Context

  • 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.

History

  • 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

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.

Structure

Co-operative Banking in India

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.

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 Regulations

  • 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.

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.

Note: 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.