Question map
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?
Explanation
The correct answer is Option 2 (2 and 3 only). The explanation for the statements is as follows:
- Statement 1 is incorrect: Urban Cooperative Banks (UCBs) are under dual regulation. While registration and management fall under the State Government (or Central Government for multi-state UCBs), their banking functions are supervised and regulated by the Reserve Bank of India (RBI), not just local boards.
- Statement 2 is correct: Following recent amendments to the Banking Regulation Act, UCBs are permitted to raise capital by issuing equity shares, preference shares, and debt securities (like bonds) to members or persons within their area of operation, subject to RBI approval.
- Statement 3 is correct: Initially, cooperative banks were outside the RBI's direct purview. They were brought under the Banking Regulation Act, 1949, through an amendment in 1966 to ensure better financial discipline and depositor protection.
Thus, statements 2 and 3 accurately reflect the regulatory and financial framework of UCBs in India.
PROVENANCE & STUDY PATTERN
Full viewThis question was triggered by the PMC Bank crisis and the subsequent Banking Regulation (Amendment) Act, 2020. While the context was current, the content was static legal history (1966 Amendment) and governance structure. Strategy: When a sector faces a crisis, do not just read the news; go back to its statutory origin and regulatory jurisdiction.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Are Urban Cooperative Banks in India supervised and regulated by local boards set up by State Governments?
- Statement 2: Are Urban Cooperative Banks in India permitted to issue equity shares and preference shares?
- Statement 3: Were Urban Cooperative Banks in India brought under the purview of the Banking Regulation Act, 1949 by an amendment in 1966?
The question statement (presented as an option) explicitly asserts that UCBs are 'supervised and regulated by local boards set up by the State Governments', showing this claim exists in exam-style material and is worth checking.
A student could compare this phrasing with authoritative descriptions (e.g., 'Registrar of Cooperative Societies') to see if 'local boards' is the correct institutional actor.
States the 'duality of control' over cooperative banks between the RBI and the State Registrar of Cooperative Societies/Central Registrar; RBI handles banking functions while State/Central governments handle registration and management.
Use this to test whether 'local boards set up by State Governments' matches the named regulator 'Registrar of Cooperative Societies' (i.e., are they the same or different bodies?).
Says Single State UCBs are registered as cooperative societies under the State Cooperative Societies Act and are regulated by the Registrar of Cooperative Societies of the State concerned.
A student can check whether the Registrar is a 'local board set up by State Governments' or a statutory office distinct from ad hoc/local boards.
Reiterates that cooperative banks are under 'dual regulation' — RBI for banking functions and respective State governments for management-related functions.
Use this to infer that supervision/regulation is split and to verify which specific state-level entity (Registrar or 'local board') carries the supervisory role.
Notes that certain categories of cooperative banks (including UCBs) have been brought under enhanced RBI supervision, indicating a shift in supervisory responsibility away from purely state bodies.
Combine this with the 'duality' clue to assess whether state 'local boards' alone could be the supervisors, or whether RBI now supervises many UCB functions.
- Explicitly says cooperative banks can issue equity shares with prior RBI approval.
- Permits issuance 'or any other security' (broad category) subject to RBI approval.
- Refers to cooperative banks including UCBs (contextually relevant).
- Defines preference shares as a form of capital instrument / security.
- Shows preference shares fall within the class of 'capital instruments' or securities that can be issued.
- Identifies Urban Cooperative Banks as a category of cooperative banks.
- Connects the general permissions for cooperative banks to the specific UCBs group.
- Explicitly states banking laws were made applicable to cooperative societies in 1966 via an amendment to the Banking Regulation Act, 1949.
- Directly links that change to regulation/supervision of urban and rural cooperative banks by the RBI under the Act.
- Distinguishes which cooperative entities fall inside the Act's scope (PACS outside the Act) and implies cooperative banks are subject to RBI/dual regulation.
- Provides contextual support about regulatory coverage of cooperative banks versus other cooperative units.
- [THE VERDICT]: Solvable. Statements 2 and 3 are direct lifts from standard economy texts (Vivek Singh/Singhania). Statement 1 is a 'terminology trap' designed to test your clarity on the 'Dual Control' structure.
- [THE CONCEPTUAL TRIGGER]: The PMC Bank scam (2019) exposed the flaws in 'Dual Regulation' (RBI vs State Registrar), making the governance of UCBs a hot theme for 2021.
- [THE HORIZONTAL EXPANSION]: (1) PACS are outside the purview of the Banking Regulation Act (not regulated by RBI). (2) UCBs now have a Priority Sector Lending (PSL) target of 75% (phased by 2024). (3) The 2020 Amendment allows RBI to supersede UCB boards without state consultation. (4) UCBs are now categorized into 4 Tiers based on deposit size for regulation.
- [THE STRATEGIC METACOGNITION]: Focus on 'Jurisdictional Boundaries'. In Indian polity/economy, knowing *who* regulates *what* (RBI vs SEBI vs State Govt) is more important than knowing the specific regulations. If 'Dual Control' is mentioned in your book, memorize the division of powers immediately.
Urban Co-operative Banks operate under a dual control framework where RBI oversees banking functions while state authorities handle non-banking/administrative aspects.
High-yield for questions on banking regulation and institutional responsibilities; helps distinguish financial supervision from administrative control and explains why regulation involves both central and state bodies. Useful for questions on regulatory jurisdiction, crises in co-operative banks, and policy responses.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 82
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Commercial Banks > p. 67
Single-state Urban Co-operative Banks are registered under the State Cooperative Societies Act and come under the regulatory/administrative oversight of the State RCS.
Important for procedural and governance questions about co-operative banks, legal registration, and management oversight; links to state-level administration, central/state interplay, and legal distinctions between single-state and multi-state co-operative banks.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 81
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CO-OPERATIVE BANKS > p. 179
Banking laws were extended to co-operative societies through a 1966 amendment, placing their banking functions within the RBI's regulatory remit.
Crucial for legal-history and statutory questions about banking sector regulation; explains the origin of RBI's supervisory role over co-operative banks and helps answer timeline or amendment-based exam items, including later reforms.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 82
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > The Banking Regulation (Amendment) Act, 2020 > p. 180
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CO-OPERATIVE BANKS > p. 179
Cooperative banks can issue equity shares or other securities only with prior RBI approval.
High-yield for regulatory questions: explains conditions under which UCBs can raise capital and differentiates cooperative bank governance from corporate issuance rules. Useful for questions on banking regulation, capital-raising norms, and RBI supervisory powers.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 82
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Commercial Banks > p. 67
UCBs are a category of cooperative banks and therefore fall under rules applicable to cooperative banks.
Essential for distinguishing regulatory frameworks for different bank types (commercial vs cooperative vs rural). Helps answer questions on jurisdiction, supervisory authority, and applicability of banking laws.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 81
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Commercial Banks > p. 67
Preference shares are a type of capital instrument/security akin to equity, relevant when interpreting permissions to issue 'other securities'.
Important for linking broad regulatory language ('other security' or 'capital instruments') to specific instruments tested in exams; aids in reasoning whether a permission covers preference shares, convertible instruments, etc.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 82
This amendment is the legislative basis by which cooperative banks (including urban ones) came under the Banking Regulation Act, 1949.
High-yield for UPSC as it ties a specific year/amendment to a major change in banking regulation; useful for chronology questions on banking law and for understanding shifts in regulator jurisdiction. It connects to topics on RBI powers and later reforms affecting cooperative banks.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Co-operative Banks: > p. 82
The 'Umbrella Organization' for UCBs. The RBI has accorded regulatory approval for the National Urban Co-operative Finance and Development Corporation (NUCFDC) to act as the umbrella body and Self-Regulatory Organization (SRO) for the sector. This is the next logical step in UCB evolution.
The 'Vague Authority' Trap. Statement 1 uses the phrase 'local boards set up by the State Governments'. In Indian administrative law, regulatory power is almost always vested in a specific statutory officer (e.g., 'Registrar of Cooperative Societies') or a specific Commission, not undefined 'local boards'. Vague, ad-hoc sounding bodies in options are usually incorrect fabrications.
Mains GS-3 (Indian Economy - Banking Reforms): The transition of UCBs from 'Dual Control' to greater RBI oversight illustrates the tension between 'Federalism' (Co-ops are a state subject) and 'Financial Stability' (Banking is a central subject). Use this as a case study for Centre-State friction in financial governance.