Co-Op Banks under RBI

Cabinet committee has promulgated an ordinance to bring around 1500 cooperative banks under the supervision of RBI. This announcement is expected since the scams exposed in the Punjab and Maharashtra Cooperative Bank last year. 

The cooperative banks (State and other) are scheduled banks under RBI Act that should submit Cash Reserve Ratio to RBI but doesn't have supervision by RBI in their CEO appointments, auditing and lending ratio. The purpose of the formation of cooperative societies or banks is to serve a small or rural community by the community itself. These banks were the alternative to other commercial banks that denies access to the downtrodden section of the society.

But these cooperative banks were not functioning as they wanted to. Since there is no auditing and interference by the central bank, corruption and bribery were increased in these banks. Banks instead of proving loans to the needy, they ended providing a large part of its loans to a single party or a small number of people. This cannot be done in other commercial banks since they have RBI guidelines to lend namely priority sector lending, auditing etc. 

Now, the Ordinance is welcome as it brings the appointment of CEOs to the coop banks and audits under the supervision of RBI. Earlier this year RBI has reduced the [lending to capital ratio] for the single borrower and small group to 10% and 25% from 15% and 45%. Also increased the priority sector lending ratio from 40% to 75%. This would solve the problem of corruption, bribery and denial of access to the needy. Also, save the coop banks from financial instability when the large single borrower defaults and save the depositors mainly.

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