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The government is planning to introduce a Bill to amend certain provisions of the Banking Regulations Act to strengthen the Reserve Bank of India's control over co-operative banks.
The amendments will result in vesting the central bank with powers to audit and inspect these banks.
"The amendments will bring about a parity in the regulation of scheduled commercial banks and co-operative banks, though it will not end the system of dual control in regulation of co-operative banks," a senior finance ministry official said without divulging further details regarding other areas covered by the amendments.
Officials said the finance ministry was in the process of preparing the draft Bill in consultation with the RBI. The Centre was also talking to state governments to amend their respective state co-operative legislations to end dual control over these banks, they added.
The officials said the RBI had initiated several steps to ensure that depositors' interests were not compromised and remedial measures taken to ensure smooth functioning of co-operative banks.
In the previous Budget, the government had allocated Rs 100 crore (Rs 1 billion) for reforms in the co-operative banking sector on the basis of recommendations of the Jagdish Capoor and Balasaheb Vikhe Patil committees.
Finance ministry officials said the government was putting in place a policy whereby co-operative banks in those states which amend their state laws would be eligible for receiving recapitalisation. States have agreed in principle to amend their respective laws which will end the system of dual control, they added.
The Patil committee had recommended that the Centre and state governments subscribe to revitalisation bonds of up to Rs 800 crore issued by co-operatives in the ratio of 60:40. In case of Jammu & Kashmir and the north-eastern states, the proposed ratio was 90:10.
"The actual recapitalisation amount will be known only when the co-operatives come up with their proposals," said an official.
For computation of assistance to the co-operative banks, the committee had suggested that accumulated losses and interest overdue for over three years should be the basis of calculation.
It had suggested a 10-year tenure for the recapitalisation bonds and said these bonds would be extinguished without any redemption of the principal.
In the process, a part of the outstanding amount in the revitalisation assistance account for co-operative banks will be wiped off each year.
The committee had also said scheduling of district co-operative banks would allow them to borrow funds from the RBI and the National Bank for Agriculture and Rural Development, which would reduce their dependence on state co-operative banks.
Bill details