Co-operative Banking in India

Context: Reserve Bank’s Governor has said that cooperative lenders will soon be able to do technical write-offs and execute compromise settlements with defaulting borrowers.

Co-operative Banking in India Background

• It has been noted that the cooperative lending sector suffers from lack of governance practices and conflicts of interest.
• RBI has decided to widen the scope of the framework for resolution of stressed asset.
• Under it, all the regulated entities including cooperative lenders will now be able to execute compromise settlements and technical write-offs to resolve non-performing assets.

What are Cooperative Banks?

• Definition: A co-operative Bank is a financial entity which is formed by persons belonging to the same local or professional community or sharing a common interest.
  • People who come together to jointly serve their common interest often form a cooperative society under the Co-operative Societies Act.
  • When a co-operative society engages itself in banking business it is called a Co-operative Bank.
  • The society has to obtain a license from the Reserve Bank of India before starting banking business.
• Regulation: The Co-operative Banks are registered under the States Cooperative Societies or Multi-State Co-operative Societies Act (MSCS) of 2002 Act.
  • The Co-operative Banks also come under the regulatory ambit of the Reserve Bank of India (RBI)under two laws –  Banking Regulations Act, 1949, and Banking Laws (Co-operative Societies) Act, 1955.
• Features of Cooperative Banks
  • Mutual Help: The co-operative structure is designed on the principles of cooperation, mutual help, democratic decision making and open membership.
  • Democratic Control: It follows the principle of ‘one shareholder, one vote’ and ‘no profit, no loss’.
  • Customer Owned Entities: Co-operative bank members are both customer and owner of the bank.
• Goals of Cooperative Banking
  • It aims to provide rural financing and micro-financing.
  • It aims to remove the dominance of money lenders and middlemen.
  • It shall provide credit services to agriculturalists and weaker sections of the society at comparatively lower rates.
  • It aims to provide financial support and personal financial services to small scale industries, housing financial assistance, etc.

Structure of Cooperative Banks

• Credit co-operatives (or co-operative banks) are broadly classified into urban or rural co-operative banks based on their region of operation.
• Rural cooperative credit institutions:
  • Short-term: State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies
    • State Co-operative Banks: These are the apex (highest level) cooperative banks in all the states of the country.
    • Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members.
    • Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality.
  • Long-term: State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs)) in nature.
• Urban Co-operative Banks (UCBs) are either scheduled or non-scheduled. Scheduled and non-scheduled UCBs are again of two kinds – multi-state and those operating in single state.

Importance of Cooperative Banking

• Easy Formation: Registration and legal requirements are comparatively easy compared to traditional banks.
  • A group of 10 adults can form a cooperative bank and needs a base capital of 25 lakh only as compared to 100 crore of Small Finance Banks.
• Alternative Credit Source: These banks act as an effective alternative to traditional money lending systems.
• Cheap Source of Credit: They provide a high-interest rate to members for their investments and low lending interest rate.
• Encouragement of Savings: These banks have encouraged the habit of thrift among the masses (masses tend to invest and save their money).
• Advancement in Farming: Cooperative societies provide credit to agriculturalists at cheaper rates to buy inputs, warehousing facilities, marketing assistance, etc.

Challenges in Co-operative Banking

• Less Capital Base: Cooperative banks can begin with a capital base of 25 lakh, making it difficult to account for a portion of that capital as working capital and raising working capital.
• Political Interference: Politicians use cooperative banks to boost their vote bank and usually get their representatives elected to the board of directors in order to gain unfair advantages.
• Weak Supervision of RBI: The supervision of RBI is not as strict on cooperative banks as compared to commercial banks.
• Dual Control: Cooperative banks are controlled by RBI and by their respective State government which poses a problem in coordination and management.
• Lack of Management and Technological Advancement: Cooperative banks are often reluctant to adopt new technologies and professional management in the banks is often missing due to lack of training of personnel.
• Dependence of Finance: These banks depend heavily on RBI, NABARD and the government for refinancing facilities.
• Overdue Loans: Overdue loans of cooperative banks are increasing yearly, restricting the recycling of funds which in turn affects the lending and borrowing capacity of the bank.
• Less Coverage: The size of cooperative societies has been very small and most of these societies are confined to a few members and their operations extended to only one or two villages.
• Money Laundering and Corruption: Cooperatives have also become avenues for regulatory arbitrage, circumventing lending and anti-money laundering regulations.
• Crisis of the non-performing assets (NPAs): Many of the co-operative banks have higher Non Performing Assets (NPA) than commercial banks. This is because co-operative institutions have the leeway to extend credit to local consumers, often on the basis of trust or compassion or due to pressure from local social or political groups.

What is RBI’s Recent Move?

• To facilitate digital lending ecosystem and enhance credit penetration in the economy, the RBI has decided to introduce default loss guarantee arrangements in digital lending.
• RBI has decided to rationalize and simplify the licensing framework for authorized persons under Foreign Exchange Management Act (FEMA), 1999.
• To further encourage greater participation, RBI has proposed to streamline the process flow of transactions and membership criteria for operating units.
• For providing greater flexibility for managing liquidity, scheduled commercial banks excluding Small Finance Banks can set their own limits for borrowing in Call and Notice Money Markets within the prescribed prudential limits for inter-bank liabilities.

Way Forward

• The establishment of dedicated Ministry of Cooperation would be a crucial moment for the history of the cooperative movement.
• Digitization in governance, banking and businesses can ensure a transparent, accountable, and efficient system.
• Democratic spirit is the core value of co-operatives which is needed to reduce the political influence and enhance inclusivity of the cooperatives.
• There is a need to undertake institutional reforms like transparency in recruitment and implementation of a robust accounting system, which are necessary for their growth.
• There is a need to bring in new people, young people and professionals in managerial roles, who will take cooperatives forward.

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