Summary of Chapter " Legislative Reform in Statutes" from the

Report of the Committee on Urban Cooperative Bank Reforms/ RBI

T

he panel headed by Reserve Bank of India Deputy

II)

Under the BR Act of 1949, Section 5, the "investment"

Governer, Shri Jagdish Kapoor was constituted to identify

also comes under the ambit of banking function. This

the areas that require legislative reforms and suggest necessary

means, the UCBs have the freedom to choose products

amendment relevant to the central and state legislation with a

in which they wish to invest funds as per the RBI

view to strengthen the Urban Co-operative Banking Movement.

guidelines. RBI has allowed UCBs to invest upto 10%

The committee submitted its report to the Govt. on 24 July 2000.

of their surplus funds in the equity of All India Financial

Institutions, units of UTI, and PSU bond, looking at the

Origin of Dual Control

limited avenues of profitable investments in Co-

operative sector. Yet, some RCS insists that their

permission being taken for every investment decisions.

Prior to 1st march 1966 Co-operative societies carrying banking

business were not covered under the Banking Regulation Act

III)

As per the BR Act of 1949, section 21, RBI is

(BRA) of 1949. Registrar of Co-operative societies (RCS) was

empowered to give direction to Co-operative Banks

the sole regulator and supervisor of such societies. The dual

with regard to the "rate of interest and other terms and

control came into existence in March 1966 after amendment in

conditions on which advances or other financial

BRA, 1949 that empowered the Reserve Bank of India (RBI) to

accommodations may be made or guarantees may

regulate the banking activities of Urban Cooperative banks

be issued". Section 21(3) further lays down that every

(UCBs) also. This brought an era of dual control. The co-

bank shall be "bound to comply with any direction

operative banks now regulated by both the respective state

given by RBI". Notwithstanding these provisions, there

RCS and the RBI. The rationale behind extending BRA, 1949

are instances where the RCS had issued direction

provisions to UCB is as follows:

saying that, UCBs should charge interest on deposits

in accordance with their instructions.

a)

To protect the interest of the depositors

IV)

Area of operation is again a matter closely related to

b)

RBI supervision was considered necessary for

the banking system. To facilitate the growth of UCBs,

extending deposit insurance

the RBI allowed them to expand their area of operation

to the entire district of their registration and in some

c)

It has a monetary policy connotation as substantial

cases to the whole of the state. Notwithstanding, RBI's

amount of funds were granted to co-operatives credit

clearance in many states, specific approval of RCS is

structure by way of created money from RBI

insisted upon. If general body approves the expansion

and RBI gives clearance, there is no rationale for

d)

Since regulation of banking business is the concern of

further approval to be granted by the RCS.

the RBI, and UCB are though co-operative entities,

but their primary objective is to carry out banking

V)

In acquisition of movable and immovable properties

business, hence, RBI should be the sole regulator of UCB.

for the purpose of carrying out banking related

functions, needs the approval of RCS. In some cases,

Areas of overlapping jurisdiction

UCBs find difficulties in getting permission even for

buying computers. The RCS also insists for prior

Though, in principal the RBI should supervise the functional

permission for recruiting any staffs.

aspects of UCB, and the RCS should look into the institutional

aspects of it, but the absence of clear-cut demarcation between

VI)

In many states, the General Body or Managing

the functions of both the agencies has hindered the growth and

Committee can't write-off unrecoverable/bad debts

smooth functioning of UCBs. Some of the instances of overlapping

from the books of accounts without the concurrence of

jurisdiction resulting in avoidable difficulties are chronicled below:

the RCS. Even though it is purely a management

I)

According to Section 23 of BR Act, 1949 (AACS), the

decision and guidelines are issued in this regard by

RBI has the authority to issue a branch license to an

both the RBI and Central Registrar of Co-operatives

UCB after convincing itself about the financial strength

Societies.

of the UCB. Whereas, in same states the UCBs are

required to obtain "No Objection Certificate" from the

VII)

Another issue is related with auditing of UCBs. RCS

RCS of the concern state even after the license has

don't allow UCBs to get their audit done by Chartered

been granted by the RBI.

Accountants, rather they want it done from Co-

operative auditors, even though there is class of

difference between these two set of auditors.

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