CO-OPERATIVE BANKING

Cooperative banking

Cooperative banking is retail and commercial banking organized on a cooperative basis.

Cooperative banking institutions take deposits and lend money in most parts of the world.

Cooperative banking (for the purposes of this article), includes retail banking, as carried out
by credit unions, mutual savings and loan associations, building societies and cooperatives, as
well as commercial banking services provided by mutual organizations (such as cooperative
federations) to cooperative businesses.

Definition of a cooperative bank

A co-operative bank is a financial entity which belongs to its members, who are at the same
time the owners and the customers of their bank. Co-operative banks are often created by
persons belonging to the same local or professional community or sharing a common interest.
Co-operative banks generally provide their members with a wide range of banking and
financial services (loans, deposits, banking accounts…). Co-operative banks differ from
stockholder banks by their organization, their goals, their values and their governance. In
most countries, they are supervised and controlled by banking authorities and have to respect
prudential banking regulations, which put them at a level playing field with stockholder
banks. Depending on countries, this control and supervision can be implemented directly by
state entities or delegated to a co-operative federation or central body. Even if their
organizational rules can vary according to their respective national legislations, co-operative
banks share common features:

• Customer-owned entities: in a co-operative bank, the needs of the customers meet the
needs of the owners, as co-operative bank members are both. As a consequence, the first aim
of a co-operative bank is not to maximise profit but to provide the best possible products and
services to its members. Some co-operative banks only operate with their members but most
of them also admit non-member clients to benefit from their banking and financial services.
• Democratic member control: co-operative banks are owned and controlled by their
members, who democratically elect the board of directors. Members usually have equal
voting rights, according to the co-operative principle of “one person, one vote”.

• Profit allocation: in a co-operative bank, a significant part of the yearly profit, benefits or
surplus is usually allocated to constitute reserves. A part of this profit can also be distributed
to the co-operative members, with legal or statutory limitations in most cases. Profit is
usually allocated to members either through a patronage dividend, which is related to the use
of the co-operative’s products and services by each member, or through an interest or a
dividend, which is related to the number of shares subscribed by each member.

Co-operative banks are deeply rooted inside local areas and communities. They are involved
in local development and contribute to the sustainable development of their communities, as
their members and management board usually belong to the communities in which they
exercise their activities. By increasing banking access in areas or markets where other banks
are less present – SMEs, farmers in rural areas, middle or low income households in urban
areas - co-operative banks reduce banking exclusion and foster the economic ability of
millions of people. They play an influential role on the economic growth in the countries in
which they work in and increase the efficiency of the international financial system. Their
specific form of enterprise, relying on the above-mentioned principles of organization, has
proven successful both in developed and developing countries.

Credit unions

Credit unions have the purpose of promoting thrift, providing credit at reasonable rates, and
providing other financial services to its members. Credit union members are usually required
to share a common bond, such as locality, employer, religion or profession. Credit unions are
usually funded entirely by member deposits, and avoid outside borrowing. They are typically
(though not exclusively) the smaller form of cooperative banking institution. In some
countries they are restricted to providing only unsecured personal loans, whereas in others,
they can provide business loans to farmers, and mortgages.

Cooperative bank:- Larger institutions are often called cooperative banks. Some of
these banks are tightly integrated federations of credit unions, though those member credit
unions may not subscribe to all nine of the strict principles of the World Council of Credit
Unions (WOCCU).

Like credit unions, cooperative banks are owned by their customers and follow the
cooperative principle of one person, one vote. Unlike credit unions, however, cooperative
banks are often regulated under both banking and cooperative legislation. They provide
services such as savings and loans to non-members as well as to members and some
participate in the wholesale markets for bonds, money and even equities. Many cooperative
banks are traded on public stock markets, with the result that they are partly owned by non-
members. Member control is diluted by these outside stakes, so they may be regarded as
semi-cooperative.

Cooperative banking systems are also usually more integrated than credit union systems.
Local branches of cooperative banks elect their own boards of directors and manage their
own operations, but most strategic decisions require approval from a central office. Credit
unions usually retain strategic decision-making at a local level, though they share back-office
functions, such as access to the global payments system, by federating.

Some cooperative banks are criticized for dilution of cooperative principles. Principles 2-4 of
the Statement on the Co-operative Identity can be interpreted to require that members must
control both the governance systems and capital of their cooperatives. A cooperative bank
that raises capital on public stock markets creates a second class of shareholders who
compete with the members for control. In some circumstances, the members may lose
control. This effectively means that the bank ceases to be a cooperative. Accepting deposits
from non-members may also lead to a dilution of member control.

Building societies

Building societies exist in Britain, Ireland and several Commonwealth countries. They are
similar to credit unions in organisation, though few enforce a common bond. However, rather
than promoting thrift and offering unsecured and business loans, their purpose is to provide
home mortgages for members. Borrowers and depositors are society members, setting policy
and appointing directors on a one member one vote basis. Building societies often provide
other retail banking services, such as current accounts, credit cards and personal loans. In the
United Kingdom, regulations permit up to half of their lending to be funded by debt to non-
members, allowing societies to access wholesale bond and money markets to fund mortgages.
The worlds largest is Britain's Nationwide Building Society.

Others

Mutual savings banks and mutual savings and loan associations were very common in the
19th and 20th centuries, but declined in number and market share in the late 20th century,
becoming globally less significant than cooperative banks, building societies and credit
unions. Trustee savings banks are similar to other savings banks, but they are not
cooperatives, as they are controlled by trustees, rather than their depositors.

International associations

The most important international associations of cooperative banks, both based in Brussels,
are the CIBP (International Association of Cooperative Banks), which has member
institutions from all around the world, and the European Association of Co-operative Banks.

List

Notable cooperative banking businesses

Assets
Members
Name Country (2010 US$ Type Alternative name Notes
(2010)
millions)
Majority owned
Crédit Joint stock
France CASA by federation of
Agricole bank
credit unions
owned by three
quarters of all
Deutsche Volksbank and
Zentralgenossenschaftbank Raiffeisenbank
DZ Bank Germany Bank
German Central (cooperative
Cooperative Bank banks) in
Germany and
Austria
Caisse Credit union
France literally “savings bank”
d'Epargne federation
Rabobank Netherlands 1,500,000+ Credit union
 federation
Nationwide
Building World's largest
Building UK
society building society
Society
Groupe
Banque France 3,400,000
Populaire
Desjardins Credit union Leading bank in
Canada 5,795,277
Group federation Quebec
Raiffeisen Credit union
Austria Bank RZB Österreich
Zentralbank federation
Banking
National Agricultural
South division of Approx US$230
Nonghyup Cooperative Federation
Korea agricultural billion in loans
(NACF)
cooperative
Istituto Centrale del
Iccrea Banca Italy Bank
Credito Cooperativo
Cassa
Centrale
Banca -
Italy Bank CCB
Credito
Cooperativo
del Nord Est
Raiffeisen
Cassa Centrale Raiffeisen
Landesbank - Italy Bank
dell'Alto Adige
Sudtirol
Raiffeisen Credit union
Switzerland
Schweiz federation
Banco
Cooperativo
Spain
Español and
Caja Rural
31% share of
Finnish credit
OP-Pohjola
market, and 32%
Group and Finland
share of savings
Pohjola Bank
and deposit
market
2nd national
Bank Koperasi Bank Persatuan cooperative
Malaysia 46,135 86,375,542.97 Bank
Persatuan Malaysia Berhad bank in
Malaysia
Co-operative UK Not Bank Subsidiary of
 consumer
Bank applicable
cooperative
World's largest
Navy Federal
US 3,004,352 33012 Credit union natural member
Credit Union
credit union
Cooperative
Shared Finance for fair
UK lending
Interest trade
society

Quebec

The caisse populaire movement started by Alphonse Desjardins in Quebec, Canada,

pioneered credit unions. Desjardins wanted to bring desperately needed financial protection
to working people. In 1900, from his home in Lévis, Quebec, he opened the first credit union
in North America, marking the beginning of the Mouvement Desjardins.

United Kingdom

British building societies developed into general-purpose savings and banking institutions
with ‘one member, one vote’ ownership and can be seen as a form of financial cooperative
(although some de-mutualised into conventionally owned banks in the 1980s and 1990s). The
UK Co-operative Group includes both an insurance provider, the CIS, and the Co-operative
Bank, both noted for promoting ethical investment.

Continental Europe

Important continental cooperative banking systems include the Crédit Agricole, Crédit
Mutuel, Banque Populaire and Caisse d'épargne in France, Rabobank in the Netherlands,
BVR/DZ Bank in Germany, Banco Popolare, UBI Banca and Banca Popolare di Milano in
Italy, Migros and Coop Bank in Switzerland, and the Raiffeisen system in several countries in
central and eastern Europe. The cooperative banks that are members of the European
Association of Co-operative Banks have 130 million customers, 4 trillion Euros in assets, and
17% of Europe's deposits. The International Confederation of Cooperative Banks (CIBP) is
the eldest association of cooperative banks at international level.

In Scandinavia, there is a clear distinction between mutual savings banks (Spar bank) and
true credit unions (Andels bank).
India

The origins of the cooperative banking movement in India can be traced to the close of
nineteenth century when, inspired by the success of the experiments related to the cooperative
movement in Britain and the cooperative credit movement in Germany, such societies were
set up in India. Cooperative banks are an important constituent of the Indian financial system.
They are the primary financiers of agricultural activities, some small-scale industries and
self-employed workers. The Anyonya Co-operative Bank in India is considered to have been
the first cooperative bank in Asia.

Microcredit and microfinance

The more recent phenomena of Microcredit and microfinance are often based on a
cooperative model They focus on small business lending..In 2006, Muhammad Yunus,
founder of the Grameen Bank in Bangladesh, won the Nobel Peace Prize for his ideas
regarding development and his pursuit of the microcredit concept.

Introduction

The Co-operative banks have a history of almost 100 years. The Co-operative banks are an
important constituent of the Indian Financial System, judging by the role assigned to them,
the expectations they are supposed to fulfil, their number, and the number of offices they
operate. The co-operative movement originated in the West, but the importance that such
banks have assumed in India is rarely paralleled anywhere else in the world. Their role in
rural financing continues to be important even today, and their business in the urban areas
also has increased phenomenally in recent years mainly due to the sharp increase in the
number of primary co-operative banks.

While the co-operative banks in rural areas mainly finance agricultural based activities
including farming, cattle, milk, hatchery, personal finance etc. along with some small scale
industries and self-employment driven activities, the co-operative banks in urban areas
mainly finance various categories of people for self-employment, industries, small scale
units, home finance, consumer finance, personal finance, etc.
Some of the co-operative banks are quite forward looking and have developed sufficient core
competencies to challenge state and private sector banks.

According to NAFCUB the total deposits & landings of Co-operative Banks is much more
than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth
of Co-operative Banks is attributed mainly to their much better local reach, personal
interaction with customers, and their ability to catch the nerve of the local clientele.

Though registered under the Co-operative Societies Act of the Respective States (where
formed originally) the banking related activities of the co-operative banks are also regulated
by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and
Banking Laws (Co-operative Societies) Act, 1965.

Cooperative banks in India finance rural areas under:

 Farming
 Cattle
 Milk
 Hatchery
 Personal finance

Cooperative banks in India finance urban areas under:

 Self-employment
 Industries
 Small scale units
 Home finance
 Consumer finance
 Personal finance

Some facts about Cooperative banks in India

  Some cooperative banks in India are more forward than many of the state and private
sector banks.

 According to NAFCUB the total deposits & lending of Cooperative Banks in India is
much more than Old Private Sector Banks & also the New Private Sector Banks.

 This exponential growth of Co operative Banks in India is attributed mainly to their

much better local reach, personal interaction with customers, and their ability to catch
the nerve of the local clientele.

Overview

Co-operative movement is quite well established in India. The first legislation on co-
operation was passed in 1904. In 1914 the Maclagen committee envisaged a three tier
structure for co-operative banking viz. Primary Agricultural Credit Societies (PACs) at the
grass root level, Central Co-operative Banks at the district level and State Co-operative Banks
at state level or Apex Level. The first urban co-operative bank in India was formed nearly
100 years back in Baroda.

Co-operative Institutions are engaged in all kinds of activities namely production, processing,
marketing, distribution, servicing, and banking in India and have vast and powerful
superstructure. Co-operative Banks are important cogs in this structure.

In the beginning of 20th century, availability of credit in India, more particularly in rural
areas, was almost absent. Agricultural and related activities were starved of organised,
institutional credit. The rural folk had to depend entirely on the money lenders, who lent
often at usurious rates of interest.

The co-operative banks arrived in India in the beginning of 20th Century as an official effort
to create a new type of institution based on the principles of co-operative organisation and
management, suitable for problems peculiar to Indian conditions. These banks were
conceived as substitutes for money lenders, to provide timely and adequate short-term and
long-term institutional credit at reasonable rates of interest.

In the formative stage Co-operative Banks were Urban Co-operative Societies run on
community basis and their lending activities were restricted to meeting the credit
requirements of their members. The concept of Urban Co-operative Bank was first spelt out
by Mehta Bhansali Committee in 1939 which defined on Urban Co-operative Bank.
Provisions of Section 5 (CCV) of Banking Regulation Act, 1949 (as applicable to Co-
operative Societies) defined an Urban Co-operative Bank as a Primary Co-operative Bank
other than a Primary Co-operative Society was made applicable in 1966.

With gradual growth and also given Philip with the economic boom, urban banking sector
received tremendous boost and started diversifying its credit portfolio. Besides giving
traditional lending activity meeting the credit requirements of their customers they started
catering to various sorts of customer’s viz. self-employed, small businessmen / industries,
house finance, consumer finance, personal finance etc.

Banking

Banking is "accepting, for the purpose of lending or investment of deposits of money from
the public, repayable on demand or otherwise and withdrawal by cheques, draft, order or
otherwise."

Bank is defined as a person who carries on the business of banking. Banks also perform
certain activities which are ancillary to this business of accepting deposits and lending. Since
Banking involves dealing directly with money, governments in most countries regulate this
sector rather stringently.

Banks provide almost all payment services by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting cheques
deposited to customers' accounts. Banks also enable customer payments via other payment
methods such as telegraphic transfer. Banks have added new payment channels like Internet
banking, Mobile Banking, ATMs etc.

Banks' activities can be divided into retail banking, dealing directly with individuals; business
banking, providing services to mid-size business; corporate banking dealing with large
business entities; private banking, providing wealth management services to High Net worth
Individuals; and investment banking, relates to helping customers raise funds in the Capital
Markets and advising on mergers and acquisitions. Banks are now moving towards Universal
Banking, which is a combination of commercial banking, investment banking and various
other activities including insurance.

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banking in India.

Bank of Hindustan, set up in 1870, was the earliest Indian Bank. Banking in India on modern
lines started with the establishment of three presidency banks under Presidency Bank's act
1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency
banks were amalgamated to form the Imperial Bank of India.

The commercial banking structure in India consists of: Scheduled Commercial Banks &
Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting,
for the purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheques, draft, and order or otherwise."

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The arrival of foreign and private banks with their superior state-of-the-art technology-based
services pushed Indian Banks also to follow suit by going in for the latest technologies so as
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The evolution of IT services outsourcing in the Indian banks has presently moved on to the
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For, these entities sustaining long-term customer relationship management (CRM) has
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Credit cooperatives are the oldest and most numerous of all the types of cooperatives in India.
The cooperative credit institutions in the country may be broadly classified into urban credit
cooperatives and rural credit cooperatives. There are about 2090 urban credit cooperatives
and these societies together constitute for about 10 percent of the aggregate banking business
and therefore regarded as an important segment of the banking system. The urban credit
cooperatives are also popularly known as Urban Cooperative Banks. The rural credit
cooperatives may be further divided into short-term credit cooperatives and long-term credit
cooperatives. With regard to short-term credit cooperatives, at the grass-root level there are
around 92,000 Primary Agricultural Credit Societies (PACS) dealing directly with the
individual borrowers. At the central level (district level) District Central Cooperative Banks
(DCCB) function as a link between primary societies and State Cooperative Apex Banks
(SCB). It may be mentioned that DCCB and SCB are the federal cooperatives and thus the
objective is to serve the member cooperatives. As against three-tier structure of short-term
credit cooperatives, the long-term cooperative credit structure has two tiers in many states
with Primary Cooperative Agriculture and Rural Development Banks (PCARDB) at the
primary level and State Cooperative Agriculture and Rural Development Bank at the state
level. However, some states in the country have unitary structure with state level cooperative
operating with through their own branches and in one state an integrated structure prevails.
The organizational structure of the credit cooperatives in India is illustrated in chart I.
interestingly, under the Banking Regulation Act 1949; only State Cooperative Apex Banks,
District Central Cooperative Banks and select Urban Credit Cooperatives are qualified to be
called as banks in the cooperative sector. In other words, only these banks are licensed to
conduct full-fledged banking business.

The Co-operative Banks function in India on State Levels. Most of the Rural Co-operative
banks function on Three-Tier and the Urban banks function on Two-Tier. At the National
Level there is NABARD to organise the Agricultural Co-operatives. Also there is National
Co-operative Union of India, as an apex institution at National Level.

The Reserve Bank of India controls the Co-operative Banks that falls under the Banking
Regulation Act of 1949.

Categories
There are two main categories of the co-operative banks.

(a) short term lending oriented co-operative Banks - within this category there are three
sub categories of banks viz state co-operative banks, District co-operative banks and Primary
Agricultural co-operative societies.

(b) Long term lending oriented co-operative Banks - within the second category there are
land development banks at three levels state level, district level and village level.

The co-operative banking structure in India is divided into following main 5 categories

1. Primary Urban Co-op Banks

Brief History of Urban Cooperative Banks in India

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to
primary cooperative banks located in urban and semi-urban areas. These banks, till 1996,
were allowed to lend money only for non-agricultural purposes. This distinction does not
hold today. These banks were traditionally centred around communities, localities work
place groups. They essentially lent to small borrowers and businesses. Today, their scope
of operations has widened considerably.

The origins of the urban cooperative banking movement in India can be traced to the
close of nineteenth century when, inspired by the success of the experiments related to
the cooperative movement in Britain and the cooperative credit movement in Germany
such societies were set up in India. Cooperative societies are based on the principles of
cooperation, - mutual help, democratic decision making and open membership.
Cooperatives represented a new and alternative approach to organisation as against
proprietary firms, partnership firms and joint stock companies which represent the
dominant form of commercial organisation.

The Beginnings

The first known mutual aid society in India was probably the ‘Anyonya Sahakari
Mandali’ organised in the erstwhile princely State of Baroda in 1889 under the guidance
of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit
societies, in their formative phase came to be organised on a community basis to meet
the consumption oriented credit needs of their members. Salary earners’ societies
inculcating habits of thrift and self help played a significant role in popularising the
movement, especially amongst the middle class as well as organized labour. From its
origins then to today, the thrust of UCBs, historically, has been to mobilise savings from
the middle and low income urban groups and purvey credit to their members - many of
which belonged to weaker sections.

The enactment of Cooperative Credit Societies Act, 1904, however, gave the real
impetus to the movement. The first urban cooperative credit society was registered in
Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst
the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905),
the No.1 Military Accounts Mutual Help Co-operative Credit Society in Poona (January
9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and
Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math Co-
operative Credit Society and the Varavade Weavers’ Urban Credit Society (March 13,
1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst the
early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by
Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906..

The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad
basing it to enable organisation of non-credit societies. The Maclagan Committee of
1915 was appointed to review their performance and suggest measures for strengthening
them. The committee observed that such institutions were eminently suited to cater to the
needs of the lower and middle income strata of society and would inculcate the principles
of banking amongst the middle classes. The committee also felt that the urban
cooperative credit movement was more viable than agricultural credit societies. The
recommendations of the Committee went a long way in establishing the urban
cooperative credit movement in its own right.

In the present day context, it is of interest to recall that during the banking crisis of 1913-
14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of
deposits from joint stock banks to cooperative urban banks. Maclagan Committee
chronicled this event thus:
“As a matter of fact, the crisis had a contrary effect, and in most provinces, there was a
movement to withdraw deposits from non-cooperatives and place them in cooperative
institutions, the distinction between two classes of security being well appreciated and a
preference being given to the latter owing partly to the local character and publicity of
cooperative institutions but mainly, we think, to the connection of Government with
Cooperative movement”.

Under State Purview

The constitutional reforms which led to the passing of the Government of India Act in
1919 transferred the subject of “Cooperation” from Government of India to the
Provincial Governments. The Government of Bombay passed the first State Cooperative
Societies Act in 1925 “which not only gave the movement its size and shape but was a
pace setter of cooperative activities and stressed the basic concept of thrift, self help and
mutual aid.” Other States followed. This marked the beginning of the second phase in the
history of Cooperative Credit Institutions.

There was the general realization that urban banks have an important role to play in
economic construction. This was asserted by a host of committees. The Indian Central
Banking Enquiry Committee (1931) felt that urban banks have a duty to help the small
business and middle class people. The Mehta-Bhansali Committee (1939), recommended
that those societies which had fulfilled the criteria of banking should be allowed to work
as banks and recommended an Association for these banks. The Co-operative Planning
Committee (1946) went on record to say that urban banks have been the best agencies for
small people in whom Joint stock banks are not generally interested. The Rural Banking
Enquiry Committee (1950), impressed by the low cost of establishment and operations
recommended the establishment of such banks even in places smaller than taluka towns.

The first study of Urban Co-operative Banks was taken up by RBI in the year 1958-59.
The Report published in 1961 acknowledged the widespread and financially sound
framework of urban co-operative banks; emphasized the need to establish primary urban
cooperative banks in new centres and suggested that State Governments lend active
support to their development. In 1963, Varde Committee recommended that such banks
should be organised at all Urban Centres with a population of 1 lakh or more and not by
any single community or caste. The committee introduced the concept of minimum
capital requirement and the criteria of population for defining the urban centre where
UCBs were incorporated.

Duality of Control

However, concerns regarding the professionalism of urban cooperative banks gave rise to
the view that they should be better regulated. Large cooperative banks with paid-up share
capital and reserves of Rs.1 lakh were brought under the perview of the Banking
Regulation Act 1949 with effect from 1st March, 1966 and within the ambit of the
Reserve Bank’s supervision. This marked the beginning of an era of duality of control
over these banks. Banking related functions (viz. licensing, area of operations, interest
rates etc.) were to be governed by RBI and registration, management, audit and
liquidation, etc. governed by State Governments as per the provisions of respective State
Acts. In 1968, UCBS were extended the benefits of Deposit Insurance.

Towards the late 1960s there was much debate regarding the promotion of the small
scale industries. UCBs came to be seen as important players in this context. The Working
Group on Industrial Financing through Co-operative Banks, (1968 known as Damry
Group) attempted to broaden the scope of activities of urban co-operative banks by
recommending that these banks should finance the small and cottage industries. This was
reiterated by the Banking Commission (1969).

The Madhavdas Committee (1979) evaluated the role played by urban co-operative
banks in greater details and drew a roadmap for their future role recommending support
from RBI and Government in the establishment of such banks in backward areas and
prescribing viability standards.

The Hate Working Group (1981) desired better utilisation of banks' surplus funds and
that the percentage of the Cash Reserve Ratio (CRR) & the Statutory Liquidity Ratio
(SLR) of these banks should be brought at par with commercial banks, in a phased
manner. While the Marathe Committee (1992) redefined the viability norms and ushered
in the era of liberalization, the Madhava Rao Committee (1999) focused on
consolidation, control of sickness, better professional standards in urban co-operative
banks and sought to align the urban banking movement with commercial banks.
 A feature of the urban banking movement has been its heterogeneous character and its
uneven geographical spread with most banks concentrated in the states of Gujarat,
Karnataka, Maharashtra, and Tamil Nadu. While most banks are unit banks without any
branch network, some of the large banks have established their presence in many states
when at their behest multi-state banking was allowed in 1985. Some of these banks are
also Authorised Dealers in Foreign Exchange

Recent Developments

Over the years, primary (urban) cooperative banks have registered a significant growth in
number, size and volume of business handled. As on 31st March, 2003 there were 2,104
UCBs of which 56 were scheduled banks. About 79 percent of these are located in five
states, - Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. Recently the
problems faced by a few large UCBs have highlighted some of the difficulties these
banks face and policy endeavours are geared to consolidating and strengthening this
sector and improving governance.

2. Primary Agricultural Credit Societies:

Agriculture Cooperatives

Various development activities in agriculture, small industry marketing and processing,

distribution and supplies are now carried on through co-operatives. The co-operatives in
the State have made an all-round progress and their role in, and contribution to
agricultural progress has particularly been significant. The schemes regarding the
construction of godowns and the conversion of villages into model villages have
assumed great importance in the wake of the Green Revolution.

The Co-operative Movement was introduced into India by the Government as the only
method by which the farmers could overcome their burden of debt and keep them away
from the clutches of the money-lenders. The Co-operative Credit Societies Act, 1904 was
passed by the Government  of India and rural credit societies were formed . Through the
appointment of registrars and through vigorous propaganda, the Government attempted
to popularize the Movement in the rural areas. Within a short period, the Government
realized some of the shortcomings of the 1904 Act and, therefore, passed a more
comprehensive Act, known as the Co-operative Societies Act of 1912. This Act
recognized non-credit societies also. But the rural credit societies have continued to be
predominant till now.

The Primary Agricultural Credit/Service Societies

The agricultural co-operative credit structure in the Punjab State is broadly divided into
two sectors, one dealing with the short-terms and medium-terms finance and the other
with the long-term credit. In the State, the short-term and medium-term credit structure 
is based on a three-tier system, i.e., the Apex Co-operative Bank at the State level, the
Central Co-Cooperative Bank at the district/tehsil level and the Primary Agricultural
Credit Societies at the village level. The major objectives of the primary agricultural
credit service societies are to supply agricultural credit to meet the requirements of funds
for agricultural production, the distribution of essential consumer commodities, the
provision of storage and marketing facilities and for light agricultural implements and
machinery.

Owing to an increasing emphasis on the development of land and agriculture, long-term

co-operative credit has assumed great importance. There is the Punjab State Land
Mortgage Bank at the Apex and the Punjab Mortgage Bank at the district/tehsil level.
These Primary Land Mortgage Banks advance loans to the farmers for long term
purposes.

At the operational level, there exists a primary co-operative to extend credit to the
farmer. This unit epitomizes the vitality and service potential of the Co-operative
Movement in India. The organization of these societies dates back to 1904, when the first
Co-operative Societies Act was passed. These societies were started with the object of
providing cheap credit to the agriculturists in order to free them from the clutches of the
rapacious money-lenders. The agricultural primary credit society is the foundation-stone
on which the whole co-operative edifice is built. Even now these societies dominate the
co-operative picture.
The first Agricultural Credit Society in the Firozpur District was registered on 4 October
1911, at the Village of Khalchi Kadim in the Firozpur Tehsil. Originally, the movement
was confined to the credit societies only and, thus, credit dominated till the partition
(1947). After the partition, the Co-operative Movement began to spread to other field, viz
labour, construction and farming.

Agricultural Non-Credit Societies

While credit is and must remain for some time the chief concern of the Co-operative
Movement relatively slow, since 1912, when the non-credit societies were brought 
officially under the aegis of the Movement. The World War II (1939-45) came as a God
send boon with respect to the development of the Co-operative Movement. Prices of
agricultural goods began to rise and touched new peaks. The repayment of loans was
accelerated and deposits began to pour in. The number of societies also rose. Another
interesting development in co-operative during the War wast the extension of the
Movement to non-credit activities, viz.  Consumer’s co-operative marketing societies,
consolidation societies, etc.

Agricultural co-operative Marketing Societies

Marketing has occupied a far smaller place in the co-operative picture in India than in
many countries, notably Denmark and the USA, but not other non-credit line of co-
operation, with the possible exception of the consolidation of land holdings and joint
farming enterprises, seems to hold greater possibilities of help to the agricultural
population of India. The development of co-operative marketing in India is closely
bound up with the problem of credit-the claims of the money-lenders commonly
inhibiting the cultivator’s freedom of action in disposing of his crop.

The full utilization of loans advanced depends upon the arrangements for the marketing
of surplus produce. For this purpose, there the Punjab State Marketing Federation at the
State Level, wholesale societies at the district level and marketing societies at the market
level. These societies also provide other agricultural facilities and make arrangements for
the supply of domestic items in the rural areas.

At the State level, the Punjab State co-operative Supply and Marketing Federation
(MARKFED) is playing an important role in building up an integrated structure for
remunerative marketing and storing of agricultural produce. It has played an important
role in hastening the Green Revolution in the State by arranging ready supplies of
essential farm inputs needed by the cultivators.

Co-operative Farming Societies.

The Royal Commission on Agriculture in 1928 observed that it co-operation failed, there
would fail the hope of the Indian agriculturist. Co-operative farming is a compromise
between collective farming and the peasant proprietorship and gives all merits of large-
scale farming without abolishing private property. It implies an organization of the
farmers on the basis of common efforts for common interests. Under this system, all
landowners in a village form a co-operative society for tilling the land. The land is
pooled, but each farmer retains the right of property. The produce is distributed by each.
They are allowed to withdraw from the co-operative farm whenever they de3sire. In
India, the exceedingly small size of holdings is perhaps the most serious defect in our
agriculture. If agriculture has to be improved, the size of the holdings must be enlarged.

Type of societies

 Co-operative Weaver’s society

 Co-operative Consumer’s Societies
 Co-operative Housing Societies
 Co-operative Women’s Societies
 Co-operative Milk-Societies

Challenges before co-operatives

The Indian Co-operative Movement has earned distinction of being the largest in the
world. This is true in terms of membership and Co-operative network which spread over
almost all the villages in the country and the number of Co-operative Societies. In our
country, there are about 5.5 lakhs of cooperative Societies with membership of more than
22crores. It covers a wide range of commercial activities and nearly 50% of them are
engaged in agriculture and agriculture related matters. Nearly 70% of the Indian
population being dependant on agriculture, is thus, connected with agricultural Co-
operatives. Co-operatives have covered 100% of villages and 67% of rural households.
Co-operative sector contributes 50% of total agricultural credit and distributes 35% of
total fertilizer consumption in the Country. They are procuring 60% of total sugar-cane.
They are also playing crucial role in the agro-processing sector i.e. processing of sugar-
cane, milk, cotton and oil seeds etc. Dairy Co-operatives have excelled in their area of
operation and have enabled India to attain top position in milk production in the world.
Edible oil marketed through Co-operative channel is estimated at 50% and handloom Co-
operatives account for 55% of the total out-put.

But in spite of being largest movement  in the world and strongest link, it faces number
of challenges like lack of internal resources and poor mobilization of external resources,
inadequate infrastructure, competitive tier  structure, apathy of members towards
management, lack of accountability increasing  sickness, dormancy, low level
professionalism, excessive government control, political interference, dominance of
vested interest over the management, lack of human resources development, education
and training. Despite all challenges, Co-operatives have to be sustainable over a period
of time for which professionalism is a must. Co-operatives have been looking for
Governmental help. But they have been paying of it like official domination and
interference in their day-to-day working etc. Dr. Kuriyan, an eminent co-operator in the
country said recently that the Co-operatives have undergone a crisis of identity being
neither government nor private. He further said that Co-operatives need to be more
efficient and competitive, but at the same time they cannot sacrifice the basic tenets of
co-operation. Inefficient Co-operatives will have to either pull up their socks or down
their shutters. Co-operatives have many advantages in tackling problem poverty
alleviation, employment generation and food security. They also have the potential to
deliver goods and services in areas where both the State and Private sectors have failed.
Over the past few years, steps like the enactment of mutually aided Co-operative
Societies Act by some States and the Multi-State Co-operative Societies Act have been
taken to give the Co-operative sector a boost. But I am aware that the Co-operatives
registered under the Mutual Aided Act have certain constraints and deficiencies, which
may be -

 Lack of supervision and inspection by Registrar of Co-operative Societies resulting

into financial misuse and disproportion institutional development.
 Government is hesitating to entrust any important government work since it does not
have any participation.
 These Co-operatives are away from the mainstream. The Co-operative Banks and
other important institutions are not prepared to admit them as members.
 NABARD and RBI are not agreeing for conversion of Central and Urban Co-
operative Banks.
 R.B.I. has also objection about the use of word "Co-operative" since Banking
Regulation Act uses the word "Co-operative Society".
 Perhaps we are not prepared or educated or sensitized enough to work without control
and supervision.
 Mischievous persons may take advantage of the situation to cheat the general public.
 When the Government are exploring the possibility of regulating the Non-
governmental organizations having vast experience, it is doubtful as to whether the
mutually aided Co-operatives in various field can give desired result.

The circumstances and the situation give rise to the Co-operative Movement in the
Country are still prevalent. The market is still not accessible to small and marginal
farmers. Supply of agricultural credit is not adequate. About 50% of our rural and tribal
household still have no facility for institutional credit. The Co-operatives are today at the
cross road at their existence, particularly in view of the fast emerging economic
liberalization and globalization. The Co-operatives still continued to function in a
traditional way with poor governance and management, poor resource mobilization,
outside interference, dependence on Government and lack of professionalization. The
Co-operatives are neither member-driven nor functioned professionally in a transparent
manner with accountability to members. In spite of all these, no doubt, the Co-operatives
have contributed a lot to the agriculture development of the Country. We cannot afford to
see that these institutions wither away. It needs reform. It is not-worthy to say that in the
National Common Minimum Programme of present UPA Government it has been
mentioned to bring constitutional amendment to ensure the democratic autonomous and
 professional functioning of Co-operatives. The constitutional amendment may limit itself
with -

 timely conduct of elections

 timely conduct of audit,
 uniform tenure of managing committee
 conduct of general body meetings
 right of a member for access to information’s and
 The accountability of the management.

In this context our strategies may be as follows. -

 Co-operatives need be member-driven; stakeholders should have a command over its

affairs and activities. There is need for more transparency, more of interaction and
confidence -building measures.
 Aggressive marketing strategy be adopted for sensitizing members and general public
about the service and quality rendered by the Co-operatives. Commitment to best
 Service and pursuit for excellence should be the hallmark of Co-operative. Every
society should adopt their customers' or members' charter and should meticulously
adhere to this charter.
 Co-operative should compete with other players in prevailing market forces without
any protectionist or discriminator approach.
 In respect of short-term, medium-term, long-term sector and Urban Bank sectors,
restrictions have been stipulated by Reserve Bank of India, NABARD in respect of
finance. These restrictions need be liberalized which would help Co-operative to
optimize its lendable resources and provide finance to members.
 Strengthening information and database of Co-operatives is of utmost importance.
MIS need be adopted by the process of computerization and inter-connectivity to provide
best services to members and customers with anytime and anywhere service.
 Professionalisation of management is one of the basic prerequisites of Co-operatives.
Both the personnel as well as directors of committee of management should be exposed
to regular training, interaction and orientation.
 Adoption of scientific planning for deployment of human resources on the principle of
'right man for the right post at right time' would help Co-operatives to accelerate the pace
 of reforms. Human resources need be proactive. Motivation, recognition for good work
and leadership be inculcated for augmenting productivity.
 Basic tenets corporate governance be adopted like fair play, transparency and
accountability.

The PACS, as the foundation of the Co-operative system are meeting the development
needs of the farmers by providing credit, inputs and storage and processing and
marketing facilities. The Co-operative federated at the district and State level constitutes
the Co-operative system. But it is found that the Apex institutions have grown stronger
whereas the primaries and in some cases, Central Co-operatives have gone weaker. The
situation has to be changed and the primaries have to grow stronger. The businesses of
the Primary Societies have to be diversified.

3. District Central Co-op Banks:

These are the principal co-operative societies in the districts, in a state, the primary
object of which is financing other co-operatives, particularly the PACBs in the district.
The DCCBs came in to existence after the passing of Co-operative Societies
Act,1912.These institutions also undertake banking business.

These institutions act as Balancing Centres of Finance at the district level. They purvey
the short term and medium term credit to the agriculturists. They also supervise the
PACBs in the districts.

4, State Co-operative Banks:

The co-operative banks arrived in India in the beginning of 20th Century as an official
effort to create a new type of institution based on the principles of co-operative
organisation and management, suitable for problems peculiar to Indian conditions. These
banks were conceived as substitutes for money lenders, to provide timely and adequate
short-term and long-term institutional credit at reasonable rates of interest.
 In the formative stage Co-operative Banks were Urban Co-operative Societies run on
community basis and their lending activities were restricted to meeting the credit
requirements of their members. The concept of Urban Co-operative Bank was first spelt
out by Mehta Bhansali Committee in 1939 which defined on Urban Co-operative Bank.
Provisions of Section 5 (CCV) of Banking Regulation Act, 1949 (as applicable to Co-
operative Societies) defined an Urban Co-operative Bank as a Primary Co-operative
Bank other than a Primary Co-operative Society was made applicable in 1966.

With gradual growth and also given philip with the economic boom, urban banking
sector received tremendous boost and started diversifying its credit portfolio. Besides
giving traditional lending activity meeting the credit requirements of their customers they
started catering to various sorts of customer’s viz. self-employed, small businessmen /
industries, house finance, consumer finance, personal finance etc.

5. Land Development Banks:

The long term credit needs of the agricultural sector are met by another type of co-
operative institutions known as Land Development Banks. The structure of these banks
is a two-tier one – at the State level there are Central Land Development Banks and at
the district or taluka level, there are primary Land Development Banks. In a few States,
e.g. Gujarat, Jammu & Kashmir and UP., the structure is unitary i.e. there are Apex Land
Development Banks which operate direct through their own branches at the district level.

The Land Development Banks meet the requirements of the farmers for developmental
purposes viz., provision of equipment like pump-sets, tractors and machinery and land
improvement in the form of leveling, bundling, reclamation of land, fencing, sinking of
new wells and repairs to old wells, Loans are granted on the security of mortgage of
immovable property of the farmers.

The Central Land Development Banks raise their resources by floating debentures in the
market. These debentures carry the guarantee of the State Government and are
subscribed by the Central and State Governments, Commercial Banks, Life Insurance
Corporation and other Land Development Banks as a measure of mutual support. The
Land Development Banks have availed of the refinancing facilities provided by the
National Bank for Agricultural and Rural Development in respect of the term loans
granted by them for the schemes of agricultural development. They also secure short
term accommodation from the State Governments, Commercial Banks and the State Co-
operative Banks.

Industrial Development bank of India:

IDBI is the apex banking institution in the field of long term industrial finance. Set up in
1964 as a wholly owned subsidiary of the Reserve Bank, IDBI was de-linked from the
Reserves Bank on 16th February, 1976 when its entire share capital was transferred to
the Central Government. Consequently, its role was also enlarged to enable it to function
as the principal financial institution for coordinating the functions and activities of all
India term lending institutions and to some extent the public sector banks.

The assistance provided by IDBI falls in two categories, i.e. (1) direct assistance to large
and medium industries, and (2) indirect assistance. Major portion of the direct assistance
is provided in the form of Project loans to industries. Besides, IDBI also provides
assistance by way of underwriting and direct subscription to the shares/ debentures of
industrial undertakings. IDBI also provides soft loans for the modernization of all
industries. In 1984, IDBI introduced Equipment Finance Scheme, wherein foreign
currency loans are made available to industrial concerns for import of capital goods and
equipment not related to any specific project.

Indirect assistance is provided by the Bank to tiny, small and medium enterprises,
through other financial institutions in a number of ways, namely:

i) by way of refinance of industrial loans granted by State Financial

Corporations, state Industrial Development Corporations (SIDCs),
Commercial Banks, Co-operative Banks and Regional Rural Banks.

ii) Re-discounting of bills arising out of sale of indigenous machinery on

deferred payment basis, and

iii) Seed capital assistance granted to new entrepreneurs generally through

SFCs and SIDCs.
IDBI also subscribes to the shares and bonds of SFCs, SIDCs and National Small
industries Corporation Ltd.

The share capital of IDBI stood at Rs 673 crore as at March 31, 2000. IDBI was wholly
owned by the Government of India till 1995-96 when it issued 17.31 lakh shares to the
public at a premium of Rs 120 per share. The share of the Government of India in its
share capital was thus reduced to 72.14 percent. The rest of the share capital is held by
financial institutions, insurance companies, banks, domestic companies and foreign
institutional investors. Individuals and others own over 15% of its share capital.

The IDBI raises the bulk of its funds from (1) market borrowings by way of bonds, and
(2) the borrowings out of National Industrial Credit (Long term Operations) Funds of the
Reserve Bank. IDBI also takes short term advances from the Reserve Bank against
lodgment of usance bills. During recent years, IDBI has also raised resources in foreign
currencies by way of loans and private placement of its bonds in foreign capital markets.
Such resources are utilized for financing imports of capital goods and services required
by the assisted projects.

IDBI has established a number of subsidiaries which include the Small Industries
Development Bank of India, IDBI Bank Ltd., IDBI Capital Market Services Ltd.

IDBI has co-sponsored a number of financial institutions as well, e.g. National Stock
Exchange of India, Over the Counter Exchange of India, Discount and Finance House of
India Ltd.

Guidelines & Articles

1. Co-operative credit structure: Recommendations

The committee on revitalisation support to the co-operative credit structure, headed by

minister of state for finance Balasaheb Vikhe Patil has recommended that financial
support for each such credit institution be split between the Centre and the respective
State Governments in the proportion of 60:40. However, for the North-Eastern States
and Jammu and Kashmir, it has suggested that the Centre's proportion be raised to 90
per cent.
Committee has recommended that the revitalisation assistance could be in the form of
bonds issued by the Centre and State Governments. These bonds should be self-
extinguishing in nature, and after 10 years, the bonds will be extinguished without any
redemption of the principal amount.

The committee has also said that a panel be constituted comprising of the Secretary
(Finance), Secretary (Agriculture), Deputy Governor, RBI, and Chairman, Nabard and
representatives of State Governments for policy direction, review, and monitoring of
the cooperative credit institutions. Similar committees may be constituted at the State-
level, it added. The panel has said that the decision on de-layering of the credit system
should be left to the individual State.

For computation of assistance to the co-operative banks the committee has suggested
that accumulated losses and interest overdue for over three years should be the basis
of calculation.

The committee has also said that scheduling of district co-operative banks will allow
them to borrow funds from Reserve Bank of India and National Bank for Agriculture
and Rural Development (Nabard) which will reduce their dependence on state co-
operative banks.

Committee hopes that recapitalisation would help the co-operative banks transform
themselves into scheduled commercial banks.

2. Cooperative Banks: An RBI Perspective

RBI has decided not to allow urban co-operative banks (UCBs) with less than Rs 50
crore net worth to spread their operations outside their state of jurisdiction. The main
risk exposure of UCBs was not credit risk but interest rate risk. As interest rates paid
by these banks, particularly on deposits, were out of sync with the rest of the banking
sector. The sheer number of weak UCBs, which is well over 200, is a cause for
concern for the RBI.
Rehabilitation of these banks may involve strategies such as the registrars directing
co-operative courts for speedy recovery process and execution of decrees, unviable
branches being either relocated or closed down, exploring avenues for getting
additional capital and merger with a well-managed bank.

RBI is in favour of ending dual control for UCBs. Therefore, demarcation of banking-
related functions and those that warrant only state governments' action were required.

According to Mr Capoor the issue of dual control could be resolved in three ways:
The first approach is by bringing the subject of co-operation under the concurrent list
so as to enable the Union government to legislate in matters pertaining to co-operative
banking. But such a move will involve constitutional amendments.

The second approach would be for the states to enact progressive legislations thereby
making the registrars confine their functions only to registration and acceptance of
bylaws. This will lead to the dual command over UCBs ending automatically.

The last approach would be to demarcate the regulatory roles of state governments
and RBI in the state acts, as suggested by the Madhava Rao committee. Mr Capoor
favours the third approach.

Government is considering incorporating amendments to the Banking Regulations

Act to empower the Reserve Bank of India to change the management and chief
executive officer (CEO) of urban co-operative banks (UCBs).

Meanwhile, the RBI had mooted a proposal to set up a separate supervising and
regulatory body for UCBs in its recent Credit Policy.

3. Off-site Surveillance System for Primary (Urban) Co-

operative Banks

Reserve Bank of India has extended the off-site surveillance system (OSS) to all non-
scheduled urban co-operative banks (UCBs) having deposit size of Rs 100 crore and
above. The decision to extend OSS to all non-scheduled UCBs has been taken
following the stabilisation of this system in scheduled UCBS.

2. A supervisory reporting system was introduced for the scheduled Primary

(Urban) Co-operatives banks with effect from March 31, 2001, as a first
step towards setting up of a system for Off-site Surveillance (OSS) of all
urban co-operative banks (UCBs).

3. The OSS reporting system comprises a set of 8 returns, of which, the

periodicity of one return, viz. Bank Profile Statement (Return No. 8) is
annual and the rest 7 are required to be submitted at quarterly intervals.

4. The OSS Returns would come into effect from quarter ended June 30,
2004. In order to facilitate smooth transition / operationalisation of the new
set of returns, the period of one month for submission of the returns would
be implemented gradually from the quarter ended December 2004
onwards.

5. Prudential concerns monitored through these returns include aspects

relating to solvency, liquidity, capital adequacy, asset quality/portfolio risk
profile, connected or related lending and concentration of exposures of the
supervised institutions.

While the main objective of the reporting system is to obtain information

on areas of prudential interest and monitor regulatory compliance, the OSS
returns are also designed to address the management information needs
and strengthen MIS within the reporting institutions. A collateral objective
of the reporting system is to sensitize managements of banks to concerns
of the supervisory authority and thereby also help in self-regulation.

6. The Off-site Surveillance Returns are required to be approved by the

Board of Directors / Chief Executive Officer of the bank and sent to the
Officer-in-Charge of Urban Banks Department (UBD) of the Regional
Office of RBI, which has supervisory jurisdiction over the bank and to
which the bank submits other regulatory returns.
 The OSS returns may be submitted in hard copy along with a floppy
containing the returns. It may be noted that RBI attaches utmost
importance to this reporting system and expects banks to submit the OSS
returns to UBD correctly compiled and within the prescribed time.

To this end, banks may designate and authorise one or two senior official/s
who would be responsible for the correct compilation and timely
submission of these returns and who would be fully responsible for the
information furnished therein. Such designated Authorised Reporting
Official/s (ARO/s) would have to liaise with the officials in the Off-site
Surveillance (OSS) Division of UBD. The names and designations of the
ARO/s may be indicated to the concerned Regional Office of UBD while
forwarding the OSS returns.

7. While the information provided in the supervisory returns would be

subject to post-facto verification during on-site inspection by RBI and by
external auditors, it would form the basis, in the interregnum, for
supervisory attention and dialogue with bank managements. The
importance of accuracy and timeliness of reporting therefore needs no
emphasis. The banks may be penalised for furnishing wrong information
to RBI.

Conclusion
 Every authority concerned with Co-operative sector will have to play its part in
ensuring that the aspirations of the Urban Co-operative Banking sector are nurtured in
a manner that depositor interest and the public interest at large is protected. The role
of RBI could, thus, be to frame a regulatory and supervisory regime that is multi-
layered to capture the heterogeneity of the sector and implement policies that would
provide adequate elbowroom for the sector to grow in a non-disruptive manner. The
State and Central Governments could recognize that the UCBs are not just co-
operative societies but they are essentially banking entities whose management
structure is that of a co-operative. They should recognize the systemic impact that
inefficient functioning of the entities in the sector could have. Consequently, it would
be in the interest of the sector if they support, facilitate and empower the RBI to put in
place mechanisms and systems that would enable these UCBs to perform their
banking functions in a manner that is in the overall interest of the depositor and the
public at large.