In a major ruling affecting the banking sector, the Supreme Court has held that the Reserve Bank of India cannot grant banking licence to cooperative societies registered under Multi-State Act without the NABARD declaring it as a state, central or primary cooperative bank.

A bench comprising Justice S N Variava and Justice H K Sema gave this ruling while directing the RBI to forthwith revoke the banking licence given to the Apex Cooperative Bank of Urban Bank of Maharashtra and Goa Ltd.

Rejecting the contention of RBI that it was competent to grant licence to a cooperative bank under Multi State Act, the Bench said so far as Banking Regulation Act was concerned, the term "cooperative bank" had a definite meaning and the RBI could not go by any other meaning given to the same term for the purpose of issuing banking licence.

"We hold that the RBI by virtue of its power under Section 22 of the Banking Regulation Act cannot grant licence to any cooperative bank unless it is a state cooperative bank or a central cooperative bank or a primary cooperative bank. It would be necessary that a declaration under the NABARD Act must be first obtained," Justice Variava said.

The apex court said the state government before declaring a cooperative society as a state cooperative bank must take into consideration its past activities.

"The state government has to look into and be satisfied that the society has faithfully and efficiently been carrying on the business of financing other cooperative societies in the state and that there have been no complaints against that society," Justice Varaiva said.

"To allow the government to declare any society, even a society which has done no business of financing other cooperative societies, as a state cooperative bank would be to permit arbitrariness," the bench said.

The court held that the Apex Cooperative could not have been declared as a state cooperative bank under the NABARD Act and hence the RBI could not have issued it licence to carry on banking business.

Keeping in mind that the RBI had argued it could have issued the licence, the bench said it could not now be left to the discretion of the RBI to cancel the licence granted to the cooperative and directed it to forthwith revoke the banking licence.

Merely because one state declares a cooperative society as a "state cooperative bank", it would not enable the RBI to issue that society a licence to carry on banking business in other states or in the rest of the country, it said.