Cooperative Banks and Dual Control under the Banking Regulation Act

A cooperative bank is two things at once, and that is the whole of its legal difficulty. It is a cooperative society, registered under a State or Central cooperative law, owned by its members and run on the principle of one member one vote. It is also a bank, holding the savings of people who are not members and have no say in how it is run. For more than fifty years two authorities shared the supervision of these institutions, each holding half the powers that a crisis required. The Banking Regulation (Amendment) Act, 2020 ended the worst of that arrangement, and it did so because a failure had made its cost unmistakable.

1. What a cooperative bank is

Section 56(c) of the Banking Regulation Act, 1949 supplies the definition for the purposes of the Act. A cooperative bank means a state cooperative bank, a central cooperative bank and a primary cooperative bank. The three correspond to the three tiers of the rural cooperative credit structure and to the urban structure that sits beside it.

• A state cooperative bank is the apex cooperative society in a State, the principal society whose primary object is the financing of other cooperative societies in that State.
• A central cooperative bank, usually called a district central cooperative bank, is the middle tier, financing the societies within a district.
• A primary cooperative bank, in ordinary usage an urban cooperative bank, is a cooperative society other than a primary agricultural credit society whose primary object is the transaction of banking business, which meets a prescribed paid up capital and reserves requirement, and whose bye-laws do not permit admission of any other cooperative society as a member.

A primary agricultural credit society at the base of the rural structure is not a bank, and after the amendment of 2020 the point is placed beyond argument by Section 3 itself.

2. Which societies the Act reaches, and which it does not

Section 3, as substituted in 2020, provides that, notwithstanding anything in the National Bank for Agriculture and Rural Development Act, 1981, nothing in the Banking Regulation Act applies to two classes of society: (a) a primary agricultural credit society, and (b) a cooperative society whose primary object and principal business is providing long term finance for agricultural development, provided that it does not use the words bank, banker or banking as part of its name or in connection with its business, and does not act as drawee of cheques.

Two features of the new Section 3 are worth noticing. The exclusion is conditional: a society loses it the moment it calls itself a bank or starts honouring cheques drawn on it, which are precisely the two things that make the public treat an institution as a bank. And the exclusion operates notwithstanding the National Bank for Agriculture and Rural Development Act, 1981, which removes an argument that used to be made about land development banks.

Figure 1: Whether the Act reaches a particular society

3. Dual control, and why it failed

Cooperative banks were brought within the Banking Regulation Act in 1966, but only through the device of Section 56, which applies the Act to cooperative societies subject to a long list of modifications. What Section 56 did not do was displace the cooperative law. The result was dual control.

Figure 2: Two masters, and the gap between them

The division looked tidy on paper. Incorporation, management and the internal affairs of a society belonged to the Registrar of Cooperative Societies of the State, or to the Central Registrar for a multi-State society. Banking belonged to the Reserve Bank. In practice the division cut through the middle of every problem that mattered.

1. The Reserve Bank could find a bank's management unfit, but could not remove it, because appointment and removal lay with the cooperative law and the general body.
2. The Reserve Bank could insist on capital, but the bank could not easily raise it, because cooperative share capital is withdrawable by a departing member and therefore is not permanent capital at all.
3. The Reserve Bank could place a bank under moratorium, but Section 45, the reconstruction and amalgamation provision that saves a failing commercial bank, did not work for a cooperative bank, so the only route out of a failure was liquidation and the deposit insurance payout.

4. The Banking Regulation (Amendment) Act, 2020

The amendment began as an Ordinance promulgated on 26 June 2020, and the Act, Act 39 of 2020, received assent on 29 September 2020. Its commencement is staggered and the dates are examinable.

• The Act is deemed to have come into force on 26 June 2020, except for Section 4, which carries the amendments to Section 56.
• For primary cooperative banks, that is urban cooperative banks, Section 4 is deemed effective from 29 June 2020.
• For state and central cooperative banks, Section 4 took effect on a date to be notified by the Central Government, which notified 1 April 2021.

What the amendment changed

1. Section 3 was substituted, placing the exclusion of primary agricultural credit societies and long term agricultural finance societies on a clear statutory footing, subject to the two conditions set out above.
2. Section 45 was amended so that the Reserve Bank may make a scheme of reconstruction as well as amalgamation, may grant loans or advances or make investments in the reconstructed entity, and may act at any other time and not only during a moratorium. The marginal heading itself was changed from reconstitution to reconstruction. This is the provision that made the resolution of a failed cooperative bank possible without liquidation.
3. Section 12 was replaced in its application to cooperative banks. A cooperative bank may now issue equity, preference or special shares and certain debentures or bonds with the prior approval of the Reserve Bank and on conditions it specifies. No share capital may be reduced except as the Reserve Bank permits, and a shareholder cannot demand payment of the value of shares he surrenders. This addresses the central defect of cooperative share capital, which was that it could walk out of the door with a departing member.
4. Management came under the Reserve Bank. The provisions on the qualifications of directors, on the appointment of a chairman, and on the supersession of the board were brought to bear, with Section 36AAA amended so that the Reserve Bank must consult the State Government before issuing an order to a cooperative bank registered under a State law.
5. A new Section 53A was inserted, allowing the Reserve Bank to exempt a cooperative bank, or a class of them, from specified provisions by notification, which is the flexibility that makes a single statute workable across institutions of very different sizes.

A later adjustment came with the Banking Laws (Amendment) Act, 2025, whose relevant provisions came into force on 1 August 2025. It raised the maximum tenure of a director of a cooperative bank, other than the chairperson and a whole time director, from eight years to ten years, bringing the Banking Regulation Act into line with the ninety seventh Constitutional Amendment.

5. The constitutional dimension

The ninety seventh Constitutional Amendment of 2011 did three things. It added the words cooperative societies to Article 19(1)(c), making their formation a fundamental right. It inserted Article 43B in the Directive Principles, directing the State to promote voluntary formation, autonomous functioning, democratic control and professional management of cooperative societies. And it inserted Part IXB, Articles 243ZH to 243ZT, which laid down detailed rules for cooperative societies, including the size and term of boards, reservation of seats, audit and offences.

6. The four tier framework for urban cooperative banks

Urban cooperative banks range from a single branch society serving the employees of one organisation to institutions with deposits larger than a small commercial bank. Applying one set of prudential rules to both was never sensible. Following the recommendations of an expert committee, the Reserve Bank announced a four tier regulatory framework on 19 July 2022, scaled by the size of deposits, which was then given effect through the categorisation circular that followed.

• Minimum net worth is two crore rupees for a Tier 1 bank operating in a single district and five crore rupees for every other urban cooperative bank, with a glide path of five years and intermediate milestones for banks that fall short.
• Capital to risk weighted assets stays at nine per cent under the existing framework for Tier 1 banks, and rises to twelve per cent for Tiers 2, 3 and 4, with a glide path of ten per cent, eleven per cent and twelve per cent across three successive financial year ends.
• Branch expansion is on an automatic route, up to ten per cent of the number of branches at the end of the previous financial year, for banks meeting the revised financially sound and well managed criteria.
• Housing loans carry risk weights determined by the loan to value ratio alone, across all tiers.

7. Quick Revision

1. Dual control means the Registrar for the society and the Reserve Bank for the banking, and the amendment of 2020 moved the line rather than erasing it.
2. Cooperative share capital was the structural weakness, because a member could withdraw it; Section 12 as applied now prevents that.
3. Before 2020 a failing cooperative bank could only be liquidated; Section 45 now permits reconstruction or amalgamation.
4. The Reserve Bank must consult the State Government before superseding the board of a State registered cooperative bank.
5. Primary agricultural credit societies are not banks, and the exclusion is conditional on name and on not acting as drawee of cheques.
6. The four tier framework scales net worth, capital and branch expansion by the size of deposits.
7. Article 19(1)(c) and Article 43B survive the Rajendra N. Shah judgment intact.

8. Frequently Asked Questions

Did the Amendment Act of 2020 end dual control?

No, and it did not try to. A cooperative bank remains a cooperative society, and its registration, its bye-laws, the conduct of its elections, the rights of its members and its winding up as a society continue to be governed by the cooperative law and administered by the Registrar. What moved to the Reserve Bank is everything that bears on the safety of deposits: the fitness of the management, the raising and retention of capital, prudential norms, and the power to reconstruct or amalgamate a failing bank. The constitutional reason the amendment could go no further is that cooperative societies are Entry 32 of the State List, while banking is Entry 45 of the Union List, and Parliament may legislate only on the banking side of the institution.

Why was Section 45 the centre of the amendment?

Because it is the only provision that lets a bank fail without its depositors failing with it. Under Section 45 the Reserve Bank may apply for a moratorium and then prepare a scheme transferring the business of a weak bank to a stronger institution, so that depositors become depositors of the transferee and are paid in the ordinary course. Before 2020 that machinery did not apply to cooperative banks, so a failure meant liquidation and a claim on deposit insurance, which at the time was capped far below the balances many depositors held. The amendment extended the machinery and, by adding the words at any other time, freed the Reserve Bank from having to impose a moratorium first.

What makes cooperative share capital different from a bank's equity?

Permanence. A shareholder in a banking company can sell his shares but cannot demand his money back from the company, so the capital stays in the business and absorbs losses. A member of a cooperative society could ordinarily withdraw his shareholding on ceasing to be a member, which meant that the capital was, in substance, another form of deposit and could shrink precisely when it was most needed. The version of Section 12 now applicable to cooperative banks closes this by requiring the Reserve Bank's permission for any reduction of share capital, by denying a shareholder any right to demand payment for shares he surrenders, and by permitting the issue of special shares and bonds that are genuinely capital.

Does the Supreme Court's judgment on Part IXB weaken the Reserve Bank's control?

Not at all, because the two rest on different constitutional foundations. Part IXB was an attempt to prescribe, through the Constitution itself, how cooperative societies are to be governed, and it failed for want of ratification by the States because cooperative societies are a State subject. The Banking Regulation Act's application to cooperative banks rests on banking, Entry 45 of the Union List, which is exclusively Parliament's. Union of India v. Rajendra N. Shah therefore leaves the banking regulation of cooperative banks untouched, and it confirms rather than disturbs the division of labour the Amendment Act of 2020 adopted.

Are cooperative bank deposits insured?

Yes. Deposits in cooperative banks are insured by the Deposit Insurance and Credit Guarantee Corporation on the same terms as deposits in commercial banks, up to the limit in force, and the obligation to make an interim payment where a bank is under a direction restricting withdrawals applies to them as well. The historical qualification is that the extension of insurance to a State's cooperative banks depended on that State passing the enabling law allowing the Corporation's powers to be exercised in relation to societies registered under its cooperative statute.

Can an urban cooperative bank escape dual control?

There is one lawful route, and it is a one way door. An urban cooperative bank may convert voluntarily into a small finance bank, on concessional capital terms that require an initial net worth of one hundred crore rupees rising to two hundred crore within five years of commencing business. On conversion it ceases to be a cooperative society and becomes a company licensed under Section 22, answerable to the Reserve Bank alone. What it gives up is the cooperative character itself: one member one vote, the member's claim on the institution, and the local ownership that was the reason for its existence. That is why very few have taken the route, and why the Amendment Act of 2020 was the more important reform.

What is an umbrella organisation for urban cooperative banks?

It is a central institution owned by the urban cooperative banks themselves, designed to supply what an individual society cannot build: a shared technology platform, liquidity support, capital raising assistance and advisory services. The idea was recommended by successive committees as the answer to the scale problem of the sector, since a bank with deposits of fifty crore rupees cannot afford a core banking system, a cyber security operations centre and a treasury desk on its own, yet is held to standards that assume all three. The Reserve Bank permitted such an organisation to be set up as a non-banking financial company, and it functions as a self help structure rather than as a regulator or a lender of last resort.

9. Related Topics and Provisions

• Structure of the Indian banking system
• Moratorium, reconstruction and amalgamation under Section 45
• Deposit insurance and the Deposit Insurance and Credit Guarantee Corporation
• Management of banking companies and removal of directors
• Licensing of banking companies under Section 22
• Priority sector lending and the targets for different classes of bank