UPSC Prelims 2021 Q5: Indian Economy – Banking & Financial Sector

UPSC Prelims 2021, General Studies Paper I · Indian Economy

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?

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 and 3 only

Explanation

Urban Cooperative Banks (UCBs): Regulation and Structure

Statement	Claim	Verdict	Detail
1	UCBs are supervised by local boards set up by State Governments	FALSE	UCBs are under dual regulation: RBI (banking functions) and Registrar of Cooperative Societies (management and elections). Not by 'local boards'. Since 2020, RBI has expanded supervisory powers over UCBs.
2	UCBs can issue equity shares and preference shares	TRUE	The Banking Regulation (Amendment) Act, 2020 allowed UCBs to raise capital by issuing equity shares, preference shares and special shares to persons within their area of operation, subject to RBI approval.
3	UCBs were brought under the Banking Regulation Act, 1949 via a 1966 Amendment	TRUE	The Banking Laws (Application to Cooperative Societies) Act, 1965 (came into force 1 March 1966) brought UCBs under the Banking Regulation Act, 1949.

Statements 2 and 3 are correct.

Answer: (b) 2 and 3 only.

Why each option is right or wrong

(a) Incorrect. Statement 1 is wrong - UCBs face dual regulation by RBI and Registrar of Cooperative Societies, not 'local boards'.
(b) CORRECT. Statements 2 and 3 are true. The 2020 amendment allowed capital-raising via equity/preference shares. The 1966 amendment brought UCBs under the Banking Regulation Act.
(c) Incorrect. Statement 1 is factually wrong.
(d) Incorrect. Statement 1 is wrong.

Key point

UCBs = dual regulation (RBI + Registrar of Coop Societies). Banking Regulation Amendment 2020 = can issue equity/preference shares. Brought under BR Act, 1949 via 1965/1966 amendment. Answer: 2 and 3.

Remember

UCBs face dual regulation: RBI (banking functions) plus Registrar of Cooperative Societies (management). The 2020 Banking Regulation Amendment allowed UCBs to issue equity and preference shares. UCBs were brought under the BR Act, 1949 through the 1965 amendment effective March 1966.

Common mistakes

Assuming UCBs are regulated only by RBI. They are under DUAL regulation - RBI handles banking, Registrar handles cooperative aspects.
Missing the 2020 Banking Regulation (Amendment) Act which strengthened RBI's role over UCBs after the PMC Bank crisis (2019).
Confusing UCBs with rural cooperative banks (StCBs, DCCBs, PACS) which are supervised by NABARD.

Exam tip

Cooperative banking pyramid: Urban (UCBs) vs Rural (StCBs/DCCBs/PACS). UCBs are dual-regulated by RBI + Registrar. Rural cooperatives fall under NABARD supervision. PMC Bank fraud (2019) led to the 2020 BR Amendment.

Sources

Banking Regulation Act, 1949 (with 2020 Amendment)
RBI Master Direction - Urban Cooperative Banks

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