THE GIST of Editorial for UPSC Exams : 02 october 2019 (Trust deficit: On Punjab and Maharashtra Co-operative Bank issue)

Trust deficit: On Punjab and Maharashtra Co-operative Bank issue

The financial system of a country comprises of the Financial Institutions which need a regulating authority for their proper functioning and for the prudence of the national economy. This role is performed in India by the Reserve bank of India(RBI).
Financial institutions, also known as financial intermediaries provide banking services to financial markets. There are three major types of financial institutions.
Depository institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies;
Contractual institutions – insurance companies and pension funds
Investment institutions – investment banks, underwriters, brokerage firms.

Commercial Banks - Provide banking services to the general public and companies which are owned and operated.
Cooperative Banks - Cooperative banking is retail and commercial banking organized on a cooperative basis (i.e. owned and operated by its members).

They need to offer above-average services.
They must provide credit at competitive and lower interest rates.
They also can work in the areas of insurance, lending, and investment dealings.
In a co-operative bank, each share older has one vote irrespective of the quantum of shares held by her as against commercial banks where voting rights are determined based on shares held. This gives them a democratic structure.
Mostly provide credit in rural areas but have a federal structure with the local level, district level, state level and Central cooperative banks present support for the agriculture sector.
To understand the regulatory role of RBI over cooperative banks, one needs to understand the structure of cooperative banks in India.

Urban Cooperative Banks
Rural Cooperative Banks which provide short term and long term credit.
The short-term co-operative credit structure operates with a three-tier system –
Primary Agricultural Credit Societies (PACS) at the village level,
Central Cooperative Banks (CCBs) at the district level and
State Cooperative Banks (StCBs) at the State level
RBI’s regulation of cooperative banks.

Banking Regulation Act, 1949.
State Cooperative Societies Act.
Multi-State Cooperative Societies Act, 2002.
PACS are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India.
StCBs/DCCBs and UCBs are registered under the provisions of State Cooperative Societies Act of the State concerned and are regulated by the Reserve Bank through National Bank for Agricultural and Rural Development (NABARD) under Sec 35 A of the Banking Regulation Act to conduct an inspection of State and Central Cooperative Banks.

Recently, the Punjab and Maharashtra Cooperative Bank (PMC), who were told last Tuesday by the Reserve Bank of India that no more than ₹1,000 could be withdrawn from their accounts for a period of six months which was reasoned by RBI to be in depositors’ interests due to financial irregularities, failure of internal control etc.

There is a need to improve the regulatory machinery by RBI to encourage people to keep depositing in the Cooperative banks and have their confidence high on them.
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