Cooperative Banks in India: Structure, Functions, and Regulation

Cooperative Banks in India form a vital part of the country’s financial system, combining banking services with principles of mutual assistance, member ownership, and community-focused support.

These banks are crucial instruments for financial inclusion, especially in rural areas where the penetration of commercial banks may be limited. They provide credit and banking services primarily to farmers, small businesses, artisans, and individuals with limited means.

Cooperative Banks

A Cooperative Bank is registered under the Cooperative Societies Act of the respective state or the Multi-State Cooperative Societies Act, 2002, and is engaged in banking business. They function based on the fundamental principles of self-help, mutual aid, and democratic decision-making.

Unlike commercial banks, which are constituted by a uniform act of Parliament and focus on profit maximization for shareholders, cooperative banks are non-profit entities whose surplus earnings are either retained for strengthening the bank's capital base or distributed among members as a reward.

Core Principles of Cooperative Banks

• Voluntary and Open Membership: Membership is open to all who can use their services and are willing to accept the responsibilities of membership.

• Democratic Member Control: Members typically have equal voting rights, following the principle of 'one person, one vote'.

• Member Economic Participation: Members contribute equitably to and democratically control the capital of their cooperative.

• Concern for Community: They work for the sustainable development of their communities through policies accepted by their members.

History and Evolution of Cooperative Banks in India

The origins of Cooperative Banks in India can be traced back to the late 19th and early 20th centuries as a direct response to rural distress and the need for affordable credit.

• Pre-1904: The Famine Commission in 1901 recommended the establishment of Rural Agricultural Banks to provide mutual credit.

• The Cooperative Credit Societies Act, 1904: This Act provided the legal framework for the formation and functioning of credit cooperatives. The first few cooperative societies were registered immediately after this act.

• The Cooperative Societies Act, 1912: This Act further recognized the need for non-credit societies and allowed the establishment of Central Cooperative Banks (CCBs) and Provincial Cooperative Banks (PCBs) to supervise and fund the primary societies.

• Post-Independence: The government recognized the vital role of cooperative credit in rural development. The All-India Rural Credit Survey Committee (1951) underscored their importance, and the subsequent Five-Year Plans emphasized their growth.

• 97th Constitutional Amendment Act (2011): This landmark amendment granted constitutional status to cooperative societies by adding Part IX-B to the Constitution (Articles 243-ZH to 243-ZT), ensuring their autonomous functioning, democratic management, and regular elections.

Structure of Cooperative Banks in India

The structure of cooperative banks in India is distinct from commercial banks, following a multi-tiered, federal system designed for efficient credit delivery down to the grassroots level. It is broadly classified into two main categories: Rural Cooperative Banks (RCBs) and Urban Cooperative Banks (UCBs).

Rural Cooperative Banks (RCBs)

Rural Cooperative Banks primarily cater to the financial needs of the agricultural and rural sectors. This structure is further divided based on the term of the credit provided.

Urban Cooperative Banks (UCBs)

The term UCBs refers to primary cooperative banks located in urban and semi-urban areas. They provide services like housing finance, personal loans, and MSME credit to small borrowers, traders, and small-scale industries.

UCBs are further categorized as:

• Scheduled UCBs: Banks listed under the Second Schedule of the RBI Act, 1934.

• Non-Scheduled UCBs: Those not included in the Schedule but still regulated by the RBI.

Functions of Cooperative Banks

Cooperative banks perform essential banking and social functions, making them a crucial component of the Indian financial system.

• Mobilisation of Savings: They accept deposits through various accounts (savings, fixed, recurring) from members and the public, promoting a culture of thrift.

• Provision of Credit: A primary function is offering affordable credit facilities, including loans, overdrafts, and cash credits, to their members. They provide agricultural loans to farmers at minimum interest rates.

• Financial Inclusion: By reaching out to the unbanked and underbanked populations in remote areas, they promote inclusive growth and reduce dependence on informal, high-interest moneylenders.

• Support to Local Economy: They offer funds for agriculture, small-scale industries, and self-employed workers, thereby strengthening the rural and semi-urban economy.

Regulation and Governance of Cooperative Banks

Cooperative Banks in India operate under a dual regulatory framework, which divides oversight between banking functions and managerial administration.

• Reserve Bank of India (RBI): The RBI regulates the banking functions under the Banking Regulation Act, 1949, and the Banking Laws (Application to Co-operative Societies) Act, 1965. This includes licensing, capital adequacy, risk management, and lending norms.

• Registrar of Co-operative Societies (RCS): This authority, under the State/Central Government, oversees the managerial and administrative aspects. This includes incorporation, registration, governance, audit, and board supersession.

• NABARD: The National Bank for Agriculture and Rural Development (NABARD) is responsible for the overall refinancing, supervision, and development of Rural Cooperative Banks.

The Banking Regulation (Amendment) Act, 2020, further strengthened the RBI's control over cooperative banks, ensuring better governance and financial stability.

Challenges Faced by Cooperative Banks

Despite their vital role, these banks face several challenges that impact their efficiency and sustainability.

• High Non-Performing Assets (NPAs): Overdue loans have been steadily increasing, which impedes the recycling of funds and negatively affects the bank's lending capacity.

• Lack of Professional Management: Many cooperative banks suffer from a lack of professional expertise and modern governance practices.

• Political Interference: Decision-making in some cooperative banks is susceptible to political influence, which can compromise prudent lending and management.

• Limited Resources: Constraints on owned funds often limit their ability to mobilize working capital and provide adequate credit, especially to tenants and small farmers.

• Technological Lag: Compared to modern commercial banks, many cooperative banks have been slower in adopting Core Banking Solutions (CBS) and digital technology, affecting their operational efficiency and competitiveness.

Recent Developments in Cooperative Banks

The Government and the RBI have been taking significant steps to strengthen and modernize the cooperative banking sector.

• Digitization: A major push is underway to computerize functional Primary Agricultural Credit Societies (PACS) with a total financial outlay of ₹2,516 crore, bringing them onto a common ERP-based National software. The aim is to accelerate the digitization of the entire cooperative credit structure.

• National Urban Co-operative Finance and Development Corporation (NUCFDC): An umbrella organization has been formed for Urban Cooperative Banks (UCBs) to enhance their operational efficiency and provide state-of-the-art IT solutions, functioning as a Non-Banking Financial Institution (NBFI).

• Enhanced Supervision: The RBI has introduced a Prompt Corrective Action (PCA) framework for Urban Cooperative Banks with deposits above ₹100 crore, replacing the earlier Supervisory Action Framework (SAF). This aims to enable timely supervisory intervention and remedial measures.

• Mergers and Consolidation: The sector is witnessing a trend of consolidation to enhance financial stability, such as the recent merger of New India Co-operative Bank with Saraswat Co-operative Bank.