Cooperative Banking in India
Cooperative societies are based on the principles of cooperation, – mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.
Cooperatives Banks are registered under the Cooperative Societies Act, 1912. These are regulated by the Reserve Bank of India and National Bank for Agriculture and Rural Development (NABARD) under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965.
Cooperative banks differ from commercial banks on the grounds of organisation, governance, interest rates, the scope of functioning, objectives and values.
- The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India.
- The first known mutual aid society in India was probably the “Anyonya Sahakari Mandali” organised in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar.
- The enactment of Cooperative Credit Societies Act, 1904, however, gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904.
- The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906.
- The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies.
- The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes.
- The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right.
- During the banking crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of deposits from joint stock banks to cooperative urban banks.
- The constitutional reforms which led to the passing of the Government of India Act in 1919 transferred the subject of “Cooperation” from Government of India to the Provincial Governments.
- The Government of Bombay passed the first State Cooperative Societies Act in 1925 “which not only gave the movement its size and shape but was a pace setter of cooperative activities and stressed the basic concept of thrift, self help and mutual aid.” Other States followed. This marked the beginning of the second phase in the history of Cooperative Credit Institutions.
- The Indian Central Banking Enquiry Committee (1931) felt that urban banks have a duty to help the small business and middle-class people.
- The Mehta-Bhansali Committee (1939), recommended that those societies which had fulfilled the criteria of banking should be allowed to work as banks and recommended an Association for these banks.
- The Co-operative Planning Committee (1946) went on record to say that urban banks have been the best agencies for small people in whom Joint stock banks are not generally interested.
- The Rural Banking Enquiry Committee (1950), impressed by the low cost of establishment and operations recommended the establishment of such banks even in places smaller than taluka towns.
After independence, the movement of cooperative societies maintained its pace even after facing several hardships during that phase and continued to be part of the economic development of the country.
- The First Five Year Plan recognised the importance of cooperatives in the implementation of development plans, particularly targeting the farmers and weaker section of the society.
- In 1954, Government of India appointed a committee called All India Rural Credit Survey Committee to remedy the problem of rural credit and other financial issues of the rural community. It recommended a well-defined institutional framework for cooperative organizations, particularly for meeting the needs of rural India.
- The recommendations of the committee were recognised and were put into effect under the Second Five Year Plan. The Second Five Year Plan recommended expanding the scope of cooperative activities to other fields with special emphasis on the warehousing sector.
- The Third Five Year Plan emphasised on training personnel for the cooperative sector and to increase the reach of the cooperative movement.
- The Fourth Five Year Plan recommended the consolidation of a cooperative system for effective functioning.
- The Fifth Five Year Plan recommended the establishment of Farmers Service Societies.
- The Sixth Five Year Plan developed a point programme for a cooperative society to bring economic development and for expanding the scope of cooperative societies.
- The Seventh Five Year Plan also focussed on expansion and growth of the scope of cooperative societies so as to achieve greater employment and decrease poverty in the country.
Rural Co-operative credit Institutions
There are different types of cooperative credit institutions working in Rural India. These institutions can be classified into two broad categories- agricultural and non-agricultural. Agricultural credit institutions dominate the entire cooperative credit structure.
Agricultural credit institutions are further divided into short-term agricultural credit institutions and long-term agricultural credit institutions.
The short-term agricultural credit institutions which cater to the short-term financial needs of agriculturists have three-tier federal structure- (a) at the apex, there is the state cooperative bank in each state; (b) at the district level, there are central cooperative banks; (c) at the village level, there are primary agricultural credit societies.
Long-term agricultural credit is provided by the land development banks.
Short-Term Rural Cooperative Credit Structure:
In rural India, there exists a 3-tier short-term rural cooperative structure. Tier-I includes state cooperative banks (SCBs) at the state level; Tier-II includes central cooperative banks (CCBs) at the district level; and Tier- III includes primary agricultural credit societies (PACSs).
State Cooperative Banks (SCBs):
- State cooperative banks are the apex institutions in the three-tier cooperative credit structure, operating at the state level. Every state has a state cooperative bank.
- They provide a link through which the Reserve Bank of India provides credit to the cooperatives and thus participates in the rural finance.
- They function as balancing centers for the central cooperative banks by making available the surplus funds of some central cooperative banks. The central cooperative banks are not permitted to borrow or lend among themselves,
- They finance, control and supervise the central cooperative banks, and, through them, the primary credit societies.
- State cooperative banks obtain their working capital from own funds, deposits, borrowings and other sources.
- State cooperative banks are mainly interested in providing loans and advances to the cooperative societies.
Central Cooperative Banks (CCBs)
- Central cooperative banks are in the middle of the three-tier cooperative credit structure.
- There can be cooperative banking unions whose membership is open only to cooperative societies. Such cooperative banking unions exist in Haryana, Punjab, Rajasthan, Orissa and Kerala.
- There can be mixed central cooperative banks whose membership is open to both individuals and cooperative societies. The central cooperative banks in the remaining states are of this type. The main function of the central cooperative banks is to provide loans to the primary cooperative societies. However, some loans are also given to individuals and others.
- The central cooperative banks raise their working capital from own funds, deposits, borrowings and other sources. In the own funds, the major portion consists of share capital contributed by cooperative societies and the state government, and the rest is made up of reserves.
- Mostly the loans are given for agricultural purpose.
- About 80 per cent loans given to the cooperative societies are unsecure and the remaining loans are given against the securities such as merchandise, agricultural produce, immovable property, government and other securities etc.
Primary Agricultural Credit Societies (PACSs)
- Primary agricultural credit society forms the base in the three-tier cooperative credit structure. It is a village-level institution which directly deals with the rural people. It encourages savings among the agriculturists, accepts deposits from them, gives loans to the needy borrowers and collects repayments.
- It serves as the last link between the ultimate borrowers, i.e., the rural people, on the one hand, and the higher agencies, i.e., Central cooperative bank, state cooperative bank, and the Reserve Bank of India, on the other hand.
- A primary agricultural credit society may be started with 10 or more persons of a village. The membership fee is nominal so that even the poorest agriculturist can become a member.
- The members of the society have unlimited liability which means that each member undertakes full responsibility of the entire loss of the society in case of its failure. The management of the society is under the control of an elected body.
- The working capital of the primary credit societies comes from their own funds, deposits, borrowings and other sources. Own funds comprise of share capital, membership fee and reserve funds. Deposits are received from both members and non- members. Borrowings are mainly from central cooperative banks.
- Only the members of the societies are entitled to get loans from them. Most of the loans are short-term loans and are for agricultural purposes. Low interest rates are charged on the loans.
Land Development Banks (LDBs) or Cooperative Agricultural and Rural Development Banks (CARDBs)
Besides short-term credit, the agriculturists also need long-term credit for making permanent improvements in land, for repaying old debts, for purchasing agricultural machinery and other implements. Traditionally, the long-term requirements of agriculturists were mainly met by money lenders and some other agencies. But this source of credit was found defective and has been responsible for the exploitation of farmers.
Cooperative banks and commercial banks by their very nature are not in a position to provide long-term loans because their deposits are mainly demand (short-term) deposits. Thus, there was a great need for a specialised institution for supplying long-term credit to agriculturists. The establishment of land development banks now known as cooperative and rural development banks (CARDBs) is an effort in this direction.
These banks have two-tier structure:
- At the state level, there are state or central land development banks, now known as state cooperative agricultural and rural development banks (SCARDBs) generally one for each state. They were previously known as central land mortgage banks,
- At the local level, there are branches of the state land development banks or SCARDBs and primary land development banks now known as primary cooperative agricultural and rural development banks (PCARDBs).
- In some states, there are no primary land development banks, but the branches of the state land development bank. In Madhya Pradesh, the state cooperative bank itself functions as the state land development bank. In other states like Andhra Pradesh, Kerala and Maharashtra, there are more than one state land development banks.
- Similarly, the primary land development banks also vary organisationally in different states. At the national level, the land development banks have also formed a union, called All-India Land Development Banks’ Union.
- The land development banks or SCARDBs provide long-term loans to the agriculturists- (a) for redemption of old debt, (b) for improvement of land and methods of cultivation, (c) purchasing costly machinery, and (d) in special cases, for purchasing land. These banks grant loans against the mortgage of land and the period of loan varies from 15 to 30 years.
Urban Cooperative Banks (UCBs)
- Urban Co-operative Banks (UCBs), though not formally defined, refers to primary co-operative banks located in urban and semi-urban areas.
- These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
- These banks were traditionally centred around communities, localities and work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.
- The area of operation is visually restricted by its bye-laws to a municipal area or town. In some cases, it exceeds this area. The Urban Co-operative Bank in New Delhi for instance, had in 1963 the whole of the Union territory of Delhi as their area of operation.
- The speedy Group on credit Co-operatives in Non-Agricultural sector has recommended that normally, it would be advisable for an Urban Co-operative Banks to restrict its area of operation to the Municipality or the Taluk where it operates.
- The main functions of the urban co-operative banks are to accept deposits from the members and non-members. Deposits from the members are given reference to deposits from non-members.
- The second main function is to lend to members for useful purposes. Loans are also given to non-members on the security of their deposits.
- Third important function of these banks and the societies is to undertake purchase and supply of essential consumers’ goods on an agency basis. But this is not generally done.
- Apart from advancing loan to their members, most of the UCBs provide them with various other Banking facilities. Several Banks provide the facility of withdrawal by ATM, cheques and arrange for the remittance of funds by Mail Transfer, E-mail, Telegraphic Transfer etc.
- Some UCBs collect money due to their customer such as Pay and pensions of government servants and local bodies and undertake regular payment of insurance premium, rent etc. Certain UCBs discount bills and hundies and a few run chit funds.
SUPERVISION AND REGULATION
- At present in India, urban credit co-operatives/banks are subjected to duality of control, meaning that the administration related aspects are being supervised and regulated by State Government and the banking operations are supervised and regulated by the central bank of the country.
- This has, understandably resulted in overlapping jurisdiction of the state Government and the central bank of the country.
- Moreover, a clear-cut demarcation of the financial and administrative areas for regulation is almost impossible and even if it is possible it surely acts as an impediment in effective supervision.
- While the central bank of the country has the wherewithal under the Banking Regulation Act for dealing with crucial aspects of functioning of commercial banks, in the case of co-operative banks it requires the intervention of the Registrar of Co-operative Societies (state Government).
- Given the number of urban credit cooperatives/banks, the central bank of the country is not in a position to effectively supervising them.
- Thus, the duality of control not only affects the quality of supervision and regulations, but also the functioning of the urban co-operative banking sector.
Case of Punjab and Maharashtra Cooperative (PMC) Bank
- Restrictions imposed by RBI on withdrawals of money from PMC bank highlighted the strong case of malfunctioning in dual regulatory system in urban cooperative banking system.
- In above PMC case, there are three major problems- financial irregularities, failure of internal control and system, and underreporting of exposures.
- PMC Bank has extended 73% of its assets to HDIL which created a panicky situation for depositors.
- Since, PMC has deposits from other smaller cooperatives banks, the financial irregularities which includes governance and transparency issues will likely to have multi-dimensional impact.
BANKING SECTOR REFORMS AND UCBs
The reform measures as applicable to UCB sector may be classified into three broad categories.
- First, while recognizing the differences between commercial and urban co-operative banks, a majority of the prudential norms introduced for commercial banks are being extended to UCBs, albeit in a phased manner.
- Second, policy initiatives have been introduced (through Monetary & Credit Policies) to contain the systemic risk emanating from co-operative sector, in particular from UCB sector.
- Lastly, duality/multiplicity of control has been recognized as an irritant to their effective regulation and supervision.
Reserve Bank of India to get more powers over co-op banks
- The Union cabinet on Wednesday approved changes to the Banking Regulation Act to give the Reserve Bank of India wider powers to regulate cooperative lenders and prevent frauds such as the one seen at Punjab and Maharashtra Co-operative Bank Ltd.
- Once the amendment is cleared by Parliament, cooperative banks will be audited according to RBI’s norms and the central bank can supersede the board, in consultation with the state government, if any cooperative bank is under stress.
- Appointments of chief executives will also require permission from the banking regulator, as is the case for commercial banks.
- Cooperative banks are currently under the dual control of the Registrar of Cooperative Societies and RBI. While the role of registrar of cooperative societies includes incorporation, registration, management, audit, supersession of board and liquidation, RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.
- The administrative role will continue to be done by the Registrar of Cooperative Societies
- The amendments will apply to all urban co-operative banks and multi-state cooperative banks.
- The government’s move to strengthen oversight of cooperative banks comes after the collapse of PMC Bank.
Why not Rural cooperatives?
- While this is good news for UCBs, question arises why rural co-operative banks have been left out of the regulatory overhaul. In fact, the problem of misgovernance and frauds are more in smaller co-operative banks since these entities are largely run by local politicians. Often, these banks don’t follow processes and engage in dubious transactions.
- If one looks at the quantum of deposits, the combined figure of rural co-operative banks is higher than that of UCBs.
- It is important that the government provides enough power to the RBI to govern rural co-operative banks as well to ensure stricter scrutiny and good governance.
Difference Between a Cooperative bank and a Commercial bank
There are three key points of difference between scheduled commercial banks and co-operative banks.
- One, unlike commercial banks, UCBs are only partly regulated by the RBI. While their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government.
- Two, unlike commercial banks which are structured as joint stock companies, UCBs are structured as co-operatives, with their members carrying unlimited liability.
- Three, while there is a clear distinction between a commercial bank’s shareholders and its borrowers, in a UCB borrowers can double up as shareholders.
In the event UCBs fail, deposits with them are covered by the Deposit Insurance and Credit Guarantee Corporation of India up to a sum of ₹5 lakh per depositor, the same as for a commercial bank.