Co-op societies are not banks, RBI cautions

Context:

The Reserve Bank of India (RBI) has cautioned members of the public not to deal with co-operative societies undertaking banking business by adding ‘bank’ to their names.

Relevance:

GS-III: Indian Economy

Dimensions of the Article:

1. About the RBI’s concern regarding Cooperative banks
2. What are Cooperative Banks?
3. Structure of co-operative banks in India
4. Importance of Cooperative Banks:
5. Problems with Cooperative Banking in India

About the RBI’s concern regarding Cooperative banks

• The Reserve Bank of India (RBI) has cautioned members of the public not to deal with cooperative societies undertaking banking business by adding ‘bank’ to their names.
• It has also come to the notice of RBI that some co-operative societies are accepting deposits from non-members/nominal members/ associate members.
• This is tantamount to conducting banking business in violation of the provisions.

What are Cooperative Banks?

• Co-operative banks are financial entities established on a co-operative basis and belonging to their members.This means that the customers of a co-operative bank are also its owners.
• Cooperative Banks continue to be important and the ideal organisations even in the changing economic environment, as participation and inclusion are central to poverty reduction.

More details about Cooperative Banks

• Co-operative banks in India are registered under the State’s Cooperative Societies Act.
• The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.
• The Registrar of Cooperative Societies (RCS) is in control of management elections and many administrative issues as well as auditing, and the RBI brought them under the Banking Regulation Act as applicable to cooperative societies.
• Urban cooperative banks have been under the radar of the RBI, but because of dual regulation either of them did not have as much control over these banks in terms of supersession of boards or removal of directors.

Structure of co-operative banks in India

• Broadly, co-operative banks in India are divided into two categories – urban and rural.
• Rural cooperative credit institutions could either be short-term or long-term in nature.
• Short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
• Long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).

Importance of Cooperative Banks:

The cooperative banking system has to play a critical role in promoting rural finance and is especially suited to Indian conditions.

Various advantages of cooperative credit institutions are given below:

1. Alternative Credit Source:  The main objective of the cooperative credit movement is to provide an effective alternative to the traditional defective credit system of the village moneylender.
2. Cheap Rural Credit: Cooperative credit system has cheapened the rural credit by charging comparatively low-interest rates, and has broken the money lender’s monopoly.
3. Productive Borrowing:  The cultivators used to borrow for consumption and other unproductive purposes. But, now, they mostly borrow for productive purposes.
4. Encouragement to Saving and Investment: Instead of hoarding money the rural people tend to deposit their savings in cooperative or other banking institutions.
5. Improvement in Farming Methods: Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc.
6. Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to the masses in rural areas.

Problems with Cooperative Banking in India

1. Politicians in local as well as in state use them to increase their vote bank and usually get their representatives elected over the board of director in order to gain undue advantages.
2. The cooperatives in northeast states and in states like West Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.
3. A serious problem of the cooperative credit is the overdue loans of the cooperative banks which have been continuously increasing over the years.
4. Large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.
5. The cooperatives have resource constraints as their owned funds hardly make a sizeable portfolio of the working capital.
6. Raising working capital has been a major hurdle in their effective functioning.

-Source: The Hindu