Co-operative Banking

Why is it in the News?

The recent fiasco related to the Punjab and Maharashtra Cooperative Bank (PMC) has brought to the fore the problems associated with Cooperative banks and the need for regulating them.


Cooperative Banks

The cooperative banks are the institutions that operate on a cooperative basis, where in the customers are also the owners of the bank. The major objective behind the setting up of cooperative banks is to provide financial assistance to agricultural activities. The history of cooperative banking in India goes back to the setting up of Cooperative societies Act, 1904, which intended to encourage thrift, self-help and cooperation amongst the people in the rural areas. Members democratically elect the board of directors according to the principle of ‘one person, one vote’.


Structure of Cooperative Banking in India

Cooperative banks in India have a federal structure. Broadly, they are classified into Agricultural and Non-agricultural credit institutions. Further, they are divided into short-term and long-term credit institutions. In rural areas, there exists a 3-tier cooperative structure – State Cooperative Banks, District Central Cooperative Banks and Primary Agricultural Credit Societies. Long-term institutions can be State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs). Urban Cooperative Banks are either Scheduled or non- scheduled, which may be operating in a single state or multiple states.


Regulation of Cooperative Banks

Cooperative Banks in India are registered under the State’s Cooperative Societies Act. They also come under RBI regulation and are governed by Banking Regulations Act, 1949 and also, Banking Laws (Cooperative Societies) Act, 1955. The Registrar of Cooperative Societies (RCS) is responsible for the elections, auditing and administration of the cooperative societies. However, granting of licenses, maintaining cash reserve, statutory liquidity, capital adequacy ratios and the inspection of these banks come under the supervision of RBI. Therefore, in a nutshell, it can be said that Cooperative banks suffer from the problem of dual regulation.

Importance of Cooperative Banks:

  1. Cooperative credit system has cheapened the rural credit by protecting the rural borrowers from the exploitation of money lenders.  
  2. Cooperatives have discouraged borrowing for unproductive purposes and channelized resources for productive activities. This has substantially improved the farming methods in rural areas.
  3. Cooperative credit movement has encouraged the saving and investment in rural areas by inculcating a habit of thrift amongst the masses.
  4. Cooperative banks have demonstrated greater resilience in times of economic crisis and therefore, is crucial for macroeconomic stability.

Problems with the Cooperative Banking in India

  1. According to All India Rural Credit Review Committee, cooperative credit still caters to only a small proportion of the credit requirement in rural areas. They have not been able to provide adequate and timely credit to the farmers.
  2. Overdues are high and they impede the recycling of funds, thereby crippling the lending and borrowing capacity of the cooperative.
  3. The big landlords in the villages receive disproportionate benefits from cooperative banks because of their dominant position in the society.
  4. Political interference in the election of board of directors is another serious concern.
  5. There have been great disparities in the distribution of cooperative credit as the states like Andhra Pradesh, Maharashtra, Gujarat, Haryana and Kerala have well-developed cooperative credit system compared to other states.
  6. Dwindling working capital due to resource constraints have hampered the functioning of cooperative banks.

The Banking Regulation Amendment Bill, 2020

The Banking Regulation Amendment Bill, 2020 was introduced in the wake of PMC Bank scam, and seeks to strengthen cooperative banks by increasing professionalism, enabling access to capital, improving governance and ensuring sound banking by giving more powers to RBI. The features of the bill include:

  1. Cooperative banks will be audited as per RBI norms, while administrative issues will be guided by Registrar of Cooperative Societies.
  2. RBI has the powers to supersede the board, in consultation with the state government if the cooperative bank is under stress.
  3. Appointment of the chief executives will be based on certain qualifications and under the supervision of RBI.
  4. The bill aims to infuse proper regulation and better management of Cooperative banks to protect the interests of depositors.
  5. The amendments will apply to all cooperative banks including urban cooperative banks and multi-state cooperative banks.

In the interests of depositors and to restore their confidence in the Cooperative banks, an appropriate mechanism for checks and balances must be put in place and RBI should bring cooperative banks on par with the developments in the banking sector.