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Understanding the Banking Regulation (Amendment) Ordinance 2020 for Cooperative Banks

Introduction

On June 26, 2020, the President promulgated the Banking Regulation (Amendment) Ordinance, 2020, aimed at enhancing the regulation and management of cooperative banks in India. This legislation seeks to safeguard depositors' interests and promote sound banking practices by extending the powers of the Reserve Bank of India (RBI) to cooperative banks.

Overview of the Banking Regulation (Amendment) Ordinance, 2020

The Ordinance revises the Banking Regulation Act of 1949 to bolster the governance and oversight mechanisms for cooperative banks. Key aspects of the amendment include:

  • Strengthened Governance: Enables improved regulation and oversight to enhance cooperative banking operations.
  • Professionalism and Capital Access: Encourages cooperative banks to adopt professional management and gain easier access to capital.
  • Exclusions: The amendments do not extend to Primary Agricultural Credit Societies (PACS) or cooperative societies primarily focused on long-term agricultural financing that do not use banking terms in their names.

Key Amendments

  1. Section 3 Modification: The Ordinance substitutes a new section 3 in the principal Act, clarifying its non-application to:

    • Primary agricultural credit societies.
    • Cooperative societies focused on long-term agricultural financing, provided they do not utilize the terms “bank,” “banker,” or “banking” and do not act as drawees of cheques.

  2. Revised Section 45: Amendments to section 45 facilitate the creation of reconstruction or amalgamation schemes aimed at protecting public and depositor interests while maintaining proper banking management without needing a moratorium.

  3. Updated Section 56: Enhancements include:

    • Redefined references to organizational structures and compliance laws.
    • Provisions for cooperative banks to issue equity and debt instruments with prior RBI approval.

Main Features of the Ordinance

  • Reconstruction and Amalgamation: Allows for schemes to reconstruct or amalgamate banking companies to maintain system stability.
  • Regulatory Framework: The amendment aligns cooperative banks with more robust regulatory frameworks while preserving existing powers granted to state registrars under cooperative laws.

Legislative Context

This Ordinance was necessary due to the inability of the Parliament to pass the Banking Regulation (Amendment) Bill, 2020, while it was not in session. The President exercised his powers under Article 123 of the Constitution to enact this ordinance.

Conclusion

The Banking Regulation (Amendment) Ordinance, 2020 represents a significant step towards reinforcing the cooperative banking sector in India. By ensuring better management and regulatory compliance, the ordinance aims to protect depositors' interests and fortify the overall banking infrastructure. Continued monitoring and support from the RBI will be crucial in achieving the intended objectives of these amendments.