The rural co-operative credit system in India is primarily mandated to ensure flow of credit to the agriculture sector. It comprises short-term and long-term co-operative credit structures. The short-term co-operative credit structure operates with a three-tier system - Primary Agricultural Credit Societies (PACS) at the village level, Central Cooperative Banks (CCBs) at the district level and State Cooperative Banks (StCBs) at the State level. PACS are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India. StCBs/DCCBs are registered under the provisions of State Cooperative Societies Act of the State concerned and are regulated by the Reserve Bank. Powers have been delegated to National Bank for Agricultural and Rural Development (NABARD) under Sec 35 (6) of the Banking Regulation Act (As Applicable to Cooperative Societies) to conduct inspection of State and Central Cooperative Banks.
Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs),
cater to the financial needs of customers in urban and semi-urban areas. UCBs are
primarily registered as cooperative societies under the provisions of either the
State Cooperative Societies Act of the State concerned or the Multi State Cooperative
Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries
of one state. The sector is heterogeneous in character with uneven geographic spread
of the banks. While many of them are unit banks without any branch network, some
of them are large in size and operate in more than one state.
Duality of Control
- Though the Banking Regulation Act came in to force in 1949, the banking laws were
made applicable to cooperative societies only in 1966 through an amendment to the
Banking Regulation Act, 1949. Since then there is duality of control over these
banks with banking related functions being regulated by the Reserve Bank and management
related functions regulated by respective State Governments/Central Government.
- The Reserve Bank regulates the banking functions of StCBs/DCCBs/UCBs under the provisions
of Sections 22 and 23 of the Banking Regulation Act, 1949 (As Applicable to Cooperative
Societies (AACS).
Convergence between Regulation & Supervision
- As part of the arrangements under MoU, the Reserve Bank constitutes a State-level
Task Force for Co-operative Urban Banks (TAFCUB) for UCBs which operate only in
one State. A Central TAFCUB is constituted for the Multi-State UCBs. TAFCUBs bring
all the decision-makers with regard to UCBs on one table, thus facilitating quick
decision-making. TAFCUBs identify potentially viable and non-viable UCBs in the
states and suggest revival path for the viable and non-disruptive exit route for
the non-viable ones. The exit of non-viable banks could be through merger/amalgamation
with stronger banks, conversion into societies or liquidation as the last option.
- The State Governments/Central Governments may, for instance, through the MoU, agree
to take immediate action on requisitions of the Reserve Bank for supersession of
the Board of Directors, appointment of liquidators, initiating action for removal
of CEO/Chairman of a bank, enhancing quality of HR and IT resources in the banks
on the lines required by the Reserve Bank, work to raise the standards of corporate
governance by putting in place certain minimum fit and proper criteria for members
to be eligible for seeking election for the post of director, institute special
audit by Chartered Accountants and furnish reports of the findings within a given
time frame, introduce long form audit reports for conducting statutory audit, modify
its audit rating models to bring it on par with the rating system of the Reserve
Bank and conduct statutory audit only through external Chartered Accountants in
respect of banks with deposits over a specified minimum level.
- The Department of Co-operative Bank Regulation (DCBR) regulates State Co- operative
Banks (StCBs), District Central Co-operative Banks (DCCBs) and Urban Cooperative
Banks (UCBs).
Legal Framework