Cooperative banking refers to a small financial institution started by a group of individuals to address the capital needs of their specific community. Such financial institutions are owned and controlled by their members, and the board members are democratically selected to oversee the operations. 

In this blog, we cover the details of cooperative banking such as its type and the crucial role they play in the Indian economy.

What is Cooperative Banking?

Cooperative banks work on the principle of cooperation and are owned and operated by their members. In order to support the financial needs of a community, such as a village or a specific community, people come together to pool resources and provide banking services such as loans, savings accounts etc.

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How does a Cooperative Bank work?

Here’s a general overview of how cooperative banks work:

Membership Individuals or businesses who meet specific eligibility criteria can become members by purchasing shares or making an initial deposit
Democratic Governance Every member has equal voting rights regardless of the number of shares they hold. Members elect a board of directors among themselves to oversee the bank’s operations and make key decisions.
Capital Formation Members contribute to the bank’s capital by purchasing shares or making deposits. These funds serve as the primary source of capital for the bank’s lending activities and other financial services.

Understanding the Structure of Cooperative Banking

Since the Indian economy is primarily agriculture-based, most cooperative banks cater to this segment. However, they can be further subdivided into short and long-term financial institutions depending on the services offered. 

types of cooperative banks

Let’s dive deeper into short-term credit institutions since these are the most popular form of cooperative banks found in India.

State Cooperative Banks

Definition A state cooperative bank, as the name suggests is organised at a state level.
Regulatory body They are regulated by both the Reserve Bank of India (RBI) and the respective state governments.
Segment served They provide financial services to rural and low-income populations across the country.
Services offered
  • They are often the primary source of credit for agricultural and allied activities, small-scale industries, & other small businesses. 
  • These banks also provide banking services to cooperatives, including credit unions, dairy cooperatives, and agricultural cooperatives.
Source of capital The working capital of SCB is obtained from deposits, funds, borrowings from RBI, state governments and other resources.

Central Cooperative Banks (CCBs)

Definition Central Cooperative Banks (CCBs) are cooperatives that are established and managed in accordance with the Cooperative Societies Act.
Regulatory body They are supervised by the State cooperative department and are regulated by the Reserve Bank of India
Segment served They provide financial services to rural & semi-urban populations across the country. 
Services offered
  • They provide services such as deposits, loans, and other banking services to their members. 
  • They also promote and finance agricultural activities, such as crop insurance and input supply services.
Source of capital The working capital for the central cooperative banks is primarily raised from individual funds, deposits, borrowings etc.

Primary Agricultural Credit Societies

Definition These financial cooperatives are typically organized by farmers and other agricultural professionals to provide credit and other services to farmers.
Regulatory body They are regulated by the Reserve Bank of India & registered under the Co-operative Societies Act
Segment served Primary agricultural credit societies are often organized in rural areas where access to traditional banking services may be limited.
Services offered
  • The primary purpose of these societies is to provide loans to members, often at low-interest rates, in order to facilitate the purchase of resources and other necessities required to operate a successful farm.
  • They also offer other services, such as crop insurance, storage services, and help marketing, that help farmers to manage their operations. 
Source of capital These societies are funded by their members who contribute both capital and labour for the benefit of the cooperative.

Unique Features of Cooperative Banks

Cooperative banking model differs from traditional banking models as their main goal is social welfare. Let’s take a closer look at the most unique features of Cooperative Banking:

  • One person, One Vote’: this is what Cooperative Banks follow. A chosen Board of Directors is held responsible for the administration of the organisation.
  • Profit Distribution: Cooperative banks are not-for-profit entities & their primary focus is to serve the financial needs of their members. Any surplus generated by the bank is distributed among the members in the form of dividends or reinvested to strengthen the bank’s capital base.
  • Community Development: They also play a vital role in community development by promoting financial literacy, supporting local businesses, and investing in community projects. They foster a sense of solidarity and mutual support among their members.

Advantages of Cooperative Banks

These banks offer a host of advantages such as providing access to banking services to low service areas. Now let’s have a closer look at some major advantages of cooperative banking:

1. Alternative Source of Credit

The rural population benefits from cooperative banking as they provide credit at a lower rate as compared to the money lenders who tend to provide credit at a higher rate of interest. This protects the rural population from the monopoly of the money lenders.

2. Encourages Savings and Investment

Cooperative banking has enabled the rural population to save more and invest rather than hoard money. This will have a long-term benefit on the money management of the rural population.

3. Improvement in Farming Methods

Due to the lower interest rates of the credits provided by the Cooperative banks, the rural population can now utilise the same for better farming methods eg: purchasing seeds, chemical fertilizers etc.

Limitations of Cooperative Banks

Despite the various advantages of these banks, there are certain limitations of this type of banking as well. We have highlighted the biggest limitations of cooperative banking below. 

1. Inadequate Coverage

The membership of the rural population of cooperative banking is just 45%, hence the inadequate coverage is a matter of concern. It is restricted only to a few states like Gujrat, Maharashtra, Punjab etc.

2. Inefficient Societies

Since these banks are often run by the members themselves, they are not run efficiently and hence lose out on alternate streams of revenue. For ex, It was observed that out of 94089 primary agricultural credit societies in the country in the year1982-83, about 34000 societies were running at a loss.

3. Problem of Overdues

The overdue loans of the cooperative institutions have been increasing over the years. 

The overdue in the short-term credit structure is most alarming in the North-Eastern States. In the long-term loaning sector, the problem of overdue has almost crippled the land development banks in 9 states, viz., Maharashtra, Gujarat, Madhya Pradesh, Bihar, Karnataka, Assam, West Bengal, Orissa and Tamil Nadu.

4. Regional Disparities

The distribution of credit is not equally divided in these banks. According to an RBI report, 8 states account for about 80 per cent of the total credit whereas the credit disbursed varied from Rs. 4 in Assam to Rs. 718 in Kerala. 

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What are urban cooperative banks?

Urban Cooperative Banks (UCBs) are financial institutions that operate at the local level and are formed with the primary objective of meeting the credit and banking needs of urban and semi-urban areas.

What are rural cooperative banks?

Rural Cooperative Banks (RCBs) are financial institutions that operate at the grassroots level and are established to cater to the banking and credit needs of rural areas.

Hw many cooperative banks are in India?

There are thousands of co-operative banks in India, including a mix of scheduled and non-scheduled banks.

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    Author Kanika Singh

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