Cooperative Banks Must Comply With Banking Regulation Act And Other Laws Related To Banking: SC [Read Judgment]

The Supreme Court has held that the co­operative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking'

One of the issues considered by the Constitution bench in Pandurang Ganpati Chaugule and others vs Vishwasrao Patil Murgud Sahakari Bank Limited was whether 'banking company' as defined in Section 5(c) of the BR Act, 1949 covers co­operative banks registered under the State Cooperative Laws and also multi-State co­operative societies?

The Constitution Bench comprising Justices Arun Mishra, Indira Banerjee, Vineet Saran, M R Shah and Aniruddha Bose in this case also held that co­operative banks are included in the definition of 'bank' and 'banking company' under Section 2(1)(c) and 2(1)(d) of the SARFAESI Act.

Referring to the scheme of the Banking Regulation Act, the bench observed that in case co­operative banks are kept outside the purview of the BR Act, 1949, and other legislation under Entry 45 and RBI Act, no licence can be granted, and they cannot do banking as that is not permissible without compliance of various provisions as provided in the BR Act, 1949. They would have to close down and stop the business forthwith, it said. The bench observed:

"The co­operative banks, which are governed by the BR Act, 1949, are involved in banking activities within the meaning of Section 5(b) thereof. They accept money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking. They perform commercial functions. A society shall receive deposits and loans from members and other persons. They give loans also, and it is their primary function. Thus, they are covered under 'banking' in Entry 45 of List I"

Holding thus, the Court overruled the Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. to the extent it observed that the co­operative banks established under the Maharashtra Co­operative Societies Act, 1960 and Andhra Pradesh Co­operative Societies Act, 1964, transacting the business of banking do not fall within the meaning of 'banking company' as defined in Section 5(c) of the BR Act, 1949.

The Court said in conclusion :

"The co­operative banks involved in the activities related to banking are covered within the meaning of 'Banking Company' defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of co­operative banks run by the co­operative societies. The co­operative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking' in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India"

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