UPSC Prelims 2021 Q5: Urban Cooperative Banks Regulation — Explained

With reference to 'Urban Cooperative Banks' in India, consider the following statements:

1. They are supervised and regulated by local boards set up by the State Governments.

2. They can issue equity shares and preference shares.

3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.

Which of the statements given above is/are correct?

1 only
2 and 3 only
1 and 3 only
1, 2 and 3

Answer: (b) 2 and 3 only

Statement-wise explanation

1: incorrect — No 'local boards' set up by State Governments regulate or supervise Urban Cooperative Banks (UCBs). The Reserve Bank of India (RBI) regulates and supervises their banking business under the Banking Regulation Act, 1949. The State Registrar of Cooperative Societies (or the Central Registrar, for multi-state banks) handles their registration, management, audit and liquidation as cooperative societies. This split is called 'dual control'. The Banking Regulation (Amendment) Act, 2020, in force for UCBs from 26 June 2020, moved further powers to the RBI, such as superseding boards and approving auditors.
2: correct — The Banking Regulation (Amendment) Act, 2020 changed the share-capital provisions as they apply to cooperative banks. With the RBI's prior approval, a cooperative bank can now issue equity shares, preference shares or special shares, at face value or at a premium, to its members or to anyone living in its area of operation. It can also issue unsecured debentures or bonds with a maturity of at least 10 years. It cannot withdraw or reduce its share capital except as the RBI specifies.
3: correct — The Banking Laws (Application to Co-operative Societies) Act, 1965 came into force on 1 March 1966. It applied parts of the Banking Regulation Act, 1949 to cooperative banks through a modified Section 56. This is the 1966 change the statement refers to. From that date, RBI's regulatory oversight covered the banking business of UCBs, which began the system of dual control.

How to eliminate

Statement 1 is the easiest to test with basic knowledge. In India, banking regulation is a Union subject and the RBI regulates banks. No State-level 'local board' supervises any kind of bank, so Statement 1 should feel wrong to anyone who knows that the RBI regulates banks and the State Registrar deals with cooperative societies. Dropping Statement 1 removes three options and leaves only '2 and 3'. Statement 3 does not need to be checked separately. It also helps to remember that the 2020 amendment, passed after the PMC Bank crisis, let cooperative banks raise capital through equity and preference shares. That supports Statement 2. Facts to remember: dual control (RBI for banking functions, Registrar for cooperative-society functions), 1 March 1966 (Section 56 applied), and 26 June 2020 (the amendment came into force for UCBs).

Know more

Urban Cooperative Banks (UCBs) are cooperative societies, owned by their members, that do banking in urban and semi-urban areas. They are registered under a State Cooperative Societies Act, or under the Multi-State Cooperative Societies Act, 2002 if they work in more than one state.

Dual control. Since 1966, two authorities have shared oversight of UCBs:

Function	Who handles it
Licensing, interest-rate and lending norms, CRR/SLR, inspection of banking business	RBI (Banking Regulation Act, 1949, read with Section 56)
Registration, bye-laws, elections, management, liquidation	State Registrar of Cooperative Societies / Central Registrar
Board supersession, auditor appointment, chairman fit-and-proper test	Moved to the RBI by the 2020 amendment (it consults the State Government before superseding the board of a State-registered bank)

Why the 2020 amendment mattered. The Punjab and Maharashtra Co-operative (PMC) Bank crisis of 2019 showed that the RBI had limited powers over cooperative bank boards. The Banking Regulation (Amendment) Act, 2020 covered about 1,544 UCBs, 363 district central cooperative banks and 33 state cooperative banks. It:

requires that at least 51% of directors have professional expertise (accountancy, banking, economics, law, etc.);
lets the RBI remove a chairman who is not 'fit and proper' and supersede the board;
allows equity, preference and special shares, and long-term unsecured bonds, with RBI approval;
lets the RBI carry out reconstruction or amalgamation without first imposing a moratorium.

What it does not cover. Primary Agricultural Credit Societies (PACS) and long-term agricultural credit cooperatives are outside these provisions, unless they use the words 'bank', 'banker' or 'banking'.

Follow-up. The RBI's Expert Committee on UCBs (chaired by N.S. Vishwanathan, report July 2021) recommended a four-tier regulatory framework based on deposit size and an umbrella organisation for the sector.

In the news

The Banking Regulation (Amendment) Act, 2020 brought cooperative banks under closer RBI control after the PMC Bank crisis, and its provisions came into force for UCBs on 26 June 2020. In 2021, the RBI's Expert Committee on UCBs was examining the sector, so UCB regulation was in the news before the 2021 Prelims.

NCERT Concepts to Revise

Urban cooperative bank: Defines a UCB as a member-owned cooperative society with a banking licence, the dual identity behind all three statements.
Multi-State Cooperative Societies (Amendment) Act 2023: Multi-state UCBs are registered under the MSCS Act with the Central Registrar, which matters when judging who supervises UCBs.