Cooperative Banks and its Structure
Cooperative Banks are institutions founded on cooperative basis and dealing in retail and commercial banking business in terms of RBI licensing norms. The capital is raised from own funds, deposits, borrowings and other sources. Under the own funds, major share comes from cooperative societies and the state government, and remaining is made up of reserves. The shares issued by cooperative banks to its members carry unlimited liability as compared to listed banks where liability is limited. In a cooperative bank, a shareholder has one vote irrespective of number of shares held whereas a listed banks' shareholders voting right gets determined by the number of shares held. Cooperative banks function under federal structure in India. Primary credit cooperative societies are the lowest rung in hierarchy; central cooperative banks at district level; and state cooperative banks at state level. Cooperative banks are also divided into two categories urban cooperative banks (UCBs) and rural cooperative banks (RCBs). Within these categories, there are multi-state cooperative banks and the cooperative banks with presence within state.
History
The cooperative movement in India began with the objective of dealing with problem of rural credit though Anyonya Sahayakari Mandali Cooperative Bank Ltd (ACBL), an Urban Cooperative Bank, was established in 1889 with an objective of providing an alternative to the exploitation by moneylenders for Vadodara's residents. The regulated history commenced with the passing of Cooperative Societies Act in 1904. The objective of the act was to establish credit cooperative societies to enhance cooperation, self-help and prudence among farmers, artisans and persons of limited means. Among the prominent credit societies were Pioneer Urban in Mumbai in November 1905, the Military Accounts Mutual Help Cooperative Credit Society, and Cosmos in Pune in January 1906. The amended Cooperative Societies Act, 1912 recognized the need of federal structure for supervision, auditing and supply of cooperative credit. Though first Land Development Bank (RCB) started in Jhang in Punjab in 1920 yet the real progress commenced with the setting up of another Land Development Bank in Chennai in 1929. With the formation of Reserve Bank of India in 1935 and the NABARD in 1982, the cooperative banks are now regulated jointly by these two entities. The long-term agriculture credit is taken care of by land development Banks. The progress of the cooperative movement remained unsatisfactory even after almost 50 years of existence when cooperative credit contributed just 3% of total rural credit by 1952.
Challenges Encountered by Cooperative Banks
With an objective of better regulations governing Cooperative Banks, Large cooperative banks with paid up capital and reserves of Rs 1 lakh were brought under the ambit of RBI supervision w.e.f. 1st March 1966 for banking related functions, viz. licensing, area of operations, interest rates, etc. whereas registration, management, audit and liquidation, etc. remained under the control of RCS of respective State Governments. This resulted in beginning of duality of control over these banks.
While these banks were set up with the objective of customer ownership, democratic set up, profits form reserves post distribution to members, community development, boost financial inclusion by reaching out to lower-strata of the society yet these banks encountered challenges of region-wise uneven growth, state ownership led to excessive state control, lack of active members and professional attitude, borrower driver entities, lack of adequate credit appraisal mechanism and skilled manpower led to acquisition of low quality of assets, credit recovery remained poor, lack of risk management systems and widening gap in technology adoption.
Recent Ordinance
In a landmark decision, Union Cabinet decides to bring almost 1540 urban cooperative (1482) and multi-state cooperative banks (58), having deposit base of Rs 4.84 lakh crore from 8 and 1/2 crore plus depositors, under RBI supervision process, which is applicable to scheduled commercial banks. The ordinance doesn't apply to Primary agriculture Credit Cooperative Societies (PACS) or cooperative societies whose primary business is long-term finance for agriculture development, and bank, banker or banking word doesn't appear in the title. This has been done to protect interest of depositors in these banks. This move comes after multiple cases of frauds and serious financial irregularities noticed in the functioning of these banks, particularly after PMC Bank fiasco last year. The Union Cabinet also approved interest subvention relief of 2% to small borrowers for a period of 12 months, availing loans up to Rs 50,000/- under Shishu category of PM Mudra Yojana.
The ordinance also amends Section 45 of Banking Regulation Act, 1949, doing away RBI requirement of moratorium, so as to avoid disruption of financial system at the time of amalgamation or reconstruction of a bank for protecting interest of public, depositors and the banking system.
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