-19 it had risen to Rs 71,543 crore whereas during the first six months of last financial year (2019-20) the total amount of bank frauds reported in our country has risen to an astronomical figure of Rs 1,13,374 crore.

Yes Bank has been under the control of RBI and in fact under RBI’s intense supervision for the past three years! RBI’s nominee has been there on the board of the Yes Bank from May 2019. Yet the promoter, who is alleged to have committed serious fraud by taking huge bribes for sanctioning loans which later became non-performing assets, was allowed a safe exit. The bank faced a moratorium. There was a flight of deposits from that bank running into thousands of crores of rupees. The public sector, State Bank of India and LIC are rescuing that bank. Reserve Bank of India utterly failed in checking this scam. The top-level scam of ICICI bank is yet to come to its logical conclusion.

It is RBI that frames the lending policy of the commercial banks. Its nominees are there in the boards of all the public sector banks and in some of the private sector banks. Yet the commercial banks have written off Rs 6,40,202 crores of depositors’ money in the five years from April 1, 2014 to March 31, 2019 while recovering only a meagre amount, thereby allowing the private corporate houses to gain. Hence the argument - “the co-operative banks are brought under the full control of RBI to secure the public deposits in cooperative banks” - does not hold water.

The PMC bank failure is cited as an example to justify the need for such an ordinance. The reality is that the PMC bank has been very much under the control of the central registrar and RBI for quite long and it was during this period a scam was perpetuated for almost a decade, giving 73 per cent of the total loans to one single party and also hiding it by opening 21,000 fictitious accounts. The role of RBI in checking this fraud stands thoroughly exposed. More than 10 depositors died unable to withdraw their own money deposited in this bank. This bank is still under moratorium since September 23, 2019 without any solution.

Currently there are more than 25 co-operative banks facing moratorium for more than one to two years. A bank by the name Rupee Co-operative bank has been facing a moratorium from February 2013! The depositors of these Banks are facing severe trauma as their withdrawal limit is restricted to a few thousands of rupees. All these banks are managed by RBI only, through its superseded boards.

Recently within two months, the licence of Mapusa Co-operative bank and that of CKP Co-operative bank have been cancelled. Prior to cancellation of its licence, CKP Co-operative bank was under the direct control of RBI with the superseded board for eight years. But the RBI could not save the bank. That bank faced a moratorium for six years, which restricted the withdrawal limit to a few thousand rupees. Now upon liquidation, the depositors lose Rs 120 crores which amount to 25 per cent of the total deposits of that bank. Ninety seven per cent of the total loans became NPA with the majority of the loans extended to just 10 real estate firms. Many of the co-operative banks have failed. The RBI data says: “the number of UCBs has been reduced from 1,926 in 2004 to 1,551 in 2018 with 129 mergers.” RBI failed here too. There is no evidence to prove that the co-operative banks would function well and the depositors’ money would be safe if they are brought under total control of RBI.

The important fact to be noted is that over a period of time, RBI has dispensed with on-site inspection upto branch level; it has started to depend on self-certified inspection reports of banks thereby giving a free hand to the managements to cook up their reports. RBI is also becoming, like many other supposedly independent institutions, an extended arm of the government of India. It has become a tool of the government to implement its pro-corporate policies.

The high power committee on urban co-operative banks (UCB) headed by Gandhi submitted a report in July 2015 recommending conversion of smaller UCBs into private small finance banks and larger UCBs into private commercial banks. Hence privatising UCBs is already on the agenda of RBI for the past five years.
This ordinance enables co-operative banks to issue equity shares or preference shares or special shares by way of public issue or private placement to non-members. This is the real intention of the government of India.  The co-operative banks belong to their members, mostly from the poor and lower middle class, who are the owners as well as the depositors and borrowers of their banks. The board of directors is democratically elected.  The co-operative banks serve the common people by extending small loans and further play a pivotal role in the agriculture and small trade sectors. The government of India wants to privatise the co-operative banks either through public issue or private placement. Through this ordinance, the central government wants to transform the role of the co-operative banks towards serving the corporates at the cost of the small borrowers and destroy the very co-operative structure.
The central government claims that this ordinance is brought to ensure professionalism.  The 97th amendment to the Constitution of India brought in the year 2011 already deals with various issues including professional approach to run the co-operative banks, periodical  election, audit etc. But the central government did not care to implement the same scrupulously.

The idea of promulgating this ordinance is clear. The central government intends to convert the co-operative banks which have been doing yeoman service to the common public into private banks and allow them to be looted by the corporates.  There is no doubt that there are maladies in the functioning of the co-operative banks. They have to be addressed seriously. But this ordinance is not a solution for this problem. Rather this will aggravate the problem. Hence this ordinance has to be opposed tooth and nail and defeated in the interest of the general public.