What is Co-operative Banking?
A cooperative bank is an institution established on a cooperative basis and dealing in the ordinary banking business. Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits, and grant loans.
- A Co-operative bank is a financial entity that belongs to its members, who are at the same time the owners and the customers of their bank.
- Co-operative banks in India are registered under the States Cooperative Societies Act. The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the
- Banking Regulations Act of 1949
- Banking Laws (Co-operative Societies) Act, 1955.
They have been established with a motive of ‘no-profit no-loss’ and hence do not look for maximizing their profits. The co-operative banking structure in India is categorized into 3 broad sectors:
- State Co-operative Banks- Total 31
- Scheduled Urban Co-operative Bank- Total 54
- Non-Scheduled Urban Co-operative Banks- Total 1528.
Features of Cooperative Banks:
- Customer Owned Entities: Co-operative bank members are both customers and owners of the bank.
- Democratic Member Control: Co-operative banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
- Profit Allocation: A significant part of the yearly profit, benefits, or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
- Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses.
What is the Structure of Cooperative Banking?
These institutions can be classified into two broad categories- agricultural and non-agricultural. Agricultural credit institutions dominate the entire cooperative credit structure.
Agricultural credit institutions are further divided into short-term agricultural credit institutions and long-term agricultural credit institutions.
The short-term agricultural credit institutions which cater to the short-term financial needs of agriculturists have three-tier federal structure-
(a) at the apex, there is the state cooperative bank in each state;
(b) at the district level, there are central cooperative banks;
(c) at the village level, there are primary agricultural credit societies.
What is the importance of Co-operative Banks in India?
- Co-operative Banks work on the objective of cooperation, self-help, and mutual help.
- Co-operative Banks in India protect the rural people from the clutches of money lenders and from exploiting the poor population.
- They have a better local reach as they are intimately familiar with the local area.
- They have in-depth knowledge of the local areas, their conditions and problems existing there.
- They have a very strong personal relationship with their customers as they make a personal interaction with their customers and try to resolve their queries on a priority basis which other types of banks fail to do.
- They work on the principle of “no profit-no loss”.
- The interest rates offered by them are very competitive either on deposits or on loans.
Disadvantage and Weakness of Co-operative Banking.
I. General Weaknesses of Primary Credit Societies:
Organisational and financial limitations of the primary credit societies considerably reduce their ability to provide adequate credit to the rural population.
The All India Rural Credit Review Committee pointed out the following weaknesses of the primary credit societies:
(a) Cooperative credit still constitutes a small proportion of the total borrowings of the farmers,
(b) Needs of tenants and small farmers are not fully met.
(c) More primary credit societies are financially weak and are unable to meet the production-oriented credit needs,
(d) Overdues are increasing alarmingly at all levels,
(e) Primary credit societies have not been able to provide adequate and timely credit to the borrowing farmers.
II. Inadequate Coverage:
Criteria of determining borrowing membership include:
(a) Borrowing members as a proportion of rural households,
(b) The average amount of loan issued per borrowing member, and
(c) The proportion of loans going to weaker sections.
The banking Commission 1972 has brought out the following reasons for the low borrowing membership cooperative societies:
(a) Inability of the people to provide the prescribed security;
(b) Lack of up-to-date land records;
(c) Ineligibility of certain purposes for loans;
(d) Inadequacy of prescribed credit limits;
(e) Onerous conditions prescribed for loans such as share capital contribution at 10 or 20 per cent of loans outstanding and compulsory saving deposits; and
(f) Default of members to repay loans.
III. Inefficient Societies:
IV. Problem of Overdues:
The Banking Commission 1972 pointed out the following reasons for the overdue loans:
- (a) Indifferent management or mismanagement of primary societies;
- (b) Unsound lending policies resulting in over-lending or lending unrelated to actual needs, diversions of loans for other purposes;
- (c) Vested interests and group politics in societies and willful defaulters;
- (d) Inadequate supervision over the use of loans and poor recovery efforts;
- (e) Lack of adequate control of central cooperative banks over primary societies;
- (f) Lack of proper links between credit and marketing institutions;
- (g) Failure to take quick action against willful defaulters; and
- (h) Uncertain agricultural prices.
V. Regional Disparities:
VI. Benefits to Big Land Owners:
VII. Lack of Other Facilities: