What is the BR Act 1949 (AACS) and how does it affect cooperative banks?
The Banking Regulation Act, 1949 (B.R. Act) is a law that regulates the banking sector in India. It covers various aspects of banking such as licensing, capital requirements, management, audit, inspection, and winding up. The B.R. Act was initially applicable only to banking companies, but in 1966, it was extended to cooperative banks as well, with some modifications.
Cooperative banks are financial institutions that are owned and controlled by their members, who are usually farmers, artisans, small traders, or other people with common interests. Cooperative banks provide credit and other banking services to their members at low interest rates and with flexible terms. They are registered under the state cooperative societies acts and are subject to the dual control of the Reserve Bank of India (RBI) and the state governments.
The B.R. Act 1949 (AACS) is the part of the B.R. Act that applies to cooperative banks, subject to some modifications. The acronym AACS stands for "As Applicable to Cooperative Societies". The B.R. Act 1949 (AACS) empowers the RBI to regulate and supervise the cooperative banks in matters related to banking activities such as minimum capital, cash reserve, liquid assets, loans and advances, inspection, directions, and penalties. However, the RBI does not have the authority to register, constitute, remove, or supersede the board of directors of cooperative banks, or to audit, inquire into, or wind up cooperative banks. These powers are vested with the state governments or the registrar of cooperative societies.
The B.R. Act 1949 (AACS) aims to ensure that cooperative banks function in a sound and efficient manner and protect the interests of their depositors and members. It also seeks to bring uniformity and consistency in the regulation and supervision of cooperative banks across different states. However, some challenges remain in the implementation of the B.R. Act 1949 (AACS) due to the diversity and complexity of the cooperative banking sector in India.
Some of the major challenges faced by cooperative banks in India are:
Limited ability to mobilize resources: Cooperative banks have a low capital base and depend largely on deposits from their members and borrowings from other banks. They face difficulties in raising funds from the market or issuing equity shares. They also have a low credit rating and high cost of funds.
Low level of recovery: Cooperative banks have a high proportion of non-performing assets (NPAs) due to poor credit appraisal, weak monitoring, political interference, and loan waivers. They also face problems in enforcing recovery due to legal hurdles and social pressure.
High transaction cost: Cooperative banks incur high operating expenses due to outdated technology, inadequate infrastructure, multiple audits, and regulatory compliance. They also have a high staff cost due to overstaffing, low productivity, and rigid wage structure.
Administered rate of interest structure: Cooperative banks have to follow the interest rate structure prescribed by the state governments or the RBI for their lending and deposit operations. This limits their flexibility and profitability in a competitive market.
Poor governance and management: Cooperative banks suffer from lack of professionalism, transparency, accountability, and autonomy in their governance and management. They are often influenced by political and vested interests, which affect their decision making and performance.
To overcome these challenges, cooperative banks need to adopt various measures such as:
Strengthening their capital base and diversifying their sources of funds.
Improving their asset quality and recovery mechanism.
Upgrading their technology and infrastructure.
Rationalizing their interest rate structure and pricing policy.
Enhancing their governance and management standards and practices.
The RBI and the government also have a crucial role to play in supporting and facilitating the development of cooperative banks. Some of the steps that can be taken are:
Providing regulatory relief and incentives to cooperative banks.
Creating a unified supervisory framework for cooperative banks.
Establishing a resolution mechanism for distressed cooperative banks.
Promoting consolidation and merger of weak cooperative banks with stronger ones.
Encouraging innovation and competition among cooperative banks.