Cooperative Banking in India

Cooperative Banks

In recent times, Cooperative Banks in Indian society has become an integral part in the success of the Indian Financial story. These Banks have achieved many landmarks since their creation and have helped make rural Indians feel more empowered and secure. But, this story has not been a smooth one and it has had its share of procedural glitches and woes placed at various pockets.

What are cooperative banks?

A co-operative bank is a financial entity that belongs to the members of the bank. These members are the owners as well as the customers of the bank. It is often established by people of the same local or professional community having a common set of interest. The purpose of these banks is for the upliftment of financially weaker sections of the society and to eliminate money lenders who provide loans at an unreasonably high-interest rate to the needy. The basic principle of these banks is cooperation, mutual help, democratic decision making and open membership. 

The Cooperative Banks have to be registered under the Cooperative Societies Act, 1912 and are regulated jointly by the Reserve Bank of India and National Bank for Agriculture and Rural Development (NABARD). 

History of Cooperative Banking in India

Cooperative Movement was first seen in Europe and the misery that was faced by the common people as they had little to no access to credit or funds for their basic needs. The idea gained popularity when the continent was faced with an economic turmoil which led large populations to fend for themselves having hardly any economic security. Cooperative bank was the idea of Hermann Schulze and Friedrich Wilhelm Raiffeisen. The bank promoted the idea of easy availability of credit to small businesses and for the poor segment of society. The success of cooperative bank was achieved as the commercial banks were unable to fund and support the needs of small business owners and ordinary people. These Banks helped overcome the vital market imperfections and serviced the poor layers of society.

Indian Cooperative Banks was also a result of distress that prevailed in Indian society.

  • The Cooperative Credit Societies Act, 1904 led to setup the Cooperative Credit Societies in both rural and urban areas.
  • The Cooperative Societies Act of 1912, this Act recognised non-credit societies and the central cooperative organisations.
  • Machlagan Committee in 1915, highlighted the deficiencies in the cooperative societies which were a result of lack of proper education to the masses. He also highlighted the importance of Central Assistance by the Government to support the movement.
  • The Royal Commission on Agriculture 1928, recognised the importance of education of members/staff for effective implementation of cooperative movement.
  • Saraiya Committee, in 1945, recommended to set up a Cooperative Training College in every state.
  • Rural Credit Survey Committee, 1954 was the first committee formed to solve the problems into the problems related to Rural credit and other financial issues of rural society.

These banking structures soon spread and resonated with the needs and wants of the rural Indian and small scale businesses. Since, 1950s, they have come a long way they have supported and provided assistance in various activities to various households across India.

Characteristics of Cooperative Bank 

Some of the main features of cooperative banks are:

They are customer-owned entities

The members of these banks are the owners as well as the customers of the bank. Hence, the aim of these banks is not profit but to provide the best possible services to the members. 

Democratic control

Cooperative banks are owned and controlled by members, who are democratically elected to be the board of directors. The basic principle of these banks is one man one vote.

Profit allocation

A specified portion of the profits are transferred to various Reserves, and a high rate of interest is paid on the capital subscribed by the members. A part of the profit is also distributed to the members.

Inclusion of rural masses

Functions of Cooperative Banks 

  • It provides financial assistance to people.
  • It supervises affiliated societies.
  • Rural financing
  • Urban financing
  • It mobilises funds and provides higher rate of interest on the invested capital.

Objectives of Cooperative Banks 

  • To provide rural financing as well as micro-financing.
  • To remove the money lenders and middleman in financial sector.
  • To provide credit to weaker sections of the society at comparatively lower rates.
  • To provide financial support to small scale industries, housing financial assistance, etc.
  • Provides basic banking services to the members of the cooperative societies .
  • To promote development of rural areas.

Advantages of Cooperative Banks

  • Easy to form
  • Alternative credit source
  • Cheaper credit rates
  • Encourages masses to save and investment their money.
  • Advancement in farming

Problems faced by the Indian Cooperative Banks

1. Small capital base

Cooperative banks can start with a small capital base of a mere 25 lakhs. A small capital can make it difficult for these banks to account a portion of such capital as their working capital and raising their working capital has been a major challenge for almost all cooperative banks.

2. Political interference

3. RBI Supervision

4. Dual control i.e. RBI and their respective state government.

5. Professional management and technological advancement

6. Dependence of finance on RBI, NABARD and government.

7. Overdue loans

In the recent time the Cooperative banks have undergone more than a few scams. These banks play an integral part in the development of the country. Hence, they are important for 

effective functioning of the banking system in India. India is termed as an underbanked country.

Frequently Asked Questions

What is the main objective of the Cooperative Banks?

The main objective of these Banks is to provide easy finance to the vulnerable sections of the societies and provide them with higher interest rates.

What is the main characteristic of cooperative banks?

They are owned by the members of the cooperative banks. Some of these members are democratically elected to be board members. 

What are the regulating Acts and bodies that governs the cooperative banks?

Cooperative Societies Act, 1912

Reserve Bank of India

National Bank for Agriculture and Rural Development (NABARD). 

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje