Brain Booster for UPSC & State PCS Examination (Topic: Banking Regulation Amendment Act, 2020)

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Topic: Banking Regulation Amendment Act, 2020

Banking Regulation Amendment Act, 2020

Why in News?

Parliament has approved the Banking Regulation (Amendment) Bill, 2020 with the Rajya Sabha giving its nod for the Bill that seeks to protect depositors of cooperative banks and empower the Reserve Bank of India (RBI) to regulate banking activities of cooperative societies.
Banking Regulation (Amendment) Bill, 2020 received Presidential Assent on 29-09-2020.
The Act will regulate the functioning of banks and provides details on various aspects such as licensing, management, and operations of banks. The Act will replace the Banking Regulation (Amendment) Ordinance, 2020 promulgated on June 26, 2020.

Key Amendments

The Act will allow the central bank to initiate a scheme for reconstruction or amalgamation of a bank without placing it under moratorium.
If the central bank imposes moratorium on a bank, the lender cannot grant any loans or make investments in any credit instruments during the moratorium tenure. .
The co-operative banks will be allowed to issue equity, preference, or special shares on face value or at a premium to its members, or to any other person residing within their area of operations. The banks may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. However, a prior approval from RBI is mandatory for such issuance.
No person will be entitled to demand payment towards surrender of shares issued to him by a co-operative bank.
The Act mentioned that RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification. These provisions are related to employment, the qualification of the board of directors and, the appointment of a chairman.
RBI may supersede the board of directors of a multi-state co-operative bank for up to five years under certain conditions. These conditions include cases where it is in the public interest for RBI to supersede the Board, and to protect depositors.
The Act will discard the provision of Banking Regulation Act, 1949 that cooperative banks cannot open a new place of business or change the location of the banks outside of the village, town, or city in which it is currently located without permission from RBI.

Exclusion

The Banking Regulation Amendment Act, 2020 will not be applicable to

Primary agricultural credit societies, and

Cooperative societies whose principal business is long term financing for agricultural development.

These two societies must not:

Use the term ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business, and

Act as an entity that clears cheque.

Significance

Government banks, including 1,482 urban cooperative banks and 58 multi-state cooperative banks, are now being brought under the supervisory powers of the RBI.
RBI's powers will also apply to the cooperative banks as they apply to scheduled banks.
This step taken by the cabinet to grant greater powers to the country’s central bank in dealing with cooperative banks will give RBI additional leverage in dealing with the cooperative banks that are not exactly registered as banks but as cooperative societies.
Now with RBI getting greater leverage over these banks, it is expected that the deep rooted malice that prevails in the operations of UCBs would be streamlined and the interests of depositors would be protected