The Union cabinet on Wednesday approved changes to the Banking Regulation Act to give the Reserve Bank of India (RBI) wider powers to regulate co-operative lenders and prevent frauds such as the one seen at Punjab and Maharashtra Co-operative Bank Ltd.

Once the amendment is cleared by Parliament, co-operative banks will be audited according to RBI’s norms and the central bank can supersede the board, in consultation with the state government, if any co-operative bank is under stress, information and broadcasting minister Prakash Javadekar said after the Cabinet meeting. Appointments of chief executives will also require permission from the banking regulator, as is the case for commercial banks, the minister said.

Co-operative banks are currently under the dual control of the Registrar of Cooperative Societies and RBI. While the role of registrar of cooperative societies includes incorporation, registration, management, audit, supersession of board and liquidation, RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.

The administrative role will continue to be done by the Registrar of Cooperative Societies, Javadekar said. The amendments will apply to all urban co-operative banks and multi-state cooperative banks.

Javadekar said the proposed amendment is aimed at protecting the interests of 86 million depositors who have put money totalling around Rs 5 lakh crore in 1,540 cooperative banks in the country. The government’s move to strengthen oversight of cooperative banks comes after the collapse of PMC Bank.

The finance ministry will introduce the bill in the Parliament in the next few days, Javadekar said.

In September, the RBI superseded PMC Bank’s board after uncovering several irregularities. Cash withdrawals were capped at ₹1,000 per account for six months, but subsequently relaxed to ₹50,000 as panic spread among depositors.

The minister also said audit of such banks will be as per RBI guidelines and recruitment for banks’ management will be based on certain qualifications. All these steps will be implemented by RBI in a phased manner.

Urban co-operative banks reported nearly 1,000 cases of fraud worth more than ₹220 crore in past five fiscal years, a Press Trust of India report said, citing the RBI.

The cabinet approval is in line with the budget announcement made by finance minister Nirmala Sitharaman on Saturday.

“To strengthen the co-operative banks, amendments to the Banking Regulation Act are proposed for increasing professionalism, enabling access to capital and improving governance and oversight for sound banking through the RBI,” she had said in the Union Budget 2020-21.

Javadekar further said this is the second important measure taken by the government to protect the interest of depositors within a week.

Sitharaman proposed in the budget to raise the insurance cover on saving deposits five times to ₹5 lakh.

PTI contributed to this story.

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