Question 74 from UPSC CSE 2021 - Economics

Question

With reference to 'Urban Cooperative Banks' in India, consider the following statements:
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?

Accepted Answer

Correct Option: B. 2 and 3 only

Strategy: Analyze the nature of regulation first. Statement 1 refers to supervision by local boards of state governments, but since 1966, RBI has handled most regulation under the Banking Regulation Act, so this is incorrect. Statement 3 is a direct recall—1966 was indeed when urban cooperative banks came under this Act. Statement 2 addresses recent regulatory changes: RBI now permits urban cooperative banks to issue equity and preference shares. So, select the option with only statements 2 and 3.

Key Info: Urban Cooperative Banks (UCBs) are cooperative credit institutions primarily located in urban and semi-urban areas, catering to small borrowers, businesses, and urban residents. Their origin lies in the cooperative movement but, unlike rural primary agricultural credit societies, they function as urban banking institutions.

## Regulation and Supervision
Since the Banking Laws (Application to Co-operative Societies) Act, 1965 and its commencement from March 1, 1966, large urban cooperative banks with sufficient paid-up capital and reserves have been brought under the ambit of the Banking Regulation Act, 1949. This amendment led to a dual regulatory regime: the Reserve Bank of India (RBI) oversees key banking functions such as licensing, prudential norms, interest rate regulation, and area of operation, while state governments (Registrar of Cooperative Societies) handle registration, management, audit, and administrative matters as per state-specific cooperative acts. The Banking Regulation (Amendment) Act, 2020 further expanded and clarified RBI's regulatory powers over UCBs, especially regarding financial stability and depositor protection.

## Issue of Shares
RBI has established guidelines allowing urban cooperative banks to augment their regulatory capital through the issuance of equity shares, preference shares, and certain debt instruments. Equity shares can be issued to persons within their area of operations, typically to members, supporting compliance with minimum capital requirements and strengthening balance sheets.

## Supervisory Structure
Contrary to statement 1, the existing structure does not vest regulatory and supervisory power solely in local boards set up by state governments. Supervision is shared, with the RBI's prudential authority being paramount after the 1966 and 2020 amendments. Local cooperative boards may exist for governance, but statutory regulation is primarily handled by RBI with certain residual powers for state registrars.

Answer

Option A: 1 only

Answer

Option C: 1 and 3 only

Answer

Option D: 1, 2, and 3