It was 1904 when the Cooperative Societies Act was passed.
That marked the onset of Indian Cooperative Banking.
What is Cooperative Banking?
Cooperative banking is a type of banking service that is provided by a cooperative, which is a financial institution that is owned and controlled by its members. Cooperative banks are founded by collecting funds through shares, accepting deposits and granting loans.
Cooperative banking services are typically focused on providing credit and other banking services to members of the cooperative.
Cooperative banking services may include savings accounts, checking accounts, loans, mortgages, insurance, and investment services. In addition, cooperative banks may offer a variety of services aimed at helping members of the cooperative with their financial needs, such as financial education and money management programs.
History of Cooperative Banking
The Banking Regulations Act of 1949 and the Banking Laws (Co-operative Societies) Act, of 1955 govern the cooperative banks in India.
Cooperative banks run with the motto of “ no profit, no loss”.
The Act enabled the formation of cooperative credit societies by providing them with a legal structure and creating infrastructure for their operations. It provided for the registration of such societies with the Registrar of Cooperative Societies and empowered them to borrow money from the government and other sources and to accept deposits from members.
It also enabled societies to lend money to their members to meet their needs. The Act also provided for the formation of State and Central Cooperative Banks, which would act as the apex body of all cooperative credit societies.
The State and Central Banks were empowered to provide loans to the registered societies, and also to inspect and audit them. The Act also made provisions for the formation of District Central Cooperative Banks, which were to act as the intermediary between the State and Central Banks and the registered societies. The Act also prescribed certain rules and regulations for the functioning of cooperative credit societies.
Functions of a Cooperative Bank
Here’s a general overview of how cooperative banks work:
- Membership: Cooperative banks have a defined membership base. Individuals or businesses who meet specific eligibility criteria can become members of the bank by purchasing shares or making an initial deposit.
- Democratic Governance: Cooperative banks operate on the principle of democratic governance, where members have equal voting rights regardless of the number of shares they hold. Members elect a board of directors from 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.
- Savings and Deposits: Cooperative banks encourage their members to save money by offering various savings accounts and deposit products. Members can deposit their savings and earn interest on their balances.
- Loans and Credit Services: One of the primary functions of cooperative banks is to provide loans and credit facilities to their members. The bank utilizes the pooled resources from its members to offer loans for various purposes such as personal loans, home loans, agricultural loans, and small business loans. The interest rates and terms of these loans are often favourably compared to traditional banks.
- Financial Services: Cooperative banks provide a range of financial services, including checking accounts, ATM services, money transfers, payment services, and insurance products. These services are tailored to meet the specific needs of the members and the community they serve.
- Profit Distribution: Unlike traditional banks, cooperative banks are not profit-oriented entities. Their primary focus is to serve the financial needs of their members and the community. 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: Cooperative banks often 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.
What are the Features of Cooperative Banks?
Let’s have a closer look at the main 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.
- Minimum interest rates are applied to the agricultural loans which the farmers can avail from the cooperative banks.
- Loans are more accessible in rural areas along with credit benefits.
- The profit earned is spent on financial resources and part of which is then distributed among the cooperative members.
Structure of Cooperative Banking
Cooperative banks can be further divided and subdivided into the following categories.
Let’s have a look.
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State Cooperative Banks
A state cooperative bank is a cooperative bank organized at the state level in India. State cooperative banks are regulated by both the Reserve Bank of India (RBI) and the respective state governments. These banks operate in a manner similar to commercial banks, offering services such as deposits, loans, and payments.
State cooperative banks are an important part of the Indian banking system, providing financial services to rural and low-income populations across the country. They are often the primary source of credit for agricultural and allied activities, small-scale industries, and other small businesses. These banks also provide banking services to cooperatives, including credit unions, dairy cooperatives, and agricultural cooperatives.
The working capital of SCB is obtained from deposits, funds, borrowings from RBI, state governments and other resources.
Central Cooperative Banks (CCBs)
Central Cooperative Banks (CCBs) are cooperatives that are established and managed in accordance with the Cooperative Societies Act. They are formed to promote economic development in rural areas and to provide credit and banking services to agricultural producers and small businesses.
CCBs are supervised by the state cooperative department and are regulated by the Reserve Bank of India. The CCBs are owned by their member shareholders and operate according to their by-laws. The CCBs 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.
The working capital for the central cooperative banks is primarily raised from individual funds, deposits, borrowings etc.
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Primary Agricultural Credit Societies
They are financial cooperatives that are typically organized by farmers and other agricultural professionals to provide credit and other services to farmers. These societies are owned and managed by their members, who contribute both capital and labour for the benefit of the cooperative.
The primary purpose of these societies is to provide loans to members, often at low-interest rates, in order to facilitate the purchase of inputs 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. Primary agricultural credit societies are often organized in rural areas where access to traditional banking services may be limited.
Advantages of Cooperative Banks:
Let’s have a closer look at the advantages of cooperative banking:
1. Alternative Source of Credit
The rural population is benefitted 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. Productive Borrowing
Cooperative banks encourage productive borrowing instead of borrowing money for consumption or other unproductive. This has enabled the system to bring a change in the nature of credit as well.
3. Encouragement to Saving 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.
4. 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. This has also enabled them to sell their products at good prices.
Weaknesses of Cooperative Banks
The total borrowings of the farmers are still not majorly provided by cooperative societies and some primary credit societies aren’t able to meet the credit needs.
There is also a rise in overdue levels. Let’s have a look at the weaknesses of Cooperative banks:
1. Inadequate Coverage
The membership of the rural population of cooperatives 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
The loaning business of the agricultural societies is facing the harsh wind. It was observed that out of 94089 primary agricultural credit societies in the country in 1982-83, 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. In 1991-92, the percentage of overdue to demand at the level of land development banks was 57, at the level of central cooperative banks was 41 and at the level of primary agricultural credit societies was 39.
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. It was observed that the eight states of Andhra Pradesh, Gujarat, Haryana, Kerala, Madhya Pradesh, Maharashtra, Punjab and Rajasthan 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.
What were the steps taken by RBI for Cooperative Banking?
RBI has taken measures to develop cooperative finance in India, let’s have a closer look at them:
- Introduction of the Model Cooperative Banks Act, 2003: The Reserve Bank of India (RBI) has introduced the Model Cooperative Banks Act, 2003, to provide a comprehensive legal framework for cooperative banks in India. The Act provides for the constitution, regulation and management of cooperative banks, including rules and regulations for their deposit-taking, lending and other operations.
- Issuance of Guidelines for Cooperative Banks: The RBI has issued various guidelines to strengthen the operations of cooperative banks in the country. These include guidelines for acceptance of deposits, management of non-performing assets, credit concentration, asset liability management and risk management.
- Setting up of Specialised Supervisory Cells: The RBI has also set up specialised supervisory cells in each of its regional offices to monitor the operations of cooperative banks. The cells review the performance of the banks and take corrective measures, if necessary.
- Setting up of Credit Guarantee Scheme: The RBI has set up a Credit Guarantee Scheme to provide credit guarantee cover to cooperative banks. This scheme aims to provide financial assistance to small borrowers in the cooperative sector.
- Introduction of Prudential Norms: The RBI has also introduced a number of prudential norms to ensure sound and prudent banking
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