Banking Regulation (Amendment) Act, 2020, Modifies Framework for Co-operative Banks

Parliament enacted The Banking Regulation (Amendment) Act, 2020, which received the President's assent on September 29, 2020, further amending the Banking Regulation Act, 1949. The legislation was published for general information on the same date. This Amendment Act is deemed to have come into force on June 26, 2020, with the exception of section 4. Section 4, in its application to primary co-operative banks, is deemed to have come into force on June 29, 2020, while for state co-operative banks and central co-operative banks, it will come into force on a date appointed by the Central Government through notification in the Official Gazette. The Act clarifies the scope of the principal Act by substituting section 3, stating that it shall not apply to primary agricultural credit societies or co-operative societies primarily providing long-term agricultural finance, provided they do not use terms like "bank," "banker," or "banking" in their name or business and do not act as drawees of cheques.

Significant changes were introduced to section 45 of the principal Act, which deals with moratorium, reconstruction, and amalgamation. The marginal heading was updated from "reconstitution" to "reconstruction." Provisions were inserted to include the granting of loans, advances, or investments in credit instruments during a moratorium period, and to extend certain conditions beyond the moratorium period. The Act also extensively amended section 56, which outlines the application of the principal Act to co-operative banks. It established an overriding effect for the Act's provisions, stating, "Notwithstanding anything contained in any other law for the time being in force, the provisions of this Act shall apply." The amendments clarified that references to "memorandum of association" or "articles of association" for co-operative banks would be construed as "bye-laws," and references to the Companies Act, 1956, would correspond to the law under which a co-operative bank is registered. Crucially, the Act substituted section 12, enabling co-operative banks to raise capital. The legislation provided: “A co-operative bank may, with the prior approval of the Reserve Bank, issue, by way of public issue or private placement,— (i) equity shares or preference shares or special shares, on face value or at premium; and (ii) unsecured debentures or bonds or other like securities with initial or original maturity of not less than ten years, to any member of such co-operative bank or any other person residing within its area of operation, subject to such conditions and ceiling, limit or restriction on its issue or subscription or transfer, as may be specified by the Reserve Bank in this behalf.” Furthermore, it mandated that no person could demand payment for the surrender of shares and restricted co-operative banks from withdrawing or reducing share capital except as specified by the Reserve Bank. Amendments to section 36AAA replaced "multi-State co-operative bank" with "co-operative bank" and introduced a proviso requiring the Reserve Bank to consult with the concerned State Government when issuing orders for co-operative banks registered with a State Registrar. A new section 53A was inserted, empowering the Reserve Bank to exempt co-operative banks or classes of co-operative banks from certain provisions of the Act, either generally or for specified periods, subject to conditions, limitations, or restrictions. The Banking Regulation (Amendment) Ordinance, 2020, was repealed, with a savings clause ensuring that actions taken under the repealed Ordinance would be deemed valid under the corresponding provisions of the amended Act.

The legislative intent behind the Banking Regulation (Amendment) Act, 2020, was to strengthen the regulatory framework governing co-operative banks and enhance their financial stability. Prior to these amendments, co-operative banks faced limitations in their ability to raise capital, which often hindered their growth and resilience. The Act addresses this statutory gap by introducing provisions that allow co-operative banks to issue equity, preference, or special shares, as well as long-term debentures or bonds, with the prior approval of the Reserve Bank of India (RBI). This move aims to provide these banks with much-needed avenues for capital infusion, thereby improving their financial health and capacity to lend. The amendments also sought to clarify the regulatory oversight by the RBI, particularly in cases involving State-registered co-operative banks, by mandating consultation with State Governments. The insertion of section 53A grants the RBI flexibility to exempt certain co-operative banks from specific provisions, allowing for a more tailored and pragmatic regulatory approach based on the unique characteristics and needs of different co-operative banking entities. These changes are designed to foster a more robust and adaptable co-operative banking sector, aligning it more closely with the regulatory standards applicable to other banking institutions while acknowledging its distinct operational structure.

Keywords: Banking Regulation Act, 2020, Co-operative Banks, RBI, Capital Raising, Financial Sector, Legislative Amendment, India, Banking Law, Ordinance Repeal

Geo Tags: Country: India District: Not Applicable