A Cooperative bank is a financial entity that is owned and operated by its members, who are both the owners and customers of the bank. In India, cooperative banks are governed by the States Cooperative Societies Act. The Reserve Bank of India (RBI) also regulates cooperative banks, which are governed by the Banking Regulations Act 1949 and the Banking Laws (Co-operative Societies) Act, 1955.

What is a Co-operative Bank?

• A cooperative bank is a financial entity that is owned and operated by its members, who are also its customers.
• Co-operative banks are frequently formed by people who belong to the same local or professional community or who share a common interest.
• Co-operative banks typically offer a wide range of banking and financial services to their members (loans, deposits, banking accounts, etc).
• They offer a limited range of banking services and specialize in agricultural products.
• Cooperative banks are the primary financiers of agricultural activities, small-scale industries, and self-employment.
• Cooperative banks operate on the principle of "no profit, no loss."
• Anyonya Co-operative Bank Limited (ACBL) is India's first co-operative bank, headquartered in Vadodara,Gujarat.

Co-operative Banks can further be divided into the following:

(i) Urban Cooperative Banks

• The term "Urban Co-operative Banks" refers to primary cooperative banks in urban and semi-urban areas.
• These banks primarily lent to small borrowers and businesses centred on communities, neighborhoods, and workplace groups.
• They primarily finance entrepreneurs, small businesses, industries, and self-employment in urban areas, as well as home purchases and educational loans.

(ii) State Cooperative Banks

• A State Cooperative Bank is a federation of the central cooperative bank that serves as the state's custodian of the cooperative banking structure.
• Co-operative banks in rural areas primarily serve agricultural-based activities such as farming, livestock, dairies, and hatcheries, among others.
• They also give loans to small-scale businesses, cottage industries, and self-employment activities such as artisanship.

Co-operative Banks – Historical Perspective

• The cooperative movement in India can be traced back to the passage of the Cooperative Credit Societies Act in 1904.
• The publication of the Rural Credit Survey Report in December 1954 was a watershed moment in the country's cooperative movement.
• The various recommendations contained in the Report were accepted by the Government of India, and State Governments were directed to draft proposals for the development of the cooperative movement during the plan period.
• The establishment of an integrated rural credit structure based on three fundamental principles was envisaged in the Second Five Year Plan:
  • state partnership at different levels
  • complete coordination of credit and economic activities (particularly marketing and processing)
  • administration with adequately trained personnel responsive to the needs of the rural population.

Co-operative Banks – Structure

Co-operative Banks – Features

• Members of a cooperative bank are both customers and owners of the bank.
• Cooperative banks are owned and controlled by their members, who elect a board of directors democratically.
• According to the cooperative principle of "one person, one vote," members usually have equal voting rights.
• A significant portion of the yearly profit, benefits, or surplus is usually set aside as reserves, and a portion of this profit can also be distributed to co-operative members, subject to legal and statutory restrictions.
• They have played an important role in bringing the unbanked rural masses into the financial mainstream.

Co-operative Banks – Significance

• Cooperative banking is a viable alternative to the village money lender's traditional flawed credit system.
• It offers low-cost credit to rural residents.
• Cooperative banks have discouraged unproductive personal consumption borrowing and established a culture of productive borrowing.
• Instead of hoarding money, the cooperative credit movement has encouraged rural people to deposit their savings in cooperatives or other banking institutions.
• Cooperative societies have also greatly aided in the adoption of more efficient agricultural methods.
• Cooperative credit is available for the purchase of improved seeds, chemical fertilisers, and modern implements, among other things.
• Deposits at cooperative banks earn a higher interest rate.

Co-operative Banks – Limitations

• The primary credit societies' organisational and financial constraints significantly limit their ability to provide adequate credit to the rural population.
  • Tenants' and small farmers' needs are not fully met.
  • Primary credit societies are financially insecure and unable to meet the needs for production-oriented credit.
  • Overdue is increasing at all levels at an alarming rate.
  • Primary credit societies have failed to provide sufficient and timely credit to borrowing farmers.
• Cooperatives face resource constraints because their owned funds do not constitute a sizable portfolio of working capital. Raising working capital has been a major impediment to their effective operation.
• Overdue loanof cooperativeve banks have been steadily increasing over the years and pose a serious problem for cooperative credit.
  • Large amounts of overdue impede the recycling of funds and have a negative impact on the cooperative's lending and borrowing capacity.
• Due to the strong socioeconomic position of large landowners, majority of the benefits from cooperatives have been reaped by them only.
• Cooperative banks are losing their lustre as a result of the growth of Scheduled Commercial Banks and the adoption of technology.
• Payment banks and small finance banks are also vying for their business.
• They are extending less long-term credit.
• Cooperatives in the northeast and states such as West Bengal, Bihar, and Odisha are not as developed as those in Maharashtra and Gujarat.
  • There is a lot of friction between different states because of competition, and this friction affects how cooperatives work.
• Politicians use them to increase their vote bank and usually get their representatives elected to the board of directors in order to gain unfair advantages.

Conclusion

• Though the overall performance of cooperatives has improved over the years, but it still remains poor, and thus NABARD was established to provide the much needed institutional support for their better and brighter future.
• A suitable mechanism of checks and balances could be developed and made mandatory for all cooperative banks.
• To maintain public trust in the banking sector, the RBI must ensure that cooperative banks become more professional.