Kurian Josephthe NABARD Act defines the NABARD Act defines J.
1. Co-operative Societies is a State subject and Banking a Central subject. What about Banking by Co-operative Societies? Does it require licence under the Banking Regulation Act?
2. All these Original Petitions relate to the registration and functions of unlicensed Urban Banks. The very expressions 'Unlicensed' and 'Bank' would call for a detailed examination as to what is Banking and whether it requires licence for conducting Banking business. Such examination is all the more necessary since the unlicensed Banking is attempted to be conducted by co-operative societies registered under the Kerala Co-operative Societies Act, 1969. The scope of the expression 'Co-operative Society' and various types of such societies and 'Banking' as appear in the Kerala Co-operative Societies Act, 1969 (Act 21 of 1969). Banking Regulation Act, 1949 (Act 10 of 1949). Reserve Bank of India Act, 1934 (Act 2 of 1934), National Bank for Agricultural and Rural Development Act, 1981 generally known as NABARD Act (Act 61 of 1989) and The Deposit Insurance and Credit Guarantee Corporation Act, 1961 (Act 47 of 1961) also requires to be examined.
3. Banking is Entry 45 in List I of the Seventh Schedule of the Constitution of India. Entry 43 in List I--Union List--provides for 'incorporation, regulation and winding up of trading corporations, including Banking, insurance and financial corporations but not including cooperative societies. Entry 32 in List II State List--provides for 'incorporation, regulation and winding up of corporations, other than those specified in List I and universities; unincorporated trading, literary, scientific and religious and other societies and associations; co-operative societies. Co-operative societies is a State subject and Banking a Central subject. But what about the Banking by co-operative societies? An attempt is made by the State and supporting respondents that since List I Entry 43 specifically deals with incorporation, regulation and winding up of trading corporations including Banking, insurance and financial corporations, but excluding specifically the co-operative societies and since the co-operative societies is a State subject, it is for the State to regulate Banking by the co-operative societies. I do not think that the issue needs any elaborate discussion for two reasons : (1) Entry 43 in List I does not exclude regulation of Banking by co-operative societies. What it takes in is the incorporation, regulation and winding up of Banking corporations excluding co-operative societies. In other words, the word 'Banking' in Entry 43 is not indicative of the activity of Banking. In its plain and literal construction it only indicates incorporation, regulation and winding up of trading corporations, Banking corporations, insurance corporations and financial corporations, but excluding co-operative societies meaning thereby that incorporation, regulation and winding up of co-operative societies is excluded being a State subject. (2) It is now well settled that once there is special and specific entry in the Union List with regard to a subject, it provides for the exclusive legislative domain of the Parliament, though it may incidentally encroach on matters assigned to State Legislature. Article 246(1) confers exclusive power on the Parliament to make laws with respect to matters enumerated in List I. Entry 45 Banking and 46 Bills of Exchange, cheques, promissory notes and any other like instruments deal with Banking business. It is for the Parliament alone to legislate on such activity of Banking business. Same is the situation with regard to Entry 47 'Insurance'. It is fruitful in this context to refer to the recent decision of the Supreme Court in Union of India v. Delhi High Court Bar Association, : [2002]2SCR450 . The Apex Court therein considered the constitutional validity of Recovery of Debts Due to Banks and Financial Institutions Act (51 of 1993). Referring to the legislative competence, the exclusive power of Parliament under Entry 45 List I despite Entry II-A in List III, it was held that:
'.....There can be little doubt that under Entry 45 of List I, it is the Parliament alone which can enact a law with regard to the conduct of business by the Banks. Recovery of dues is an essential function of any Banking institution, xx xx As none of the items in the lists are to be read in a narrow or restricted sense, the term 'Banking' in Entry 45 would mean legislation regarding all aspects of Banking including ancillary or subsidiary matters relating to Banking. Setting up of an adjudicatory body like the Banking Tribunal relating to transactions in which Banks and financial institutions are concerned would clearly fall under Entry 45 of List I giving the Parliament specific power to legislate in relation thereto.'
Therefore, it is for the Parliament alone to make laws regulating Banking business whether it be by a co-operative society or a company or any person.
4. Reserve Bank of India Act, 1934 (Act 2 of 1934) intends to regulate the issue of Bank notes and keeping of the reserves with a view to securing monetary stability in India and to Operate the currency and credit system of the country to its advantage. Reserve Bank of India is constituted under Section 3 of the Act for the purpose of carrying on the business of Banking in accordance with the provisions of the said Act.
5. The Banking Regulation Act, 1949 (Act 10 of 1949) was enacted to consolidate and amend the law relating to Banking. Prior to 1965 there was no specific law dealing with Banking activities of the co-operative societies. With a view to introducing and developing Banking in co-operative sector on sound Banking practices and principles the Parliament thought it necessary to extend the Banking Regulation Act with suitable modifications to cooperative societies and that led to Act 23 of 1965. The Banking Laws (Application to Cooperative Societies) Act, 1965, which came into force with effect front 1.3.1966 as per Notification dated 31.12.1965 issued by the Government of India. Part V of the Banking Regulation Act, Section 56 provides for the application of the Act as far as co-operative societies are concerned.
6. Section 3 of the Banking Regulation Act, 1949, reads as follows:
'3. Act to apply to to-operative societies in certain cases.--Nothing in this Act shall apply to--
(a) primary agricultural credit society;
(b) a co-operative land mortgage Bank; and
(c) any other co-operative society except in the manner and to the extent specified in Part V.'
It may be seen that the Banking Regulation Act itself does not apply to a primary agricultural credit society and a co-operative land mortgage Bank. But it applies to a co-operative society in the manner and to the extent specified in Part V of the said Act. The exclusion as above is indicated in the preamble of Act 23 of 1965 thus:
'An Act further to amend the Reserve Bank of India Act, 1934 and the Banking Companies Act, 1949 for the purpose of regulating the Banking business of certain cooperative societies and for matters connected therewith.'
A primary agricultural credit society is defined at Section 56(c) inserting a new clause at Section 5 as (cciv) as follows :
'(cciv) 'primary agricultural credit society' means a co-operative society--
(1) the primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops); and
(2) the bye-laws of which do not permit admission of any other co-operative society as member:
Provided that this sub-clause shall not apply to the admission of a co-operative Bank as a member by reason of such co-operative Bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose'.
It may be noted that the primary agricultural credit society which is excluded by the Banking Regulation Act, 1949 is a co-operative society. A co-operative society under Section 56(c) of the Banking Regulation Act as applicable to co-operative societies bears the meaning assigned to it under the NABARD Act, 1981. Under Section 2(f) of the NABARD Act, 1981, co-operative society means a society registered under the Co-operative Societies Act, 1912 (Central Act) or any law relating to co-operative societies for the time being in force in any State. Therefore, a primary agricultural credit society to which the Banking Regulation Act, 1949 itself does not apply is only a co-operative society registered under the provisions of the Kerala Co-operative Societies Act, 1969, as far as the State is concerned. But the activity of a primary agricultural credit society which is outside the purview of the Banking Regulation Act, 1949 is confined to providing of financial accommodation to the members of such a society for agricultural purposes or for purposes connected with agricultural activities including marketing of crops. The further restriction is that the bye-laws should not permit admission of any other co-operative society as a member except as indicated in the proviso in the case of a co-operative Bank.
7. The Banking Regulation Act, 1949 provides for Banking business in the case of two types of co-operative societies : (1) Co-operative Bank, and (2) Primary Credit Society. As per Section 56(c) co-operative Bank means a State Co-operative Bank, a Central Cooperative Bank and a Primary Co-operative Bank. Section 56(c) provides that meanings assigned to those expressions under the NABARD Act would apply to them. Those definitions as found at Section 2(d) and 2(u) of the Act read as follows:
'2(d) 'Central Co-operative Bank' means the principal co-operative society in a District in a State, the primary object of which is the financing of other cooperative societies in that District:
Provided that in addition to such principal society in a district, or where there is no such principal society in a district, the State Government may declare anyone or more co-operative societies carrying on the business of financing other cooperative societies in that district to be also or to be a central co-operative Bank or central co-operative Banks within the meaning of this definition.'
2(u) 'State co-operative Bank' means the principal co-operative society in a State, the primary object of which is the financing of other co-operative societies in the State:
Provided that in addition to such principal society in a State, or where there is no such principal society in a State, the State Government may declare anyone or more co-operative societies carrying on business in that State to be also or to be a State Co-operative Bank or State Co-operative Banks within the meaning of this definition'.
Primary Co-operative Bank is defined under Section 56(c) of the Banking Regulation Act as follows:
'56(c)(5)(ccv) 'Primary Co-operative Bank' means a co-operative society, other than a primary agricultural credit society:
(1) the primary object or principal business of which is the transaction of Banking business;
(2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and
(3) the bye-laws of which do not permit admission of any other co-operative society as a member:
Provided that this sub-clause shall not apply to the admission of a co-operative Bank as a member by reason of such co-operative Bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose.'
Primary credit society is defined under Section 56(c)(5)(ccvi) as follows:
'(ccvi) 'primary credit society' means a co-operative society, other than a primary agricultural credit society--
(1) the primary object or principal business of which is the transaction of Banking business;
(2) the paid-up share capital and reserves of which are less than one lakh of rupees; and
(3) the bye-laws of which do not permit admission of any other co-operative society as a member:
Provided that this sub-clause shall not apply to the admission of a co-operative Bank as a member by reason of such co-operative Bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose.
Explanation.: If any dispute arises as to the primary object or principal business of any co-operative society referred to in Clauses (cciv), (ccv) and (ccvi), a determination thereof by the Reserve Bank shall be final.'
The difference between a primary co-operative Bank and a primary credit society is only in the case of paid up share capital and reserve. As far as a primary co-operative Bank is concerned the same shall not be-less than one lakh of rupees and in the case of a primary credit society it shall be less than one lakh of rupees. It is significant to note that the primary object or principal business of both shall be the transaction of Banking business. It has also to be specifically noted that both definitions expressly exclude a primary agricultural credit society. The legislative intention of such a specific exclusion is clear from the Act itself. The primary agricultural credit society is permitted to provide financial accommodation only to its members and that too for agricultural purposes and purposes connected with agricultural activities; whereas coming to co-operative Banks and primary credit societies, those societies are intended to engage in the transaction of Banking business. The only common factor is that all such societies are co-operative societies.
8. Banking is defined under Section 5(b) of the Banking Regulation Act, which reads as follows:
'(b) 'Banking' means the 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.'
It is to be noted that Banking business as such is given an exhaustive definition-accepting money from the public for the purpose of lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. As already noted above, a primary agricultural credit society engages in providing financial accommodation to its members whereas a primary co-operative Bank or a primary credit society engages in transaction of Banking business.
9. The next question to be considered is whether licence is required for a co-operative Bank or a primary credit society for transacting Banking business. Section 22 of the Banking Regulation Act, 1949 deals with licensing of co-operative Banks, Section 22(1) reads as follows:
'22. Licensing of co-operative Banks--
(1) Save as thereinafter provided, no co-operative society shall carry on Banking business in India unless,
(a) it is a primary credit society, or
(b) it is co-operative Bank and holds a licence Issued in that behalf by the Reserve Bank, subject to such conditions, if any, as the Reserve Bank may deem fit to impose:
Provided that nothing in this sub-section shall apply to a co-operative society, not being a primary credit society or a co-operative Bank carrying on Banking business at the commencement of the Banking Laws (Application to Cooperative Societies) Act, 1965, for a period of one year from such commencement.'
It can be seen that no licence is required for Banking business in the case of a co-operative society which is a primary credit society whereas for other co-operative societies to carry on Banking business they should be co-operative Banks and they should hold licence issued in that behalf by the Reserve Bank of India.
10. Section 7(56)(f) of the Banking Regulation Act provides that no co-operative society other than a co-operative Bank shall use as part of its name or in connection with its business any of the words 'Bank, Banker or Banking'. It is also provided that no co-operative society shall carryon the business of Banking in India unless a society uses as part of its name anyone of the above mentioned three words. Section 7 reads as follows:
'7. Use of words 'Bank', 'Banker' or 'Banking'--
7(1). No co-operative society other than a co-operative Bank shall use as part of its name or in connection with its business any of the words 'Bank', 'Banker' or 'Banking' and no co-operative society shall carryon the business of Banking in India unless it uses as part of its name at least one of such words.
(2) Nothing in this section shall apply to--
(a) a primary credit society, or
(b) a co-operative society formed for the protection of the mutual interests of cooperative Banks or co-operative land mortgage Banks, or;
(c) any co-operative society, not being a primary credit society, formed by the employees of--
(i) a Banking company or the State Bank of India or a corresponding new Bank or a subsidiary Bank of such Banking company, State Bank of India or a corresponding new Bank, or
(ii) a co-operative Bank or a preliminary credit society or a co-operative land mortgage Bank, insofar as the word 'Bank', 'Banker' or 'Banking' appears as part of the name of the employer Bank, or as the case may be, of the Bank, whose subsidiary the employer Bank is.'
Section 7(2) provides for a few exceptions namely a primary credit society, a co-operative society formed for the protection of the mutual interests of co-operative Banks or cooperative land mortgage Banks or a co-operative society formed by the employees of certain Banking companies. Therefore, under the Scheme of the Banking Regulation Act, 1949, a co-operative society registered under the Kerala Co-operative Societies Act is entitled to canyon Banking business only if it is a co-operative Bank having licence and only by using anyone of the words Bank, Banker or Banking. A primary credit society, a co-operative society formed for the protection of the mutual interests of the co-operative Banks or cooperative land mortgage Banks and any society, formed by the employees of certain Banking companies are the exemptions.
11. The Deposit Insurance and Credit Guarantee Corporation Act, 1961 is intended to provide for the establishment of a Corporation for the purpose of insurance of deposits and guaranteeing of credit facilities and for other matters connected therewith or incidental thereto. 'Banking' under this Act bears the same meaning as in the Banking Regulation Act. Section 3 provides for the establishment of the Corporation. Under Section 13A all eligible co-operative Banks are to be registered with the Corporation and it is specifically provided that if only a co-operative Bank is licensed under the Banking Regulation Act, 1949 or is otherwise permitted to carry on Banking business by the Reserve Bank of India, the registration is permissible. If only there is registration, the benefit of insurance of deposits under the Act will be available.
12. A conspectus of the above provisions would show that (1) a State Co-operative Bank and a Central Co-operative Bank, (2) co-operative societies which are primary co-operative Banks and whose paidup share capital and reserves are not less than one lakh rupees, (3) cooperative societies which are primary credit societies whose primary object or principal business is the transaction of Banking business are the three types of co-operative societies entitled to do Banking business, the former two with licence issued by the Reserve Bank of India, Under Section 5(ccvi) Central Co-operative Bank and State Co-operative Bank have the meanings respectively assigned to them under the NABARD Act, 1981. Section 2(d) of the NABARD Act defines Central Co-operative Bank as the principal co-operative society in a district in a State, the primary object of which is the financing of other co-operative societies in that district. The State Government is also entitled to declare similar societies in a district as Central Co-operative Banks. State Co-operative Bank under Section 2(u) of the NABARD Act is the principal co-operative society in a State, the primary object of which is the financing of other co-operative societies in the State and therein also the State Government is entitled to declare any similar co-operative societies as State Co-operative Banks. Duly those societies are entitled to retain as part of their anyone of the titles 'Bank, Banking and Banker' and that only with anyone of the abovementioned three titles, a cooperative society is entitled to do Banking business. The primary agricultural credit societies are permitted only to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities including marketing of crops. Such primary agricultural credit societies are not entitled to transact Banking business by accepting deposits from the public which is withdrawable by cheque, draft, order, or otherwise.
13. 'Unlicensed urban Banks' is an expression introduced under Rule 15 of the Kerala Co-operative Societies Rules, 1969, 'Classification of Societies, according to Types' as per SRO No. 380/2000 with effect from 2.5.2000. Under the said Rule 'after the registration of a society the Registrar shall classify the society' into one of the types 'according to the principal object provided in the bye-laws. In other words, the classification of the society after its registration into a type should be on the basis of the principal object for which the society is formed. As already noted above, for a co-operative society in order to transact Banking business, it should have its primary object as the transaction of Banking business and it shall not be a primary agricultural credit society. There are 11 types provided under the Rules like Credit, Marketing, Consumer, Farming, etc. Credit societies are divided into three categories depending on the duration of the credit and also the purpose of credit. Type 1-A is Short Term/ Medium Term, 1-B is Long Term and 1-C is Housing Societies. Type 1-A Short Term/ Medium Term is again sub-grouped into three as (1) Apex, (2) Central and (3) Primary. Various examples are provided against each type. The examples of type 1-A(3) primary credit societies are of two categories : Category (a)--primary agricultural credit societies, regional Banks, rural Banks, farmers service co-operative Banks, urban co-operative Banks and Category (b)--employees credit societies/unlicensed urban co-operative Banks agricultural improvement societies. Thus unlicensed urban co-operative Bank under the Kerala Cooperative Societies Rules is a primary credit society. Primary credit society is defined under Section 2(ob) of the Act as a society not being an apex or central society which has its principal object of raising of funds to be lent to its members. It may be noted that a primary credit society under the provisions of the Kerala Co-operative Societies Act also is entitled to have the financial accommodation of lending money, only to its members. Urban co-operative Bank is defined at Section 2(ta) meaning a society registered under the provisions of the Societies Act having its area of operation in the urban areas and which undertakes Banking business. In order to undertake Banking business, a co-operative society should be a co-operative Bank and it should have licence from the Reserve Bank of India. Such a co-operative Bank functioning in urban areas is an urban co-operative Bank. Though the term unlicensed urban co-operative Bank is not defined under the Act or Rules, inferentially it only means a cooperative society registered under the provisions of the Kerala Co-operative Societies Act having its area of operation in the urban areas it undertakes Banking business but without licence from the Reserve Bank of India. Then the question is, is there any situation wherein a co-operative society having its area of operation in the urban areas undertaking Banking business without licence from the Reserve Bank of India?
14. Section 22(1) as already seen earlier provides that no co-operative society shall carry on Banking business in India unless it is a Primary credit society or it is a co-operative Bank having licence from the Reserve Bank of India. Section 22(2)(56)(o) however, providing for certain exemptions, reads as follows:
'22(2). Every co-operative society carrying on business as co-operative Bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965, shall before the expiry of three months from such commencement, every co-operative Bank which comes into existence as a result of the division of any other co-operative society carrying on business as a co-operative Bank or the amalgamation of two or more co-operative societies carrying on Banking business shall, before the expiry of three months from its so coming into existence, every primary co-operative Bank after such commencement shall before the expiry of three months from the date on which it so becomes a primary co-operative Bank and every co-operative society other than a primary credit society shall before commencing Banking business in India, apply in writing to the Reserve Bank for a licence under this section :
Provided that nothing in Clause (b) of Sub-section (1) shall be deemed to prohibit--
(i) a co-operative society carrying on business as a co-operative Bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965; or
(ii) a co-operative Bank which has come into existence as a result of the division of any other co-operative society carrying on business as a co-operative Bank, or the amalgamation of two or more co-operative societies carrying on Banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965, or at any time thereafter; or
(iii) a primary credit society which becomes a primary co-operative Bank after such commencement from carrying on Banking business untill it is granted a licence in pursuance of this section or is, by a notice in writing notified by the Reserve Bank that the licence cannot be granted to it.'
Thus as of now every co-operative Bank which comes into existence as a result of division of any other co-operative society carrying on Banking business as a co-operative Bank or the amalgamation of two or more co-operative societies carrying on Banking business need apply for licence only within three months of its so coming into existence and every primary credit society which becomes a primary co-operative Bank (when the share capital and reserves is one lakh or more rupees) also gets a period of three months for making an application for licence from the date it so becomes a primary co-operative Bank. In the case of the above mentioned categories namely (1) a co-operative society carrying on business as a co-operative Bank as on 1.3.1966, (2) a co-operative Bank which has come into existence as a result of the division of any other society carrying on business as a co-operative Bank or the amalgamation of two of more co-operative societies carrying on Banking business as on 1.3.1966 or at any time thereafter; (3) a primary credit society which becomes a primary co-operative Bank after 1.3.1966, they are entitled to carry on Banking business without licence until they are granted licence under Section 22 or until the Reserve Bank of India notifies in writing that licence cannot be granted to them. A co-operative Bank functioning in urban areas in such circumstances and during the abovementioned permitted period can be described as an unlicensed urban Bank.
15. Yet another situation of unlicensed Banking is contemplated under Section 36A of the Banking Regulation Act. Section 36A(56)(za) reads as follows:
'36A. Certain provisions of the Act not to apply to certain co-operative Banks:
(1) The provisions of Section 11, Section 18 and Section 24 shall not apply to a cooperative Bank which has been refused a licence under Section 22 or whose licence has been cancelled under that section or which is or has been prohibited or precluded from accepting deposits by virtue of any order made under this Act, or of any alternation made in its bye-laws.
(2) Where the Reserve Bank is satisfied that any such co-operative Bank as is referred to in Sub-section (1) has repaid, or has made adequate provision, for repaying all deposits accepted by the co-operative Bank, either in full or to the maximum extent possible, the Reserve Bank may, by notice published in the Official Gazette, notify that the co-operative Bank has ceased to be a co-operative Bank within the meaning of this Act, and thereupon all the provisions of this Act applicable to such co-operative Bank shall cease to apply to it, except as respects things done or omitted to be done before such notice.
(3) Subject to the provisions of Sub-sections (1) and (2), a co-operative society carrying on business as a primary co-operative Bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965, or a cooperative society which becomes a primary co-operative Bank after such commencement shall, notwithstanding that it does not at any time thereafter satisfy the requirements of the definition of primary co-operative Bank in Clause (ccv) of Section 5, continue to be a primary co-operative Bank within the meaning of this Act, and may, with the approval of the Reserve Bank and subject to such terms and conditions as the Reserve Bank may specify in that behalf, continue to carry on the business of Banking.'
Section 11 referred to in Section 36A deals with the requirement of the minimum paidup capital and reserves, Section 18 deals with cash reserve and Section 24 deals with maintenance of percentage of assets. It is provided under Sub-section (3) of Section 36A that subject to the provisions of Sub-sections (1) and (2) a co-operative society carrying on Banking business as a primary co-operative Bank on 1.3.1966 or a co-operative society which becomes a primary co-operative Bank after 1.3.1966, notwithstanding the fact that such a society does not satisfy the requirements of a primary co-operative Bank, continues to be a primary co-operative Bank under the provisions of the Banking Regulation Act, 1949 and carry on the business of Banking with the approval of the Reserve Bank of India and subject to the conditions of the Reserve Bank of India may specify in that behalf. In that situation also it may be seen that there is no licence for a co-operative Bank to transact Banking business and yet the Act permits such business. Therefore, the situation under Section 22(2) and Sub-section (3) of Section 36A of the Banking Regulation Act and the two situations wherein a co-operative society exists as a co-operative Bank and transacts Banking business without licence from the Reserve Bank of India and in those situations such Banks may be described as unlicensed urban co-operative Banks in case such co-operative Banks function in urban areas. The expression 'unlicensed urban co-operative Banks' under Rule 15(1)A(3)(b) would only take in those two situations under Sections 22(2) and 36A(3) of the Banking Regulation Act.
16. It is also significant in this context to note that the question of such a classification into a type of society arises only after the registration of a society. It could not have been otherwise because an unlicensed urban co-operative Bank is not a species in itself to be formed and registered. As case be seen from Section 22(2) and Section 36A(3) of the Banking Regulation Act an unlicensed urban Bank comes into existence only in limited situations indicated above. None of the situations warrants the formation of a co-operative society from the stage of Rule 3(2), by not less than 25 persons forming a promoting committee. It follows that the Kerala Co-operative Societies Act and Rules do not permit registration of a co-operative society as an unlicensed urban Bank.
17. Next question to be tackled is regarding the supervisory and regulatory powers of the Reserve Bank of India, Section 35A of the Banking Regulation Act confers specific powers on the Reserve Bank of India to give directions to co-operative Banks in public interest, in the interest of the Banking policy and to secure the proper management of the Banking business of any co-operative Bank. It is clearly provided that the directions may be general in nature or to any co-operative Bank in particular and that the co-operative Bank or Banks shall be bound to comply with such directions, Section 33A(56(a) and (x)) reads as follows:
'33A. Power of the Reserve Bank to give directions:
(1). Where the Reserve Bank's satisfied that-
(a) in the public interests; or
(aa) in the interest of Banking policy; or
(b) to prevent the affairs of any co-operative Bank being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the co-operative Bank; or
(c) to secure the proper management of the Banking business of any cooperative Bank generally; it is necessary to issue directions to co-operative Banks generally or to any co-operative Bank in particular, it may, from time-to time, issue such directions as it deems fit, and the co-operative Banks or the co-operative Bank, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may on representation made to it or on its own motion, modify or cancel any direction issued under Sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.'
Section 36[56(a) and (2)] provides for further powers and functions of the Reserve Bank. It reads as follows:
'36. Further powers and functions of Reserve Bank.--(1) The Reserve Bank may--
(a) caution or prohibit Banking companies generally or any Banking company in particular against entering into any particular transaction or class of transactions, and generally give advice to any Banking company;
(b) on a request by the company concerned and subject to the provisions of Section 44A, assist, as intermediary or otherwise, in proposals for the amalgamation of such Banking companies;
(c) give assistance to any Banking company by means of the grant of a loan or advance to it under Clause (3) of Sub-section (1) of Section 18 of the Reserve Bank of India Act, 1934;
(d) at any time, if it is satisfied that in the public interest or in the interest of Banking policy or for preventing the affairs of the Banking company being conducted in a manner detrimental to the interests of the Banking company or its depositors it is necessary so to do, by order in writing and on such terms and conditions as may be specified therein--
(i) require the Banking company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the Banking company, or require an officer of the Banking company to discuss any such matter with an officer of the Reserve Bank;
(ii) depute one or more of its officers to watch the proceedings at any meeting of the Board of Directors of the Banking company or of any committee or of any other body constituted by it; require the Banking company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank;
(iii) require the Board of Directors of the Banking company or any committee or any other body constituted by it to give in writing to any officer specified by the Reserve Bank in this behalf at this usual address all notices of, and other communications relating to, any meeting of the Board, committee or other body constituted by it;
(iv) appoint one or more of its officers to observe the manner in which the affairs of the Banking company or of its officers or branches are being conducted and make a report thereon;
(v) require the Banking company to make, within such time as may be specified in the order, such changes in the management as the Reserve Bank may consider necessary.
(2) The Reserve Bank shall make an annual report to the Central Government on thetrend and progress of Banking in the country, with particular reference to itsactivities under Clause (2) of Section 17 of the Reserve Bank of India Act, 1934,including in such report its suggestions, if any, for the strengthening of Bankingbusiness, throughout the country.
(3) The Reserve Bank may appoint such staff at such places as it considers necessary for the scrutiny of the returns, statements and information furnished by Banking companies under this Act, and generally to ensure the efficient performance of its functions under this Act.'
It needs no further discussion that the Act provides for vast supervisory powers under Sections 35A and 36 of the Banking Regulation Act. In fact Section 21 onwards deal with the supervisory powers including the power of inspection, licensing, cancellation of licence, restrictions on opening of new branches, shifting of place of business, conduct of business of Banking, accounting, etc. Part III deals with suspension of business and Part IV penal provisions. Section 47 provides that Court shall take cognisance of any offence punishable under Section 46 only on complaint in writing by an officer of the Reserve Bank or the National Bank as the case may be. Section 47A empowers the Reserve Bank to impose penalty. These provisions would clearly indicate that the Reserve Bank of India is the guardian, guarding the Banking business in general and Banking business by the co-operative societies in India in particular.
18. As observed by the Supreme Court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, : AIR1962SC1371 , popularly known as the Palai Central Bank case, the Reserve Bank is the Central Bank for India. Its position is as a Bankers' Bank. It has control over the Banking companies and Banking in India. In Corporation Bank v. D.S. Gowda, : (1994)5SCC213 , at paragraph 16 the Apex Court held as follows:..... As pointed out earlier, under the Banking Regulation Act wide powers are conferred on the ReserveBank to enable it to exercise effective control over all Banks.'
In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, 1999(2) SCC 343, the Supreme Court held that the Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the Banking system in the country. In Canara Bank v. P.R.N. Upadhyaya, : AIR1998SC3000 , the Supreme Court held that the circulars issued by the Reserve Bank of India under Sections 21 - 35 of the Banking Regulation Act, 1949 are statutory in nature. Section 25 deals with the power of Reserve Bank to control advances to co-operative Banks and Section 35 inspection.
19. That takes us to the question as to whether the Reserve Bank has any say in the matter of registration of co-operative societies for the purpose of transacting Banking business under the Kerala Co-operative Societies Act. The process of registration and licensing, as far as co-operative Banks are concerned is complimentary to each other and unless there be close co-ordination between the registering authority on the one hand and Reserve Bank of India on the other, it might lead to a situation of defeating the purpose of both Acts in matters relating to Banking by co-operative societies. Since the purpose of formation of a society and registration of the same as an urban co-operative Bank is to transact Banking business in urban areas as a co-operative Bank, it is necessary in public interest that an assessment is made as to whether the proposed co-operative Bank is capable of complying with the requirements of the various provisions under the Banking Regulation Act. True the registering authority is the Registrar of Co-operative Societies, but the purpose of registration is transaction of Banking business which is regulated under the provisions of the Banking Regulation Act. The Reserve Bank of India being the authority vested with supervisory powers over the Banking institutions and the regulatory authority in Banking business, it is for the Reserve Bank of India to prescribe norms.
20. Section 5A[56(d)] of the Banking Regulation Act provides that:
'5A. Act to override bye-laws etc.--
(1) The provisions of this Act shall have effect, notwithstanding anything to the contrary contained in the bye-laws of a co-operative society, or in any agreement executed by it, or in any resolution passed by it in general meeting, or by its Board of Directors or other body entrusted with the management of its affairs, whether the same be registered, executed or passed, as the case may be, before or after the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965.
(2) Any provision contained in the bye-laws, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.'
Therefore, in order to avoid difficulties to co-operators intending to transact Banking by cooperative societies, it is necessary that the norms prescribed by the Reserve Bank of India are followed in the matter of registration. Mr. Jacob Varghese, learned Counsel appearing for the Reserve Bank of India submitted that norms in the matter of registration of new urban Banks have been evolved pursuant to detailed study and various meetings. Report of the Committees on Corporation in India (Chairman : Sir Maclagan), Report of the Committee on Urban Cooperative Banks (Chairman : Madhava Das), 1978, Report of the Committee on Licensing of New Urban Co-operative Banks (Chairman : S.S. Marathe), 1992, Report of the Agricultural Credit Review Committee (Chairman: A. M. Khusro), 1989, and Report of the Committee on Financial System (Chairman : M. Narasimham), 1991, are some of the reports in this regard. Ext R-5(a) is the earliest of the norms. The Reserve Bank of India requested the Registrar of Co-operative Societies to ensure compliance with the norms and conditions stipulated in the norms prescribed by the Reserve Bank of India on registering new urban cooperative Banks. Ext. R-5(a) (in the counter affidavit in O.P. No. 33751/2001) dated 5.10.1974 was followed by another circular dated 2.6.1979, Ext. R-5(b) and then Ext. R-5(c) dated 12.11.1982, Ext. R-5(d) dated 11.10.1983, Ext. R-5(e) dated 25.5.1993, Ext. R-5(f) dated 30.8.2000. The registering authority under the Kerala Co-operative Societies Act, 1969 is bound to comply with Ext. R-5(a) to (f) circulars and such other directions issued by the Reserve Bank of India from time-to-time in the matter of registration of new urban cooperative Banks.
21. It is significant in this context to note that Section 7(1)(e) of the Kerala Co-operative Societies Act requires the satisfaction of the Registrar 'that the proposed society complies with the requirements of sound business as a condition precedent to the registration of the society and its bye-laws.' Obviously all the norms prescribed by the Reserve Bank of India in the matter of registration of New Urban Banks are only with a view to ensuring sound Banking business by co-operative Banks. Hence for that reason also the Registrar is bound to comply with the directions issued by the Reserve Bank of India in the matter of registration of new urban Banks. Mr. T.R. Ramachandran Nair, learned Counsel appearing for some of the parties submits that the Registrar is aware of such a requirement as evident from some of the Circulars. Circular No. 54/1987 issued by the Registrar of Co-operative Societies provides for instructions in the matter of registration of societies. Paragraph 5(a) of the said circular reads as follows:
'For registration of co-operative societies at the primary level, prior permission of Registrar is not necessary. However, in cases where prior concurrence of other agencies like NABARD, Reserve Bank of India, etc. (for example, registration of the Primary Co-operative Agricultural Development Banks, Urban Banks, etc.) is required, such proposals should be referred to this office. Similarly proposals of those societies, the area of operation of which extent to or exceeds one district shall be referred to Registrar for concurrence before registration.'
The said circular is still in force.
22. Ext. R-5(e) circular dated 25.5.1993 provides for a norm regarding the area of operation also. But since the registering authority is bound to see that the area of operation of a proposed society does not overlap another society of similar type under Section 7 of the Kerala Co-operative Societies Act, the registering authority is bound to take into consideration that aspect also unless otherwise exempted by notification under Section 101 of the Kerala Co-operative Societies Act.
23. There is challenge against steps taken by the Reserve Bank of India cautioning the gullible public regarding the unauthorised and illegal activities undertaken by certain unlicensed urban Banks. (Ext. P-1 in O.P. No. 34640/2001, Ext. P-2 in O.P. No. 10529/2002, etc.). As already observed above, it is the duty of the Reserve Bank of India under Section 35A of the Banking Regulation Act to protect public interest and the interest of the Banking policy. The Reserve Bank of India is also bound to prevent the affairs of a co-operative Bank being conducted in a manner detrimental to the interests of depositors or in a manner prejudicial to the interests of the co-operative Bank. It has also a duty to secure the proper management of the Banking business of the co-operative Bank.
24. Section 49A of the Banking Regulation Act is also relevant in this context. The said provision deals with restriction on acceptance of deposits withdrawable by cheque. Section 49A reads as follows :
'49A. Restriction on acceptance of deposit withdrawable by cheque:
No person other than a co-operative Bank, the Reserve Bank, the State Bank of India or any other Banking institution, firm or other person notified by the Central Government in this behalf on the recommendation of the Reserve Bank shall accept from the public deposits of money withdrawable by cheque:
Provided that nothing contained in this section shall apply to--
(a) a primary credit society;
(b) any other co-operative society accepting such deposits at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 for a period of one year from the date of such commencement; and
(c) any savings Bank scheme run by the Government.'
Banking a primary credit society and a savings Bank scheme run by the Government, only a co-operative Bank, the Reserve Bank and the State Bank of India and any other Banking institution or firm or other person notified by the State Government in this behalf on the recommendation of the Reserve Bank shall accept from the public deposits of money withdrawable by cheque. If any person, let alone a co-operative society, contravenes the said provision or any provisions under the Banking Regulation Act it is the duty and function of the Reserve Bank of India to protect the gullible public in public interest. Therefore, the steps taken by them including the press release cautioning the general public regarding the unlicensed and unauthorised activities of certain co-operative societies are perfectly in order and in exercise of their duties and powers under the Banking Regulation Act. The Reserve Bank of India can be faulted only if they do not take such steps in public interest, being the statutory authority to act in such circumstances to protect public interest.
25. The factual and legal position being what is stated above, it is not necessary for the Court to go into the various details of individual original petitions. It is for the Registrar of Co-operative Societies and the State Government under the Kerala Co-operative Societies Act, and the Reserve Bank of India under the Banking Regulation Act to take appropriate steps in the light of what is stated above. In cases where the Registrar, the Government or the Reserve Bank of India, as the case may be, has already been moved regarding the violation of statutory provisions, action in the light of the judgment shall be taken to set things in order, within two months and in other cases within two months from the date of receipt of appropriate representation. It is the duty and function of the Reserve Bank of India to take prompt steps provided under the Banking Regulation Act, 1949 in the event of violation of the provisions of the Act, for safeguarding public interest, for protecting Banking policy, for preventing the disorderly functioning of the co-operative Banks and for the proper management of Banking business in co-operative Banks and it is for the public to alert the Reserve Bank of India regarding their duties and functions, in the event of violation of the provisions of the Banking Regulation Act, 1949.
The Original Petitions are disposed of as above.