The Union Cabinet approved a slew of proposals, including an ordinance bringing cooperative banks under supervisory powers of the Reserve Bank of India.
• Co-operative banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners. These banks provide a wide range of regular banking and financial services.
• The problem of rural credit was the key reason behind the advent of the co-operative movement in India.
• In India, co-operative banks are registered under the States Cooperative Societies Act. They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
• Co-operative banks differ from stockholder banks by their organization, their goals, their values, and their governance.
• Co-operative banking institutions take deposits and lend money in most parts of the India.
• Co-operative banking, includes retail banking, as carried out by credit unions, mutual savings and loan associations, building societies and co-operatives, as well as commercial banking services provided by manual organizations (such as co-operative federations) to co-operative businesses.
Types of Co-operative Bank
Broadly, co-operative banks in India are divided into two categories - urban and rural.
Rural cooperative credit institutions could either be short-term or long-term in nature. Further, short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies.
The long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled. Scheduled and non-scheduled UCBs are again of two kinds- multi-state and those operating in single state.
DifferencesBetween Commercial Bank and Co-operative Bank
Parameter Commercial Bank Co-operative Bank
Target Customers General Public and Business owners are the target customers. It mainly supports the agriculturists and also helps rural industries with financial help.
Governing Act Banking Regulation Act, 1949 Cooperative Societies Act, 1965
Area and motive of operation Operates on a large scale with profit as the base Operates on a small scale with service as the base.
Borrowers Account-holders are the borrowers Member shareholders are the borrowers
The interest rate on deposits It is less compared to the cooperative banks It is higher compared to commercial banks.
Following the cabinet decision, 1,482 urban cooperative banks and 58 multi-state cooperative banks will come under the central bank’s oversight, which would mean tighter supervision.
RBI’s powers on scheduled banks would be applicable on cooperative banks as well.
The decision to bring 1,540 cooperative banks under RBI's supervision will give an assurance to more than 8.6 crore depositors in these banks that their money amounting to Rs 4.84 lakh crore will stay safe.
The banks will come under RBI supervision with immediate effect from date of President’s approval on the ordinance.
Cooperative banks had for a long been a weak link in the financial system because of lack of adequate oversight.
While RBI has been regulating and supervising banking functions, primary oversight has been with the registrar of societies. The Union cabinet had in February this year approved amendment to the Banking Regulation Act to bring cooperative banks under the RBI.
The immediate trigger is the trouble that the Punjab and Maharashtra Cooperative Bank (PMC) got into last year which led to its board being superseded and a moratorium on withdrawals imposed.
Harshad Mehta and Hiten Dalal sank the Mumbai-based Mercantile Cooperative Bank in 1991 and Ketan Parekh did the same with the Ahmedabad-based Madhavpura Cooperative Bank in 2001. In the PMC Bank, over 70 per cent of the loans went to a single borrower, HDIL, which defaulted.
The government’s action puts these cooperative banks on a par with the scheduled commercial banks, that is regular banks whose branches can be seen everywhere.
The main problem with ensuring that cooperative banks of any size were run in a responsible manner was that they till now came under dual control: the Registrar of Cooperative Societies in the states and the Centre and the RBI.
In the case of scheduled commercial banks, the RBI has been faulted for stepping in too late, as with Yes Bank.
The RBI has been found not to have had its ear to the ground sufficiently when it comes to the operatives in the country’s main financial centres so that it can spot dark clouds before they are fully visible to all.
Now, it will have to be tuned into the financial space across the country since as many as 1,540 cooperative banks will come under its supervision — in contrast, there are 32 scheduled commercial banks, with 12 belonging to the public sector.
The decision to bring all urban and multi-state cooperative banks under the direct supervision of the Reserve Bank of India (RBI) was long pending and a welcome step. It will secure the interests of depositors who currently number around 86 million. But the question is whether the RBI has the time or the human resources to take on this additional burden of overseeing a large number of institutions spread across the country.