Stronger Oversight and Reforms in Co-operative Banks under Amended BR Act, 1949

In 2024, the RBI released comprehensive guidelines under its Master Direction on Fraud Management, specifically targeting regulated entities, including co-operative banks.

In a significant step towards strengthening the regulatory framework of co-operative banks in India, the Government has amended the Banking Regulation Act, 1949 through the Banking Regulation (Amendment) Act, 2020. These amendments have granted the Reserve Bank of India (RBI) enhanced supervisory powers to ensure greater accountability, transparency, and governance within the co-operative banking sector, particularly focusing on Urban Co-operative Banks (UCBs).

The revised provisions of the Act have been in effect for UCBs since June 26, 2020. These amendments address several critical areas, including governance, audit, capital adequacy, and processes related to restructuring, amalgamation, and liquidation. Notably, key governance and management-related provisions—such as Sections 10, 10A, 10B, 35B, and 36AB of the Banking Regulation Act—are now applicable to co-operative banks. This has significantly aligned their functioning with that of commercial banks, thereby introducing a more rigorous regulatory regime.

Key Measures to Prevent Irregularities and Corruption in Co-operative Banks

To address issues of fraud and malpractice within co-operative banks, the RBI and other relevant authorities have introduced several proactive measures:

1. Master Direction on Fraud Management (2024)

In 2024, the RBI released comprehensive guidelines under its Master Direction on Fraud Management, specifically targeting regulated entities, including co-operative banks. These guidelines emphasize:

• Timely and structured fraud reporting.

• Adherence to the principles of natural justice.

• Establishment of a robust governance mechanism.

• Implementation of an Early Warning System (EWS) to detect potential fraud.

• Fixation of staff and third-party accountability.

• Defined roles for internal and external auditors.

These directions aim to create a more transparent, responsible, and secure banking environment.

2. Prompt Corrective Action (PCA) Framework

The RBI continues to monitor the health of UCBs through its PCA Framework. Under this, banks identified as financially weak are required to undertake timely remedial measures. These include capital infusion, governance reforms, risk mitigation, and enhancing operational efficiency. The PCA acts as a preventive tool rather than a punitive one, ensuring the restoration of financial stability and protection of depositor interests.

3. Deposit Insurance via DICGC

To safeguard depositors, a financial safety net has been implemented in the form of deposit insurance under the Deposit Insurance and Credit Guarantee Corporation (DICGC). This insurance provides coverage of up to ₹5 lakh per depositor per bank, including co-operative banks, thus ensuring a basic level of financial security for account holders.

4. Public Awareness via ‘RBI Kehta Hai’

RBI’s public awareness campaign, ‘RBI Kehta Hai’, educates customers about various types of banking frauds and their modus operandi. Through multimedia content, including infographics and videos, the initiative empowers depositors with the knowledge to protect themselves from common financial scams.

Strengthening Governance in Multi-State Co-operative Societies

Parallel to the banking reforms, the Multi-State Co-operative Societies (MSCS) Act, 2002 has also undergone amendments. These reforms focus on:

• Strengthening governance frameworks.

• Enhancing transparency and member participation.

• Reforming the electoral processes within co-operative societies.

• Implementing provisions of the 97th Constitutional Amendment that promote cooperative autonomy and democratic functioning.

Key Developments under MSCS Act:

• Co-operative Ombudsman: A Co-operative Ombudsman has been appointed under Section 85A of the MSCS Act to address member grievances related to deposits, equitable benefits, or any infringement of individual rights within Multi-State Co-operative Societies.

• Co-operative Election Authority: A dedicated Election Authority has been established to ensure free, fair, and impartial elections in all Multi-State Co-operative Societies. This step is expected to bring more professionalism and transparency into the election process, reducing the scope for manipulation and malpractice.

NABARD and Law Enforcement Coordination

The National Bank for Agriculture and Rural Development (NABARD) has issued detailed guidelines requiring co-operative banks to report suspected fraud cases to law enforcement agencies, such as the State Police and Economic Offences Wings (EOWs). This aims to ensure that criminal elements within the co-operative banking system are swiftly brought to justice.

Ministry of Cooperation’s Role

The newly formed Ministry of Cooperation (MoC) has been tasked with deepening the cooperative movement across India. Its broad objectives include:

• Promoting cooperative-based economic development models.

• Creating an enabling policy and legal environment for cooperatives.

• Organizing capacity-building training for cooperative personnel and office bearers.

• Supporting the vision of “From Cooperation to Prosperity,” with a focus on grassroots impact.

By integrating financial regulation, capacity-building, and democratic governance, the Ministry seeks to unlock the full potential of cooperatives as engines of inclusive growth.

In summary, the confluence of legislative amendments, RBI’s enhanced regulatory oversight, institutional reforms under the MSCS Act, and public awareness initiatives reflect the government’s robust approach to cleaning up and revitalizing the cooperative banking sector. These efforts aim not only to restore public trust but also to ensure that cooperative banks serve their foundational purpose of providing inclusive, community-focused financial services.