What Are Cooperative Banks?

Context:

Recently, the Minster of Home Affairs and Cooperation has addressed a conclave, organised by the National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB), emphasising the needed Reforms for Urban Cooperative Banks (UCB).

Relevance:

GS-III: Indian Economy (Banking)

Dimensions of the Article:

1. What are Cooperative Banks?
2. Structure of co-operative banks in India
3. Importance of Cooperative Banks
4. Concerns Associated with Urban Co-operative Bank

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.

Important Details with respect to Urban 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.

Concerns Associated with Urban Co-operative Bank

• The uncovering of large-scale financial irregularities has taken urban cooperative banks off guard.
• Low capital basis, weak corporate governance, inability to detect fraud, delayed adoption of new technologies, and insufficient system of checks and balances are difficulties confronting urban cooperative banks (UCBs).
• The latest Banking Regulation (Amendment) Act 2020 empowers the RBI with all powers, including those formerly reserved for the registrar of cooperative organizations.
• The RBI’s control was limited, and it shared it with the registrar of cooperative societies of states, resulting in the much-discussed dual control and the issues it posed to the central bank.
• The cooperative sector has two challenges:
  • first, increased competition from not just Scheduled Commercial Banks, but also from minor financing banks and payments banks;
• second, vulnerability caused by internal shortcomings, such as the inability to detect and prevent fraud.

-Source: The Hindu