Cooperative Banks, particularly Urban Cooperative Banks (UCBs), have recently been in the spotlight as the Minister of Home Affairs and Cooperation addressed a conclave organised by the National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB). During this meeting, the minister highlighted the need for reforms in the sector. NAFCUB is the promotional body for Urban Cooperative Banks and Credit Societies Ltd. in India. Their mandate includes promoting the urban cooperative credit movement and safeguarding the interests of the sector.
Understanding Cooperative Banks
A cooperative bank is an institution built on cooperative principles aimed at handling conventional banking business. These banks are established using funds raised through shares, accepting deposits and extending loans. They operate as cooperative credit societies where community members collaborate to lend each other money under favourable conditions. These banks are registered under the Cooperative Societies Act of the respective state or the Multi-State Cooperative Societies Act, 2002. They are governed by the Banking Regulations Act, 1949 and the Banking Laws (Co-operative Societies) Act, 1955.
Characteristics of Cooperative Banks
Cooperative banks are unique due to the involvement of their members. Not only are the members customers of the bank, but they also own and control it. The democratic election of a board of directors by the members is another key feature of such banks. They typically follow the “one person, one vote” principle. A significant part of the annual profit, benefits or surplus is often allocated to set up reserves, and a portion of this profit may be distributed among the co-operative members, within legal constraints. These banks have played a crucial role in promoting financial inclusion, especially among the unbanked rural population, by providing affordable credit.
An Overview of Urban Cooperative Banks
Urban Cooperative Banks (UCBs) primarily operate in urban and semi-urban areas. They started by lending money to small borrowers and businesses within communities or local workgroups. However, their scope of operations has greatly expanded over time.
Challenges Faced by Cooperative Banks
Despite their importance, cooperative banks face several challenges. These include evolving trends in the financial sector, dual regulation by the state registrar of societies and the Reserve Bank of India (RBI), susceptibility to money laundering and corruption, declining agricultural lending, irregular audits, government interference, and limited coverage due to their small scale.
Recent Developments in Cooperative Banking
Notable developments in this sector include the revision of the Supervisory Action Framework (SAF) for UCBs by the RBI in January 2020 and the central government’s approval of an ordinance to bring all urban and multi-state cooperative banks under the direct supervision of RBI in June 2020. In 2021, a four-tier structure for UCBs was recommended by an RBI-appointed committee.
Way Forward
To overcome the aforementioned challenges and restore faith in the cooperative banking system, vital reforms like transparency in recruitment and implementing robust accounting systems are needed. Additionally, the inclusion of young professionals in managerial roles is deemed essential for growth.