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Impact Of Cancelling United Co-Operative Bank’s License

By 02/06/2021June 8th, 2021No Comments

The license of United Co-operative Bank Ltd., Bagnan, West Bengal, has been revoked by the Central Bank of India, according to an order dated May 10, 2021. As a result, on May 13, 2021, at the end of the business, the bank will cease to undertake banking activities. With immediate effect, United Co-operative Bank Ltd., Bagnan, West Bengal, is forbidden from doing the business of “banking,” which includes accepting and repaying deposits, as defined in Section 5 (b) read with Section 56 of the Banking Regulation Act, 1949. The West Bengal Registrar of Cooperative Societies has also been asked to issue an order for the bank’s winding up and the appointment of a liquidator.

As listed in the order here are the following reasons because of which the bank’s license was revoked by the Reserve Bank:

  •  The bank lacked sufficient capital and earnings potential. As a result, it violated section 11(1) and section 22 (3) (d) of the Banking Regulation Act, 1949, as well as section 56 of the Act.
  •   The bank has failed to comply with the provisions of sections 22 (3) (a), 22 (3) (b), 22 (3) (c), 22 (3) (d), and 22 (3) (e) of the Banking Regulation Act, 1949, as well as section 56.
  • The bank’s continued existence was seen to be detrimental to its depositors’ interests.
  •  With its current financial situation, it was concluded that the bank would be unable to pay all of its current depositors in full; and
  •  If the bank had been permitted to continue operating as a bank, it would have harmed the public interest.

With the cancellation of the license and the initiation of liquidation processes, the process of repaying the depositors of United Co-operative Bank Ltd., Bagnan, West Bengal, as per the DICGC Act, 1961, would begin. According to the bank’s information, all depositors will get the whole amount of their deposits from the Deposit Insurance and Credit Guarantee Corporation (DICGC). Subject to the terms of the DICGC Act, 1961, every depositor would be entitled to receive deposit insurance claim amounts in respect of his or her deposits up to a monetary ceiling of Rs. 5,00,000/- (Rupees Five lakh only) from the DICGC upon liquidation.

The Banking Regulation (Amendment) Bill 2020, which was passed by the Lok Sabha, brought cooperative banks under RBI supervision in order to solve the following issues that the cooperative banking industry in India was facing.

1)  The capital base is limited

Cooperative banks have a small capital base, which can start as low as Rs. 25 lakhs, making it difficult to account for a portion of that capital as working capital, which has been a major difficulty for practically all cooperative banks.

2)  Interference by politicians

Politicians use them to increase their vote bank, and they usually elect their representatives to the board of directors in order to get illegitimate benefits such as loan approvals that are later revoked.

3)  Supervision by the RBI

Cooperative banks are subject to less stringent RBI oversight than commercial banks. The RBI only inspects the records of some banks once a year.

4)  Dual-control system

Cooperative banks are managed by a dual system, with the RBI and state governments overseeing them, providing coordination and management difficulty.

5)  Management expertise and technical advancement

Cooperative banks are usually resistant to new technology, such as computerized data management. Due to a lack of funds and human training, professional management at banks is usually insufficient.

6)  Financial reliance

Cooperative banks rely heavily on the RBI, NABARD, and the government for refinancing. It relies on the government for funding rather than its members.

As a result, cooperative banks are now controlled by the RBI, which has the jurisdiction to give or revoke a bank’s license. The amendment’s goal is to safeguard depositors’ interests and enhance cooperative banks by improving governance and supervision, as well as extend the RBI’s authority over other banks to cooperative banks. However, existing powers of the State Registrars of Co-operative Societies under state co-operative legislation are unaffected by the modifications. This measure will increase cooperative banks’ access to capital, which has been limited previously. It strikes the right note by establishing a process for these institutions to be reformed, as well as significantly enhancing their regulatory oversight by the RBI, a competent and efficient regulator. This move should increase public confidence in cooperative banks while also protecting the interests of all stakeholders in the long run.

To deal with bank failures, central banks have been established all over the world. Even after regulating and adopting extensive oversight of banks, the RBI has been unable to prevent many of them from collapsing, as indicated by the recent history of banks put under moratorium in the public interest due to mismanagement and progressively going out of business. Due to increased control and regulation, cooperative banks play a significant role in the achievement of development goals and are crucial to the smooth running of India’s banking industry. Following a series of high-profile scams, India is categorized as an underbanked country, and actions must be done to narrow the gap and restore public trust in the banking system.

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