On 5 May 2020, Supreme Court in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited, a five judge constitution bench headed by Justice Arun Mishra ruled that the provisions of the Securitisation and Recon- struction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) will also be applicable to state and multi-state cooperative banks, and not just commercial banks. The judgement came in a case that chal- lenged the parliament’s decision to amend Section 2(c) of the SARFAESI Act which allows financial institutions to seize and auction properties of defaulters to recover their dues and the judgement include cooperative banks among those who can exercise this power under the act. The judgement has been welcomed by the co-operatives banks as before this act the financial institutions had to file civil suits in courts to recover their dues, which is a lengthy and time-consuming process.
The bench also held that the state and multi-sate cooperative banks will fall under the definition of “banks” under the provisions of the Banking Regulation Act. The judgement empowers financial institutions to take possession of the pledge as- sets of the borrower, take over management after giving a notice period of 60 days.
The case had been referred to the constitution bench after conflicting decision in the cases of Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd and Union of India and Anr. v. Delhi High Court Bar Association (1995 IAD Delhi 1238, AIR 1995 Delhi 323, II (1995) BC 42, 1998 92) On the question of parliament’s power to amend SARFAESI Act, the bench clarified the relationship between the two legislative authorities i.e. the Union and the State under the sev- enth schedule of the Constitution: entry 45, list I (Union list), i.e. ‘banking’ and its interaction with entry 32, list II (State list), ‘incorporation, regulation winding up of co-operative societies’. The judgement held that the SARFAESI Act was regulat- ed the banking business of co-operative banks, and as there was no regulation, incorporation and winding up, hence there was no encroachment upon the state list. The bench held co-operative bank registered under state legislation with re- spect to their ‘banking’ business are to be governed by the Union. The judgement will impact the future Union legislation pertaining to co-operative banking, starting with the Banking Regulation(Amendment) Bill, 2020.
The Banking Regulation (Amendment) Bill, 2020
To prevent crisis like faced by PMC bank due to financial irregularities which caused distress to depositors and to strengthen cooperatives banks by increasing professionalism, improving governance and ‘ensuring sound banking’ through Reserve Bank of India, the Union Finance minister has presented the Banking Regulation (Amendment) Bill, 2020 before the Lok Sabha to amend the Banking Regulation Act, 1949.
Currently the cooperatives banks are under the dual control of the RBI and the State Government. ‘Banking’ as a subject to the Union and regulation of co-oper- ative societies to the states. However the bill aims to bring cooperatives bank un- der the radar of the RBI by giving additional powers apart from regulatory func- tions, to bring them at par with the commercial banks. The apex bank can super- sede management in case of liquidation or failure by replacing the Board of Direc- tors with a Board of management consisting of professionals, after consultation with the state government. The bill also enables cooperatives banks to open business activities at new locations without RBI’s permission.
The view in Chaugule furthers the regulation of banking activity of co-operative banks by the Union, whereas the regulation of remaining aspects of the co-opera- tive banks continues to remain with the States. In Rustom Cavasjee Cooper v. Union of India2, it was held that the term ‘banking’ in the Union entry is to be read widely as defined under Banking Regulation Act, the term encapsulates within its fold ‘banking’ and ‘banking business’.
To permit conformity with the practicalities of commerce a la mode, the law must refrain from solidifying the meaning of ‘banking’ as it changes contemporarily. In ICICI Bank Ltd. v. Official Liquidator, the Supreme Court held that banks could undertake novel activities with permission from RBI, and the RBI is free to grant
such permission as long as they are no restricted under Section 8 and 9 of the Banking Regulation Act.
Including co-operative banks in the ambit of the term ‘banking’ will strengthen the hands of the co-operative banks as it makes recoveries of loan easier and en- sures the safety of the funds to their depositors. The apex court also clarified the distinction of legislative powers of the Union and State, stating ‘banking business’ under the Union and regulation, incorporation and winding up within the State list. With the introduction of Banking Regulation (Amendment) Bill, 2020 the regulato- ry powers of the RBI has been increased, to protect depositors’ interests and pre- vent fraud and corruption within banks. The government should further take steps to expand bill’s ambit to rural co-operative banks to improve the rural economy’s growth and development.