Banking

• Banks are financial institutions that accept deposits and make loans.
• Banks are the financial intermediaries that the average person interacts with most frequently.
• A person who needs a loan to buy a house or a car usually obtains it from a local bank. Most people keep a large proportion of their financial wealth in banks in the form of savings Accounts, or other types of bank deposits

Functions of Banks

1. Acceptance of deposits from the public
2. Provide demand withdrawal facility
3. Lending facility
4. Transfer of funds
5. Issue of drafts (DD)
6. Creation of money
7. Provide customers with locker facilities
8. Dealing with foreign exchange                                

Classification of Banks

1. Central Bank
2. Cooperative Banks
3. Commercial Banks
4. Regional Rural Banks (RRB)
5. Local Area Banks (LAB) – [Created by Lead Bank Scheme – sponsor bank should adopt one district/town & Monitor the Other Bank working].
6. Specialized Banks – NHB, Mudra, SIDBI, EXIM, NABARD
7. Niche Banks - Small Finance Banks, Payments Banks (Create for Special Purpose).

• All banks which are included in the 2nd Schedule to the Reserve Bank of India Act, 1934 are Scheduled Banks.
• These banks comprise Scheduled Commercial Banks and Scheduled Co-operative Banks.
• Scheduled Commercial Banks in India are categorised into five different groups according to their ownership and / or nature of operation. These bank groups are (i) State Bank of India and its Associates, (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).
• Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks.

Regional Rural Banks

• In the early 1970s, there was a feeling that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers.
• This issue was taken up by the government and it set up Narasimham Working Group in 1975.
• On the basis of this committees recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
• The RRBs were owned by three entities with their respective shares as follows:
• Central Government → 50%
• State government → 15%
• Sponsor bank → 35%
• Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and pro poor focus.
• Every bank was to be sponsored by a “Public Sector Bank”, however, they were planned as the self-sustaining credit institution which were able to refinance their internal resources in themselves and were excepted from the statutory pre-emptions.
• But the original assumptions were belied as within a very short time, most banks were making losses by 1980s.
• The RRB concept was based upon the policy that they would lend only to the weaker sections of rural society, charging lower interest rates, opening branches in remote and rural areas and keep a low cost profile.
• But the commercial motivation was absent.
• Kelkar Committee recommended to stop with existing 196
• Bhandari Committee and Basu Committee suggested restructuring norms
• 171/196 were running losses in 1999
• Obligation of concessional loans abolished and interest rates were made normal.
• Target of Rural and weaker section clause removed and it was made open to any borrower.
• Amalgamation was proposed by Narasimman Committee in 1993 (Merge weak bank to Strong Bank, Merge 2 or 3 regional Bank to One Bank).
• After amalgamation 57 RRBs.

Cooperative Banks

• A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
• Co-operative banks in India are registered under the States Cooperative Societies Act. The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the
• Banking Regulations Act 1949
• Banking Laws (Co-operative Societies) Act, 1955.

Features of Cooperative Banks:

• Customer Owned Entities: Co-operative bank members are both customer and owner of the bank.
• Democratic Member Control: Co-operative banks are owned and controlled by the members, who democratically elect a board of directors.
• Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
• Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
• Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses.

Advantage of Cooperative Banking

• Cooperative Banking provides effective alternative to the traditional defective credit system of the village money lender.
• It provides cheap credit to masses in rural areas.
• ooperative Banks have discouraged unproductive borrowing personal consumption and have established the culture of productive borrowing.
• Cooperative credit movement has encouraged saving and investment, instead of hoarding money the rural people tend to deposit their savings in the cooperative or other banking institutions.
• Cooperative societies have also greatly helped in the introduction of better agricultural methods. Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc
• Cooperatives Banks offers higher interest rate on deposits.

Problems with Cooperative Banking in India

• Organisational and financial limitations of the primary credit societies considerably reduce their ability to provide adequate credit to the rural population.
• The cooperatives have resource constraints as their owned funds hardly make a sizeable portfolio of the working capital. Raising working capital has been a major hurdle in their effective functioning.
• A serious problem of the cooperative credit is the overdue loans of the cooperative banks which have been continuously increasing over the years.
• Large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.
• Most of the benefits from the cooperatives have been covered by the big land owners because of their strong socio-economic position.
• Cooperative Banks are losing their lustre due to expansion of Scheduled Commercial Bank and adoption of technology. They are also facing stiff competition from payment banks and small-finance banks.
• Regional Disparities: The cooperatives in northeast states and in states like West Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.
• Political Interference: Politicians use them to increase their vote bank and usually get their representatives elected over the board of director in order to gain undue advantages.

Dual Regulation of Urban Cooperative Bank

• Urban Co-operative Banks are regulated and supervised by State Registrars of Co-operative Societies (RCS) in case of Single-State co-operative banks and Central Registrar of Co-operative Societies (CRCS) in case of multi-State co-operative banks and by the RBI.
• The RCS exercises powers under the respective Co-operative Societies Act of the States with regard to incorporation, registration, management, amalgamation, reconstruction or liquidation and in case of UCBs that have multi-State presence, are exercised by the CRCS.
• The banking related functions such as issue of license to start new banks/branches, matters relating to interest rates, loan policies, investments and prudential exposure norms are regulated and supervised by the Reserve Bank under the provisions of the Banking Regulation Act, 1949.

Countering Dual Regulation Problem

• A high powered committee chaired by former Deputy Governor of RBI, R. Gandhi has recommended the merging and converting some of the cooperatives banks to small finance banks and the same has been implemented by RBI in form of scheme for voluntary transition of urban cooperative banks into small finance banks.
• Setting up of an independent regulator for Urban Cooperative Banks.
• H Malegam committee recommended a board of management of eligible and proper persons as opposed to elected Directors

For the first time the Reserve Bank of India (RBI) has admitted that it has noticed three major irregularities in the operations of multi-state Maharashtra & Punjab Co-operative (PMC) Bank that necessitated immediate action under the Section 35A of the RBI Act.

• These three violations include
• major financial irregularities,
• failure of internal control and systems, and
• wrongdoing and under-reporting of its (lending) exposure.
• PMC Bank, a 36-year old institution, is a cooperative bank regulated by the RBI and registered under the Cooperative Societies Act. The bank has 137 branches spread over half a dozen states.
• In fact, the majority of its nearly 100 branches are in Maharashtra. The other states where it has branches include Karnataka (15), Goa (6), Delhi (6) and Gujarat (5).
• For the last one year, the bank has been focussing on making its loss-making branches profitable. The financial irregularities and wrongdoing and under reporting of its (lending) exposure will change the bank's financial numbers.
• Strikingly there was no apparent sign of distress to trigger the bank’s virtual collapse, following the regulator’s intervention.
• Current situation - As per its annual report, things were going smoothly by March 2019,
• Deposits growing nearly 17% year-on-year to ₹11,617 crores.
• In this, the long-tenure savings account for the largest chunk.
• In a tough year for banks, profits were flat and the bad loans have more than doubled.
• The proportion of bad loans was far lower at PMC than at most public sector banks.
• RBI imposed restrictions as precautionary measure
• During the period of restriction, the customers of PMC bank are not allowed to withdraw more than Rs 1,000.
• RBI has also imposed restrictions on lending by cooperative bank.
• The notification issued by RBI said that the PMC banks cannot grant or renew loans, make investment, borrow funds, accept fresh deposits, agree or disburse payments without prior permission from the central bank.
• The bank said that the restrictions will be eased according to the performance of PMC banks. However, the bank license had not been withdrawn.

What is Section 35 A of India’s Banking Regulation act, 1949?

• Section 35A of the Banking Regulation act provides powers to RBI to give directions to banks.
• It enables RBI with the power to take action in order to prevent a banking company acting detrimental to the interests of the depositors.

Is PMC a scheduled bank?

• Yes, PMC is a scheduled bank. It was provided the status of scheduled bank in 2000. The banks that are accounted in the second schedule of RBI act, 1934 are called scheduled banks.
• The banks with reserve capital more than 5 lakhs rupees are qualified to become scheduled banks. The banks should also satisfy RBI that its affairs are carried out in a way with no harm to the interest of the depositors.