Reforming the Governance of Co-operative Banks – A Study of State & District Central Co-operative Banks in 10 States

Reports by Corporate & Financial Law · December 10, 2019
Author(s): Shehnaz Ahmed and Debanshu Mukherjee

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.

Download the full Report – Reforming the Governance of Co-operative Banks – A Study of State & District Central Co-operative Banks in 10 States


About Shehnaz Ahmed:

Shehnaz is a Senior Resident Fellow with the Corporate Law and Financial Regulation vertical. Her areas of interest include the intersection of law and digital economy and business and human rights. At Vidhi, she has worked with various Ministries/Departments and a multilateral institution on various projects involving research and drafting support on areas diverse areas including financial resolution, digital economy (including payment systems law), business and human rights and competition law. Shehnaz graduated from RML National Law University in 2011. She has authored independent projects on tech-based interventions for regulating payment wallets, blueprint of a National Health Insurance Law and reforms for competition law. Prior to joining Vidhi, she headed a law firm (Zeta Law Chambers) co-founded by her, the Financial Regulatory Practice at Cyril Amarchand Mangaldas, Mumbai and the Dispute Resolution team at J. Sagar Associates. She has written for publications such as Oxford Business Law Blog, Financial Express, Firstpost and Business Standard.


About Debanshu Mukherjee:

Debanshu is part of the founding team at Vidhi and leads its Corporate Law and Financial Regulation vertical. He graduated from the Hidayatullah National Law University and completed his graduate studies at Harvard University and the University of Oxford. He attended Harvard Law School as a Fulbright- Nehru Fellow where he was awarded the Irving Oberman Memorial Writing Prize in Bankruptcy and the Dean's Scholar Prize in Corporations. He has advised the Ministry of Finance, the Ministry of Corporate Affairs, the RBI and the IBBI on projects relating to bankruptcy, corporate law, and financial regulation. He was previously a lawyer with AZB & Partners. Link to full bio