The Centre has proposed radical changes in the guidelines for co-operative banks, which, if passed by the Parliament, will unseat almost all chairpersons and directors of these banks.

Section 56 of the Banking Regulation Act, 1949, which governs all co-operative banks, has also proposed to be deleted.

Co-op banks: Of laxity, loopholes and scams: Complete Coverage

The changes have been suggested in the Banking Regulation (Amendment) Bill 2003, which was introduced in the last monsoon session of the Parliament.

The Bill, which has been sent to a select committee of Parliament, will affect the nearly 2,090 urban co-operative banks and all the district and rural co-operative banks in the country.

For co-operative banks, the most critical provisions of the Bill relate to the appointment of directors and chairmen.

The Bill says that not less than 51 per cent of the directors should be persons having specialised knowledge or practical experience in accountancy, banking, finance, science & technology, economic affairs, small scale industry and agriculture. The remaining 49 per cent can be inducted as per existing norms.

The problem is that the 49 per cent will also include reserved seats. Banks generally have a board of 20 directors. Thus, 11 (51 per cent) will be experts.

Of the remaining nine seats, one will be reserved for SC/ ST category, one for OBC category, two for women's category and two for employees' representatives.

Thus, there will be only three seats for people who promote the bank and take the lead in its growth.

One of the directors will be appointed as chairman on either whole-time or part-time basis. If he is on part-time basis, the affairs of the bank will be managed by a managing director.

The qualifications required to be a chairman or a managing director include the point that they should have special knowledge or practical experience of a banking co-op society or financial, economic, business administration or co-operation.

They can be disqualified if they are directors of any company or co-op society or partner of a firm which carries on trade and industry or has substantial interest in any other company or co-op society or firm or is a director, manager, partner, proprietor of any trading, commercial, industrial concern or is engaged in any other vocation.

The appointments have to be confirmed by the Reserve Bank of India, which can disqualify them if it finds them unfit to hold the office.

The Bill also incorporates an RBI directive, effective from October 2003, prohibiting loans to directors of co-op banks.

Urban cooperative banks alone control deposits of over Rs 1 lakh crore, more than half of which is under the reins of some 700 (UCBs) in Maharashtra.