Cooperative Banks in India
Cooperative Banks in India have become an integral part of the success of Indian Financial Inclusion story. They have achieved many landmarks since their creation and have helped a normal rural Indian to feel empowered and secure. The story has not been smooth and has its share of procedural glitches and woes placed at various pockets.
History of Cooperative Banking in India
The historical roots of the Cooperative Movement in the world days back to days of misery and distress in Europe faced by common people who had little or no access to credit to fund their basic needs, in uncertain times. The idea spread when the continent was faced with economic turmoil which led large populations to live at subsistence level without any economic security. People were forced to poverty and deprivation. It was the idea of Hermann Schulze (1808-83) and Friedrich Wilhelm Raiffeisen (1818-88) which took shape as cooperative banks of today across the world. They started to promote the idea of easy availability of credit to small businesses and for the poor segment of society. It was similar to the many microfinance institutions which have become highly popular in developing economies of today. Although this helped spread cooperative movement in many parts of Europe, in British Isles it is came from the revivalist Christian movement and found high acceptance with working class and lower middle class segments of society. However, UK and Irish credit unions in 20th century were inspired by US credit unions which in-turn owe their emergence to Canadian adaptations of the German cooperative banking concept. These movements were supported by governments of the respective countries. This success was achieved due to the failure of the commercial banks to fund and support the needs of small business owners and ordinary people who were outside the formal banking net. Cooperative banks helped overcome the vital market imperfections and serviced the poorer layers of society.
Indian Cooperative Banks was also born out of distress prevalent in Indian society.
- The Cooperative Credit Societies Act, 1904 led to the formation of Cooperative Credit Societies in both rural and urban areas. The act was based on recommendations of Sir Frederick Nicholson (1899) and Sir Edward Law (1901). Their ideas in turn were based on the pattern of Raiffeisen and Schulze respectively.
- The Cooperative Societies Act of 1912, further gave recognition to the formation of non-credit societies and the central cooperative organizations.
- In independent India, with the onset of planning, the cooperative organizations gained more leverage and role with the continued governmental support.
- Machlagan Committee in 1915, highlighted the deficiencies of in cooperative societies which seeped-in due to lack of proper education to the masses. He also laid down the importance of Central Assistance by the Government to support the movement.
- The Royal Commission on Agriculture 1928, enumerated the importance of education of members/staff for effective implementation of cooperative movement.
- Saraiya Committee, in 1945, further recommended the setting up of a Cooperative Training College in every state and a Cooperative Training Institute for Advanced Study and Research at the Central level.
- Central Committee for Cooperative Training in 1953, constituted by RBI for establishing Regional Training Centres.
- Rural Credit Survey Committee, 1954 was the first committee formed till then to first delve into the problems of Rural credit and other financial issues of rural society.
The cooperative movement and banking structures soon spread and resonated with the unexpressed needs of the rural Indian and small scale businesses. Since, 1950s, they have come a long way to support and provide assistance in activities like credit, banking, production, processing, distribution/marketing, housing, warehousing, irrigation, transport, textiles, dairy, sugar etc. to households.
Extent of Cooperative Banking
Indian cooperative structures are one of the largest such networks in the world with more than 200 million members. It has about 67% penetration in villages and fund 46% of the total rural credit. It also stands for 36% of the total distribution of rural fertilizers and 28% of rural fair price shops.
Structure of Cooperative Banking in India
The structure of cooperative network in India can be divided into 2 broad segments-
- Urban Cooperative Banks
- Rural Cooperatives
Urban Cooperatives can be further divided into scheduled and non-scheduled. Both the categories are further divided into multi-state and single-state. Majority of these banks fall in the non-scheduled and single-state category.
- Banking activities of Urban Cooperative Banks are monitored by RBI.
- Registration and Management activities are managed by Registrar of Cooperative Societies (RCS). These RCS operate in single-state and Central RCS (CRCS) operate in multiple state.
The rural cooperatives are further divided into short-term and long-term structures. The short-term cooperative banks are three tiered operating in different states. These are-
- State Cooperative Banks- They operate at the apex level in states
- District Central Cooperative Banks-They operate at the district levels
- Primary Agricultural Credit Societies-They operate at the village or grass-root level.
Likewise, the long-term structures are further divided into –
- State Cooperative Agriculture and Rural Development Banks (SCARDS)- These operate at state-level.
- Primary Cooperative Agriculture and Rural Development Banks (PCARDBS)-They operate at district/block level.
The rural banking cooperatives have a complex monitoring structure as they have a dual control which has led to many problems. A Forum called State Level Task Force on Cooperative Urban Banks (TAFCUB) has been set-up to look into issues related to duality in control.
- All banking activities are regulated by a shared arrangement between RBI and NABARD.
- All management and registration activities are managed by RCS.
Cooperative Banks-Irritants and Future Trends
A cooperative bank is an institution which is owned by its members. They are the culmination of efforts of people of same professional or other community which have common and shared interests, problems and aspirations. They cater to a services like loans, banking, deposits etc. like commercial banks but widely differ in their values and governance structures. They are usually democratic set-ups where the board of members are democratically elected with each member entitled to one vote each. In India, they are supervised and controlled by the official banking authorities and thus have to abide by the banking regulations prevalent in the country. The basic rules, regulations and values may differ amongst nations but they have certain common features:
- Democratic structures
- Profits are mainly pooled to form reserves while some amount is distributed to members
- Involved in community development
- Foster financial inclusion by bringing banking to the doorstep of the lowest segment of society
These banks are small financial institutions which are governed by regulations like Banking Regulations Act, 1949 and Banking Laws Cooperative Societies Act, 1965. They operate both in urban and rural areas under different structural organisations. Their functions are decided by the level at which they operate and the type of people they cater to. They greatly differ from the commercial banking entities.
- These are established under specific acts of cooperative societies operating in different states unlike mainstream commercial banks which are mainly joint-stock companies.
- They have a tiered network with a bank at each level of state, district and rural. The state-level bank forms the apex authority.
- Not all sections of banking regulation act are applicable to cooperative banks
- The ultimate motive is community participation, benefit and growth as against profit-maximisation for commercial banks.
Major irritants in the functioning of the Cooperative Banks
- The duality in control by RCS of a state as ‘Cooperation’ is a state subject. However financial regulatory control by RBI has led to many troubles as there is ambiguity in power structure as there is no clear demarcation.
- Patchy growth of cooperative societies across the map of India. It is said these have grown maximally in states of Gujarat, Maharashtra, Tamil Nadu whereas the other parts of India don’t have a heightened presence.
- The state partnership has led to excessive state control and interference. This has eroded the autonomous characters of many of these.
- Dormant membership has made them moribund as there is a lack of active members and lack of professional attitude.
- Their main focus being credit so they have reduced to borrower-driven entities and majority of members are nominal and don’t enjoy voting rights.
- Credit recovery is weak especially in rural areas and it has sustainability crisis in some pockets.
- There is a lack of risk management systems and lack of basic standardised banking models.
- There is a widening gap between the level of skills and the increasing computerisation of banks.
The government needs to have a serious look into the issues as they did not show an impressive growth in the last 100 years.