Cooperative Banks in India

What is Cooperative Movement

The co-operative movement involves autonomous association of persons united voluntarily to meet their common economic, social and cultural needs through a jointly owned and democratically controlled enterprise. Co-operatives, as business enterprises, are different from other firms, in view of the fact that their ownership and control are directly vested in the hands of the members. The co-operative structure is designed on the principles of mutual help, democratic decision making and open membership.

Mr. Mr. Ban Ki-moon, the UN Secretary General remarks:

"Co-operatives are a reminder to the international community that it is possible to pursue both economic viability and social responsibility"

Incidentally, the current year 2012 is declared by the UN as the International Year of Cooperatives.

Voluntary and open membership, democratic control, economic participation, autonomy, training and concern for the community are some of the overarching values with which the co-operatives have been associated with.

Brief History of Cooperative Movement in India:

• The Co-operative movement has a long history in India. Co-operative societies were set up in India towards the close of the nineteenth century drawing inspiration from the success of experiments related to the co-operative movement in Britain and the cooperative credit movement in Germany.
• Since inception, the UCBs have been playing an important role in the socio-economic development of the country by making available institutional credit at affordable cost, particularly, in the urban and semi-urban areas.
• The extension of the Banking Regulation Act, 1949 to co-operative societies, with effect from March 1, 1966, brought the co-operative banks within the ambit of the Reserve Bank’s regulation and supervision.
• Correspondingly, deposit insurance cover was also extended by Deposit Insurance and Credit Guarantee Corporation (DICGC) to the co-operative banks. While there has been a gradual growth in the UCB business over the period, with deposits growing from Rs. 1.67 billion to Rs. 2,120.31 billion and advances growing from Rs. 1.53 billion to Rs. 1,363.41 billion during the period 1966 to 2011, the growth of UCBs in the total banking business has not been commensurate with the overall growth of the banking sector.
• Despite their large number, UCBs constitute a very small market share at 3.5 per cent (as of March 31, 2010) of the total banking sector

Rural Cooperative Banks

Rural Cooperative Banks were the first formal institutions established to provide credit to rural India. Rural cooperatives have been a key instrument of Financial Inclusion reaching out to the last mile.

Framework of Rural Cooperative Banks:

In India Cooperative banks are registered under the respective State Co-operative Societies Act or Multi State Cooperative Societies Act, 2002 and governed by the provisions of the respective acts.

Rural cooperatives structure in India is bifurcated into short-term and long-term structure.

1. Short Term Cooperative Structure:

   The short-term cooperative structure is a three-tier structure

   1. State Cooperative Banks at the apex (State) level,
   2. District Central Cooperative Banks (DCCBs) at the intermediate (district) level
   3. Primary Agricultural Credit Societies (PACS) at the ground (village) level.

   The short-term structure caters primarily to the various short / medium-term production and marketing credit needs for agriculture.

2. Long Term Cooperative Structure:

   The long-term cooperative structure has the

   1. State Cooperative Agriculture and Rural Development Banks (SCARDBs) at the apex level
   2. Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) at the district or block level.

SCARDB and PCARDB were conceived with the objective of meeting long-term credit needs in agriculture.

Number of Rural Cooperative Banks:

By the end of 2008, there were around 31 State Cooperative Banks, 371 DCCBs and 94,950 PACS. There were 717 Long Term Rural Cooperative Credit Institutions (LTCCIs) comprising 20 SCARDBs and 697 PCARDBs.

Regulatory Framework:

The Rural Cooperative Structure in India is regulated by NABARD. The Board of Supervision, a Committee of the Board of Directors of NABARD, gives directions and guidance in respect of policies and matters relating to supervision and inspection of State Cooperative Banks and DCCBs.

• A large number of StCBs as well as DCCBs are unlicensed as of now and and are allowed to function as banks till they are either granted license or their applications for licence are rejected.

Rural Co-operative Banks and Rakesh Mohan Committee:

The Rakesh Mohan Committee had recommended that there should be a roadmap to ensure that only licensed banks operate in the cooperative space and that banks which fail to obtain a license by 2012 should not be allowed to operate to expedite the process of consolidation and weeding out of non viable entities from the cooperative space. A roadmap has been put in place to achieve this position.

CRAR Norms for Rural Cooperative Banks:

Please note that currently CRAR norms are not applicable to StCBs and DCCBs. Since March 31, 2008, they are only required to disclose the level of CRAR in the 'notes on accounts' to their balance sheets every year. The income recognition, asset classification and provisioning norms are applicable as in the case of commercial banks.

Urban Cooperative Banks

The Urban Cooperative Banks have to obtain a license from the Reserve Bank for doing banking business. The unlicensed primary (urban) co-operative banks can continue to carry on banking business till they are refused a license. Further UCBs also have to obtain prior authorization of the Reserve Bank to open a new place of business. UCB have to follow the Prudential norms relating to income recognition, asset classification, provisioning and capital adequacy ratio.

The client profile of Urban Cooperative Banks (UCBs)  today predominantly consists of priority sector segments viz. small business establishments, SSI, retail traders, self-employed, etc who would not, normally, find it easy to access commercial banks. The priority sector loans of the UCBs are today at 46 per cent as against the prescribed target of 40 per cent. Nearly 90 per cent of the loan accounts are less than Rs. 0.5 million in value. To this extent, UCBs

are already contributing to financial inclusion. However, there remains a huge hidden potential waiting to be tapped. Given the large number of urban co-operative banks, and with 271 districts not having any presence of UCBs, there exists a huge potential for UCBs to increase their spread and business and also participate in the national mission of financial inclusion.