Context:
The banking sector unions, under the aegis of the All India Bank Employees’ Association (AIBEA), have sought exemption from income tax on profits of cooperative banks in the upcoming Union Budget.
What are Cooperative Banks?
Key Demands:
- Tax Exemption for Cooperative Banks
- Cooperative banks are not for profit entities and surplus is distributed among members.
- Taxing them contradicts cooperative principles and reduces funds for expansion.
- Historical Context
- Previously exempt from income tax but the UPA government removed the exemption.
- Potential Impact
- More capital for expansion and digital banking investments.
- Stronger financial support for rural credit small businesses.
- Revenue loss for the government making full exemption unlikely.
Recapitalization of Cooperative Banks
- Why Its Needed?
- Many cooperative banks face capital shortages affecting lending capacity.
- Requires investment in core banking solutions (CBS) digital infrastructure. It will enable banks to comply with RBI norms and improve financial stability.
- Vaidyanathan Committee Recommendations
- Recapitalization should be conditional and limited to wellgoverned banks Both Central State governments must contribute Possible Government Response Selective recapitalization for financially sound banks.
- Funds could be tied to reforms governance enhancements.
Revocation of the 2020 Banking Regulation Amendment (AIBEAs) Objection
- It permits cooperative banks to accept deposits from the public bringing them closer to being commercial banks.
- The amendment was targeted to improve governance transparency.
- A rollback is unlikely as it aligns cooperative banks with modern banking practices.
Source: Business Standard
