Co-operative Banks under the Act

Section 56 then supplies the definitions the Act needs. A "co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank. The section separately defines a primary co-operative bank, a multi-State co-operative bank, a primary credit society and a co-operative society, and provides that "central co-operative bank", "primary rural credit society" and "state co-operative bank" have the meanings assigned in the National Bank for Agriculture and Rural Development Act, 1981.

And it modifies the provisions that cannot apply as written. The licensing provision, the capital requirements, the management provisions, the winding-up provisions and the penalty provisions each appear in section 56 in a modified form suited to a society, and the Act's references to the Companies Act and the registrar of companies are replaced by references to the relevant co-operative societies law and the Registrar of Co-operative Societies.

Which societies are outside altogether

Section 3, worked in chapter 50, is the exclusion, and it must be read with section 56. The Act does not apply to a primary agricultural credit society, or to a co-operative society whose primary object and principal business is providing long-term finance for agricultural development, provided the society does not use the words bank, banker or banking in its name or in connection with its business.

So the line runs between a co-operative bank and a co-operative credit society. A primary agricultural credit society in a village, lending to its members, is outside the Act and answerable to the Registrar alone. A primary co-operative bank, taking deposits from the public, is inside.

The problem of dual control

For fifty-five years the sector suffered from divided responsibility. Incorporation, membership, elections, the conduct of the board and the audit of the society answered to the Registrar of Co-operative Societies under State law. Licensing, capital, cash reserves, inspection and winding up answered to the Reserve Bank under this Act.

The consequence was predictable. When an urban co-operative bank was badly run, the Reserve Bank could inspect it and could direct it, but the people running it were appointed and removed under State law, and the Reserve Bank's powers over management were significantly weaker than over a banking company.

The failure of a large urban co-operative bank made the position untenable, and Parliament responded with the Banking Regulation (Amendment) Act, 2020, an Ordinance first and then an Act, which this print's footnotes date w.e.f. 26 June 2020 in more than thirty places inside section 56 alone.

What the 2020 amendment did

In substance it removed the modifications that had kept the Reserve Bank's management powers out of the co-operative sector, so that the provisions chapter 100 works now reach a co-operative bank in much the same way as a banking company.

Management and appointments. The provisions on the qualifications of directors, on the appointment of a chairman or managing director, and on the Reserve Bank's power over those appointments were applied to co-operative banks, so that a co-operative bank's board must satisfy fitness requirements the Reserve Bank supervises rather than the Registrar alone.

Supersession of the board. The Reserve Bank's power to supersede the board and appoint an Administrator was made available for co-operative banks, which is the power that matters most when a bank is being run badly.

Reconstruction and amalgamation without a moratorium. The same amendment inserted into section 45 the words "or at any other time" and the bar on lending during a moratorium, which chapter 120 works. For co-operative banks this is the most practically important change of all: a failing co-operative bank can now be amalgamated with a stronger institution without first freezing its depositors out, which is what had caused the hardship in the failure that prompted the Act.

Capital raising. The amendment also enabled co-operative banks to raise capital by issuing the instruments the section permits, with the Reserve Bank's approval, addressing the structural difficulty that a society cannot easily issue shares to outsiders.

What it did not do. It did not convert co-operative banks into companies, did not remove them from co-operative law for non-banking matters, and expressly preserved the Registrar's role in the affairs of the society as a society. The amendment separated the banking questions from the society questions and gave the first to the Reserve Bank.

Enforcement: the other half of the story

A separate question is whether a co-operative bank may use the recovery statutes, and it was contested for years because those statutes speak of a "bank".

It was settled in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., (2020) 9 SCC 215, where a Constitution Bench held that co-operative banks carrying on banking business are "banks" for the purposes of the SARFAESI Act, 2002 and may therefore enforce their security under it without going to court. Chapter 560 works the decision in full.

Its practical importance is very large. Co-operative banks lend heavily against property, and before that decision their recovery depended on co-operative law machinery that was slow and varied from State to State.

A worked example

Ganesh Nagari Sahakari Bank Ltd. is a primary co-operative bank registered under the Maharashtra Co-operative Societies Act.

Which law governs its registration, membership and elections? The State Act, administered by the Registrar. Section 56 does not touch its character as a society.

Which law governs its licence, its cash reserve and its inspection? The Banking Regulation Act, applied by section 56, administered by the Reserve Bank. It needs a licence, and the licensing provision reaches it in its section 56 form.

Its board appoints as chief executive a person the Reserve Bank considers unfit. Before 26 June 2020 the Reserve Bank's powers here were limited. After the 2020 amendment the appointment provisions apply, and the Reserve Bank's approval is required.

The bank's position deteriorates. The Reserve Bank may now supersede its board and appoint an Administrator, and may prepare a scheme under section 45 for its amalgamation with a stronger bank without first imposing a moratorium, because of the words "or at any other time" inserted in 2020. Its depositors keep operating their accounts throughout, which is exactly what the amendment was for.

A borrower defaults on a loan secured by his shop. On Pandurang Ganpati Chaugule, the bank is a "bank" for SARFAESI purposes and may enforce the security under section 13 of that Act.

Contrast Shivneri Primary Agricultural Credit Society, in a village, lending only to members and not using the word bank in its name. Section 3 excludes it from the Act altogether, so none of the above applies to it.

Co-operative bank against banking company

What it does NOT mean

Section 56 does not make a co-operative bank a company. It construes the Act's references, so that a statute written for companies can be read as applying to societies.

It does not abolish the Registrar. Registration, membership, elections and the general law of the society remain with him; what moved in 2020 was the banking supervision.

It does not apply the Act to every co-operative society. Section 3 excludes the primary agricultural credit society and the long-term agricultural finance society, provided they do not use the banking words.

And the 2020 amendment is not a nationalisation of the co-operative sector. Ownership and the co-operative character are untouched; only the regulator's powers changed.

Limits and criticism

Section 56's technique is hard on the reader, and that is a real criticism rather than a stylistic complaint: a student or a director of a small bank must read the Act twice, once as printed and once as modified, and the modified version exists only inside one enormous section.

Dual control has been reduced rather than abolished. A co-operative bank still answers to two authorities on two sets of questions, and the boundary between a "banking" question and a "society" question is not always obvious.

The sector remains structurally fragile. Many urban co-operative banks are small, with concentrated local exposures and limited access to capital, and the 2020 amendment's capital-raising provisions address that only partly. The honest conclusion is that the amendment fixed the supervision problem and left the scale problem where it was.

Quick revision

Section 56: notwithstanding any other law, the Act applies to co-operative societies as it applies to banking companies, subject to the modifications it sets out; references to a banking company are read as references to a co-operative bank, and references to the commencement of the Act as to the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965.

"Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank; section 56 also defines primary co-operative bank, multi-State co-operative bank and primary credit society.

Section 3 excludes a primary agricultural credit society and a society whose principal business is long-term agricultural finance, if it does not use the banking words.

Banking Regulation (Amendment) Act, 2020, w.e.f. 26 June 2020: applied the management and appointment provisions and the power to supersede the board to co-operative banks; enabled capital raising with Reserve Bank approval; and, through the amendments to section 45, allowed a scheme at any other time and barred lending during a moratorium.

Pandurang Ganpati Chaugule, (2020) 9 SCC 215: a co-operative bank carrying on banking business is a "bank" for SARFAESI.

Test yourself

1. How does the Banking Regulation Act reach a co-operative bank? Through section 56, which applies the Act to co-operative societies as it applies to banking companies, subject to the modifications set out in that section, and construes references to a banking company as references to a co-operative bank.

2. What does "co-operative bank" mean in the Act? A state co-operative bank, a central co-operative bank and a primary co-operative bank, as section 56 defines it.

3. Which co-operative societies are outside the Act? A primary agricultural credit society, and a co-operative society whose primary object and principal business is providing long-term finance for agricultural development, provided it does not use the words bank, banker or banking in its name or in connection with its business: section 3.

4. What was the problem of dual control, and how did the 2020 amendment address it? Management and the affairs of the society answered to the Registrar of Co-operative Societies while banking answered to the Reserve Bank, so neither had complete responsibility. The Banking Regulation (Amendment) Act, 2020, in force from 26 June 2020, applied the appointment and management provisions and the power to supersede the board to co-operative banks, eased capital raising, and allowed a section 45 scheme to be made without a moratorium.

5. May a co-operative bank enforce its security under the SARFAESI Act? Yes. In Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., (2020) 9 SCC 215, a Constitution Bench held that co-operative banks carrying on banking business are banks for the purposes of that Act.