By: Aditi Rawat
There have been a lot of sparks currently in the talks surrounding commercialization of cooperative banks and the related upgradations. It becomes a matter of crucial understanding for the citizens how the critical changes affect their functioning and the citizens in turn.
Co-operative banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners. These banks provide a wide range of regular banking and financial services. However, there are some points where they differ from other banks.
The co-operative banking system came into being with the aim to promote saving and investment habits among people, especially in rural parts of the country.
In India, co-operative banks play a crucial role in rural financing, with funding of areas under agriculture, livestock, milk, personal finance, self-employment, setting up of small-scale units among the few focus points for both urban and rural cooperative banks. They provide a much-needed alternative to the age-old exploitative practice of people approaching the village moneylender, most often getting into a debt-trap that they struggle to pull themselves out of.
Understanding better, cooperative bank is an institution established on a cooperative basis to deal with the ordinary banking business. Cooperative banks are founded by collecting funds through shares, accepting deposits, and granting loans.
They are Cooperative credit societies where members from a community group together to extend loans to each other, at favourable terms. They are registered under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002. They were brought under the RBI’s watch in 1966, a move which brought the problem of dual regulation along with it.
The Co-operative banks are governed by the,
- Banking Regulations Act, 1949.
- Banking Laws (Co-operative Societies) Act, 1955.
Co-operative banks in India are divided into two categories – urban and rural.
Rural cooperative credit institutions could either be short-term or long-term in nature.
Further, short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies. The long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled. Scheduled and non-scheduled UCBs are again of two kinds multi-state and those operating in single state.
Debate around conversion of Scheduled Urban Cooperative Banks into commercial banks –
The debate around the conversion of Scheduled Urban Cooperative Banks into commercial banks warrants an investigation into their performance. The larger objective is to examine whether SUCBs are able to compete with their peer group and remain viable when subjected to stringent regulatory requirements, in the event of their conversion.
The performance of SUCBs as a group is comparable with that of their peer group, that is, old private sector banks, with the exception of non-performing assets. Performance rankings reveal that the smaller SUCBs are better performers than larger ones, calling for a relook at the threshold for conversion. In the event of conversion of SUCBs into commercial banks, some of the converted entities will be as good as some of the existing OPSBs, or may even be better.
Large urban co-operative banks (UCBs) are expected to come under the provisions of the Banking Regulation (BR) Act, even as the smaller ones among them are to remain within the exclusive fold of the Registrar of Co-operative Societies (RoCS).
However, banks falling below the threshold of Rs.20,000 crore suggested by the Rama Subramaniam Gandhi committee may also be brought under the banking regulation act.
The upcoming changes will bring down the curtains on the vexed issue of dual control of UCBs, which has been in vogue for 54 years. Earlier, it was up to the banks to decide whether they wanted conversion or remain a multi-state urban cooperative. But the panel did warn them about curbing their freedom.
This means, the larger UCBs — largely multi-state in nature — and above a certain threshold may now have no option but to convert into a scheduled commercial bank over a period of time. A conversion into a small finance bank (SFB) is ruled out, given the inherent restrictions under the licence terms, which place restrictions on the ticket size of loans, and the nature of businesses they can undertake.
Well, these banks (UCBs) came to be within the ambit of the Reserve Bank of India (RBI) when certain provisions of the Banking Regulation Act were extended to them — effective March 1966 — even as the Registrar of Cooperative Societies remained vested with significant powers regarding the functioning of their boards and management.
But, in the revised scheme, the inspection of the urban co-operative banks solely under the Banking Regulation Act will be done by the central bank, with those of others being carried out by the Registrar of Co-operative Societies. Both categories of urban co-operative banks will get cover from the Deposit Insurance and Credit Guarantee Corporation. And the hike in the deposit insured, which is in the works, will also be extended to them. Besides, the new framework will affect 1,551 urban co-operative banks in the country, which had a total business of Rs.7.36 trillion.
According to the last consolidated number available in the RBI’s Report on Trend and Progress of Banking in India 2017-18 they have deposits of Rs.4.56 trillion and advances of Rs.2.80 trillion in 2017-18.
In a nutshell, urban co-operative banks, which are to come fully under the BR Act, will be subject to Basel III guidelines like commercial banks — as on date, they are under the dated Basel I. And these banks can be expected to get a transition period to comply with the same.
Challenges Faced by the Cooperative Banks
There are many challenges at present that cooperative banks encounter in their functional aspirations and a lag that need to be primarily addressed. We need a look at the trends and equally at the pointers we missed long back but are now in the way to fulfil the purpose.
- Changing Trends in Financial Sector: Changes in the financial sector and evolving microfinance, FinTech companies, payment gateways, social platforms, e-commerce companies, and Non-Banking Financial Companies (NBFCs) challenge the continued presence of the UCBs, which are mostly small in size, lack professional management, and have geographically less diversified operations.
- Dual Control: The UCBs were under dual regulation by the state registrar of societies and the RBI. But in 2020, all UCBs and multi-state cooperatives were brought under the supervision of RBI.
- Money Laundering and Corruption: Cooperatives have also become avenues for regulatory arbitrage, circumventing lending and anti-money laundering regulations. Investigations into the case of Punjab and Maharashtra Cooperative (PMC) Bank scam have shown gross financial mismanagement and a complete breakdown of internal control mechanisms.
- Declining of Agricultural Lending: The RBI report noted that despite a crucial role played by the sector, its share in total agricultural lending diminished considerably over the years, from as high as 64 % in 1992-93 to just 11.3 % in 2019-20.
- Unfair Audit: It is well known that audits are done entirely by department officials & are neither regular nor comprehensive. Delays in the conduct of audits and submission of reports are widespread.
- Government Interference: Right from the beginning the government has adopted an attitude of patronizing the movement. Cooperative institutions were treated as if these were part & parcel of the administrative set up of the government.
- Limited Coverage: The size of these societies has been very small. Most of these societies are confined to a few members and their operations extended to only one or two villages. as a result, their resources remain limited, which make it impossible for them to expand their means and extend their area of operations.
The recent developments targeting cooperative banks
In January 2020, the RBI revised the Supervisory action Framework (SAF) for UCBs. In June 2020, the Central government approved an Ordinance to bring all urban and multi-state cooperative banks under the direct supervision of RBI. In 2021 RBI appointed a committee that suggested 4 tier structure for the urban cooperative banks –
- Tier 1 with all unit UCBs and salary earner’s UCBs (irrespective of deposit size) and all other UCBs having deposits up to Rs.100 crore.
- Tier 2 with UCBs of deposits between Rs.100 crore and Rs.1,000 crore.
- Tier 3 with UCBs of deposits between Rs.1,000 crore and Rs.10,000 crore.
- Tier 4 with UCBs of deposits more than Rs.10,000 crore.
The RBI should interpret the Act’s provisions so that they do not disrupt UCBs and people’s faith is restored in the cooperative banking system. There is a need to undertake institutional reforms like transparency in recruitment and implementation of a robust accounting system, which are necessary for their growth. There is a need to bring in new people, young people and professionals in managerial roles, who will take cooperative forward.
NAFCUB needs to focus more on the Urban Credit Cooperative Societies particularly on their accounting software and their common bylaws. Having a good Urban Cooperative Bank in every town is the need of the hour and country. NAFCUB should not only take up the problems of cooperative banks and solve them but at the same time should also work better for Symmetrical Development.
Treating UCB equally in government policies in respect of taxation, BR Act [The Banking Regulation Act, 1949] or the Reserve Bank’s norms. Responsibility lies with the cooperative sector. It is the cooperatives’ responsibility to establish trustworthiness and earn people’s faith as well as win the confidence of the RBI and the government.
Undertaking institutional reforms like transparency in recruitment and implementation of a robust accounting system, which is necessary for their growth. These progressive directives can definitely make a long leap in bringing a great trust of the citizens in the functioning and a leading light in the growth of cooperative banks in future.