With a view to inform the ongoing public debate on the regulation of co-operative banks in India, this study focuses on State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs). These banks have historically received lesser regulatory attention as compared to commercial banks and urban co-operative banks (UCBs).
StCBs and DCCBs constitute the backbone of the short-term rural credit delivery structure in a state. Due to the reach of these banks and their connect with the local population, they are uniquely placed in the financial system to further the financial inclusion efforts of the government. However, such banks face several challenges which hinders the full realisation of their potential for meeting the goals of financial inclusion. Primary among such challenges is the dual system of regulation that subjects such banks to the oversight of the Registrar of Co-operative Societies (RCS) (under different state laws) and the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949. Emanating from the allocation of legislative powers between the Centre and the States under the Constitution of India, this model of governance has led to a fragmented legal framework, impacting critical areas of governance and management of these banks.
Against this background, this Report studies the legal challenges in the governance of StCBs and DCCBs, evaluates RBIs’ powers to regulate these banks vis-à-vis banking companies and compares the co-operative societies laws of 10 states (as applicable to such banks) on the basis of specific governance related parameters. The findings of the study highlight the limited powers of RBI in the management and resolution of StCBs and DCCBs and also underscores the disparity in state laws on critical areas of regulation.
Such a fragmented framework is highly susceptible to under-regulation and friction, leaving ample room for arbitrage opportunities. This calls for a renewed and focused regulatory approach to governing such banks. Our report suggests some short term and medium-term solutions for moving towards a more structured regime for effective regulation of these banks.
We hope that our report makes meaningful contributions to the on-going debate and paves the way for better regulation of co-operative banks in India.