When co-operative societies engage in banking business, in addition to the regulatory laws applicable to
co-operative societies, the central laws governing banking4 are attracted. Thus, the Banking Regulation
Act, 1949 has been made applicable to co-operative banks.
DUALITY OF CONTROL -CONFLICT OF LAWS
In the case of banking companies, which are registered under the Companies Act and are also governed
by the provisions of the Banking Regulation Act in respect of their banking business, if the provisions of
the Banking Regulation Act are in conflict with the Companies Act, the former prevails7. Hence, the
Reserve Bank has full regulatory powers over the banking companies.
In the case of co-operative banks, although they are required to obtain a licence under Section 22 of the
Banking Regulation Act, they are subject to a lesser extent of regulatory oversight under the modified
provisions of BR Act as provided in Section 56.
REGULATION OF BANKS - UNIFORM REGULATIONS
For the proper regulation of the banking system in the country, it would be essential to have a more or
less uniform regulatory regime for all kinds of banks irrespective of their constitution as company, cooperative
society or statutory corporation, as these provisions are meant for proper regulation of the
business of banking and not in respect of their constitution as such. Any regulation on management, in so
far as it is essential for proper management of the business of banking, has to be considered as
incidental to the main regulatory provisions on banking and therefore justified even if it touches the
subject of regulation of co-operatives which is a State subject. In the case of co-operatives which for any
reason do not want to be subject to the discipline of the banking system, they may be given the option to
go out of the system and work as thrift and credit societies. Those co-operatives, which continue in the
banking system, should be subject to regulation under the Banking Regulation Act on the lines of the
provisions applicable to banking companies.
OPTING OUT OF BANKING - THRIFT AND CREDIT
Banking as defined in Section 5(a) of the Banking Regulation Act means accepting for the purpose of
lending or investment of deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise. Thus acceptance of deposit from the public is an
essential feature of banking and if a society does not accept deposit from the public, it would not be
engaged in the business of banking. Hence, societies not accepting public deposit would be outside the
purview of the banking regulation Act. If any co-operative society does not want to be subjected to the
regulatory regime for banks, such societies may be permitted to go outside the purview of the Banking
Regulation Act by not accepting deposits from public and thereby ceasing to do banking business as
defined in Section 5 (a) of the BR Act.
DEPOSIT AND PUBLIC DEPOSIT
A relevant question is whether acceptance of deposits from members has to be treated as public deposits
and regulated. Financial Companies which accept public deposits but are not engaged in banking
business are regulated by the Reserve Bank under the RBI Act11 and other companies by DCA under the
Companies Act12 and Companies (Acceptance of Deposits) Rules made thereunder.
Deposit or public deposit is not defined in the Banking Regulation Act. In the RBI Act "deposit" is defined
in Section 45 I (bb) (for the purpose of regulation of NBFCs and UIBs) to cover all kinds of receipts of
money including loans but excluding share capital, security deposit, advance for purchase of goods etc.
and loans from banks, financial institutions etc. "Public deposit" is not defined in the RBI Act. However,
there is a definition of "public deposit" in the Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 199813 which provides that all deposits except certain categories.
The societies doing business only with their members are considered to be able to manage their own
affairs as the society is managed by them and public intervention may not be necessary. However, many
societies accept deposits from the public enrolling the depositors as nominal members who may not be
eligible to full membership rights and therefore, having no effective control over the management of the
society. While allowing societies to go outside the Banking Regulation Act by restricting deposits to
member deposits, it may be insisted that such members may have full and equal rights in participation of
the affairs of the societies.
ISSUANCE OF CHEQUE
Section 49A of the Banking Regulation Act restricts acceptance of deposits by any person other than a
banking company, Reserve Bank, State Bank or any other banking institution, firm or other person
notified by the Central Government. However, a primary credit society is exempted from these provisions.
MUTUALLY AIDED CO-OPERATIVE SOCIETIES
The dependence of co-operative societies on Government and the consequent rigors of regulation by
Government on co-operative societies has led to the enactment of Mutually Aided Co-operative Societies
Act or Self Financing Co-operative Societies Act in several states19. In the societies under the
enactments, , Government capital is prohibited and the management of the societies is vested in the
Board of Directors and the policies are decided by the General Body subject to limited regulatory powers
exercised by the Registrar by way of registration of society, registration of bye laws, etc. These State
enactments are in addition to the existing State laws on co-operative societies and provides alternative
legal framework for co-operative societies. However, in some States (like Orissa), the State enactments
provide for creation of a cooperative as distinguished from a co-operative society .This could lead to the
position that the entity in question is not co-operative society and the enactment concerned is not a State
law on co-operative societies, and that would render the co-operative ineligible to be licensed as a
cooperative bank under section 22 of the BR Act.