COOPERATIVE BANKS IN INDIA:

CHALLENGES AND NEED OF REFORM

Submitted by

SAYALI GOVIND SATONKAR

UID No. - PG21-26

Under the Supervision of

Dr. Himanshu Pandey, Associate Professor of law

Ms. Devyani, Assistant Professor of Law
Mr. Sumit Malviya, Assistant Professor of Economics
Dr .K.P. Rajesh, Assistant Professor of sociology

November 2021
MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR
 List of statute:

1. The Cooperative Societies Act 1912

2.The Banking Regulation Act 1949

3. The Constitution of India

List of abbreviation:

1. UCB Urban cooperative banks

2. RBI Reserve Bank of India
3. NABARD National Bank for agriculture and rural
development
4. DCB District cooperative Bank
5. NPA Non performing asset
6. DCCB District central cooperative bank
7. StCB State central cooperative banks

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 Content
Subject page no.
1. Introduction.................................................................................1-2
2. Objective of Study......................................................................2
3. Research Hypotheses.................................................................3
4. Research Question.......................................................................3
5. Research Methodology...............................................................3
6. Scope and Limitation..................................................................4
7. Introduction/chapters.... ..............................................................5-9
8. Conclusion and suggestions........................................................10

Bibliography

I. Printed Source
1. Books
2. Articles
II. Electronic Source
1. Webliography

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 Introduction:

Cooperative Banks is an institution established by “Cooperative Societies

Act” on Cooperative basis and dealing in ordinary banking business.
Granting loans, accepting deposits, collecting funds are some of the functions
of cooperative banks which show similarity with any other bank system in
India.
There are approximately
1531 Urban and 97,006 Rural Cooperative Banks working in India at
present1but many of them are facing crises of financial deposits &working
inefficiency and suffering from great losses but still many of Cooperative
Banks are in top position in NRFT rank and working with great efficiency
and making profit as of commercial banks but they are many few.
The main purpose of
forming cooperative banks is to provide financial support for rural and
agricultural activities to farmers and weaker section of society. Cooperative
Banks are more concerned with rural credit mechanism.“The root of
cooperative banking where grown in Europe”. In India Cooperative Credit
Society Act 1904 let to formation of Cooperative Credit Society in both urban
and rural area based on idea of “sir Fredrick Nicholson (1899) and sir Edward
Law”(1901)
Dual Control is one of the
characteristic of Cooperative Bank which differentiates Cooperative Banks
from Commercial Banks. These banks are in control of states and also
regulated by ‘Reserve Bank of India’ under Banking Act and Banking
Regulation act of 1912.NABARD is also a supervisory body of Cooperative
Banks in India
Mutual help, co-operation,
democratic decision making & open membership are some key futures of the
cooperative banks. Urban Cooperative and Rural Cooperative Banks are main
types of Cooperative Credit institutions in which urban Cooperative further
divided into Scheduled USB and Non- scheduled USB. Scheduled USB and

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m.rbi.org.in

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non scheduled USB further divided into multi state cooperative and single
state cooperative banks
Rural Cooperative
institutions further divided into long term and short term Cooperative
institutions in which State cooperation, District Central cooperation and
Primary cooperation are the types of short term cooperative credit
institutions.
Cooperative banks have
their own objectives and mechanisms and are different from commercial
banks on ground of governance, objective and values, Interest, Organisation
etc. Cooperative banks provide funds for the agriculture, livestock, milk, and
nursery and especially to small scale industries. To provide micro and rural
finance, housing finance assistance, remove dominance of money lenders,
credit to weaker and developing sections and to provide basic banking service
to customers are some of the objective of cooperative banks in India.In
present cooperative banks are facing great financial loss because of
mismanagement and lack of funding many of them are in condition of
winding up. In this research researcher is going to discuss challenges of
cooperative institutions and tried to suggest way by analysing present
condition.

Objectives of research:

1. To find out present condition of cooperative banks in India.

2. To determine importance of cooperative bank especially in rural sector.
3. To examine difference between commercial banks and cooperative banks
in India.
4. To study RBI guidelines for improving performance of cooperative
banks.
5. To find methodology applied by efficient cooperative banks and compare
it with inefficient cooperative institutions.
6. To analyse challenges in functioning of cooperative banks in India.
7. To study reform and amendment suggested by different committee for
effective performance of cooperative banks.

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 8. To find way forward to improve condition of cooperative banks.

Hypotheses:

By analysing research problem and questions the researcher guided his

investigation based on certain hypotheses which are:

1. Cooperative banks have difference governing mechanism then

Commercial Banks.
2. NPA and indeptness are the leading problems of Cooperative Banks.
3. The number of Cooperative Banks is reducing due to lack of funding.
4. RBI is tacking initiative to improve conditions of Cooperative Banks.
5. Cooperative Banks are struggling to sustain in market.

Research Question:

1. What are the major challenges faced by cooperative banks at present?

2. What makes cooperative bank different from commercial banks?
3. Whether amendment is needed in banking regulation act and cooperative
societies act?
4. Which mechanism is opted by topmost cooperative banks in India?
5. Whether cooperative banks are in condition to full fill objective of its
formation?

Methodology:

This research is mainly doctrinal form of research but researcher is also tried
to collect imperial data to give justice to title. Basically the researcher is
relied on primary and secondary data, different article, news report and
opinion of scholars. Data is collected from many authentic and governmental
sites.
The Researcher is also
relied on provisions in Banking Regulation Act, Cooperative Societies Act
and the recommendation of different committees set up by RBI to deal with
present condition of cooperative banking institutions. The Researcher had
studied RBI guidelines regarding reformation of cooperative banks and also

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relied on figures and numbers mention in various reports to analyse situation
of cooperative baking institutions.
The Researcher is also
tried to find out why top 10 cooperative banks are top 10 in ranking by
following official sites of bank and award and recognition to the same.
Basically researcher is trying to find out functioning and management of
efficient cooperative banks and compare that functions and management with
banks which are in crisis to find out way forward for cooperative banking
institution to sustain in market.

Scope and limitation

Scope:

Present research is strictly restricted to finding out challenges faced by many

cooperative banks/societies in India and analysing situation by suggesting
reform in management. In this research researcher is trying to mainly focus
on cooperative banks which are in debt by analysing their stagey in service to
customers. This study basically gives idea about initiative taken by RBI and
different committees to suggest reform form better performance of
cooperative banks in India. The performance of USB, scheduled and non
scheduled banks are the major area of concern in mind of researcher.

This is overall study of

challenges in front of cooperative bank by studying all types of cooperative
banks in brief. Researcher only wanted brief information which supports title
and give justice to title without categorising cooperative banks as urban or
rural.

Limitations:

Present research is strictly restricted to title of research any detail information

is not covered in this research.Different types of cooperative banks has
different function and working in different areas of society but in this
research overall challenges of all types of cooperative banks taken in
consideration

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 Only relevant guidelines of RBI amendments and report of different
committees are taken into the consideration.

Introduction:

a) Advantages of cooperative banking in India

Cooperative banks provide financial support to weaker section of society.
1. Alternative credit source:
It is the best alternative source to defective practise of traditional money
lender. The money lender used to dominate common people and exploiting
them by taking double interest from common people. Cooperative banks are
the best solution to minimize these practises.
2. Productive borrowing:
Cooperative society discourage unproductive borrowingthe nature of loan
taken by borrowers is changed and borrowers seek to borrow money only for
productive propose.
3. Encouragement to saving and investment:
Instead of keeping money in hand rural people are depositing money in a
cooperative banking system.
4. Improving farming methods:
Cooperative credit is available for purchasing seeds fertilizers livestock milk
so small scale businesses and farming methods are also improving.
5. Suitable federal system for all section of society:
Cooperative Bank has federal structure of bank with primary agricultural
societies at village level higher financing agencies in form of central and state
cooperative banks land development banks for providing long credit to
agriculture.

b) Crisis faced by cooperative banks at present ( PMC bank)

There are approximately 1531 UCB and 97,006 rural cooperative Banks at
present2. Reserve Bank of India cancelled license of many banks on account
of inadequate capital base. RBI gives 48 directives to UCBs to either
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m.rbi.org.in

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 imposing fresh regulatory majors or extending exiting ones and cancelled 6
licenses of cooperative banks India3. Report shows that there are 75
increasing number of cases over non compliance as compared to just 23 in
2020 and 7 in 20194.
Major financial irregularities,
failure of internal control system wrongdoing and under-reporting of its
exposure are some of the reason behind collapsing cooperative banks in
India. Report shows that many cooperative banks are collapsed because of
many issues. PMC bank has been facing regulatory action and investigation
over alleged irregularity in certain loan account. Central bank the amount a
customer could withdraw from their account.
PMC bank allegedly created
fictitious account of companies which borrowed small sum of money and
created fake report to hide from regulatory supervision. It is basically case of
fraud in cooperative banks.

C) Challenges faced by cooperative banks:

1. Dual Control:
Reserve bank of India and various state governmentshad extensive
deliberation over issue of bringing in cooperative institution carrying on
banking actives with in ambit of banking regulation act. RBI can regulatory
oversight on banking activities of USB, state cooperative banks,(StCB) and
District cooperative banks(DCCB) but the powers of RBI are limited in many
spheres after Reserve ban liberalisation banking policy for UCB in 1993,
nearly 1/3 of newly licensed one become financially unsound for short term.

Corporate Governance:

Confusion on role & mission of cooperatives, lack of clarity among the

purchase of governance and boards role, weak control mechanism at time of
functioning, lack of clear guidance to adapt to change in market and
emerging conflict between profitability and objective in cooperative sector,
3
https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-cancels-united-co-operative-
banks-licence/articleshow/82607367.cm

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https:// The Hindu/speech by/ Nirmala Sitaraman

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 undefined length of service of board members are some of the challenges in
corporate governance in cooperative banks in India.

Small Capital Base:

Cooperative banks has very small capital base it can start business with a
base capital of 25 lakhs, which means difficult for cooperative banks to
account a portion of such capital as their working capital and raising working
capital has been major hurdle for many cooperative banks.

Minimum asset size:

Cooperative banks plays crucial role in Indian banking system despite its
asset size is only10% compared to that of scheduled commercial banks in
2020.

RBI supervision:
Increase in amount of fraud is one of the challenges in front of RBI. The bank
fraud where the amount involved was more than rs.1 lakh in each case, has
increased from 1542.8 crore in 2008-09 to Rs. 22,469 crore in 2018-19 5

Administrative rate of structure for a long time:

All administrative and financial power is vested with board/management.
Promoting member proximity insuring regular, frequent and meaningful
interaction with the members are some of the challenges before cooperative
banks in India at present.

Low level of recovery and high amount of NPA:

Reports shows that nonperforming assets in cooperative banks are increasing
day by day urban cooperative banks mark 11.3% increasing NPA in FY21 as
against 10.8 in FY20 and 7.5 in FY19. Increasing level of NPA is one of the
reasons in winding many of the cooperative banks at present6.

5
https://www.hindupost.issesand/challanges/in/cooperative/banks/38229
6
https://www.financialexpress.com/industry/banking-finance/district-co-operative-banks-bad-loan-ratio-hits-
12-6-sitharaman/2294437/#:~:text=The%20minister%20said%20the%20

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 Inefficient staff and lack of technical knowledge:
Many times there is political interference in appointment of staff in many of
the cooperative banks in India. Appointment of CEO, directors and other staff
are not skilled and qualification based. Many of the time it seems that staff
has lack of technical knowledge.

Trust deficit:
At account of widening trust deficit and competition from strong industry
rivals these cooperative banks entities are struggling to survive. They have
seen sharp erosion in business in recent years. The decline in loan growth and
deposit growth indicates trust deficit by the depositors on functions of
cooperative banks in India.

E) Changes made in banking regulation Amendment Bill 2020

Considering deteriorating condition of cooperative banks in country loksabha

passed banking regulation amendment bill. Central government aims to bring
cooperative banks with in ambit of Reserve Bank of India. This bill is to
protect depositors.
This bill seeks to enforce
sticker banking regulation by RBI on cooperative bank while administrative
issues are still guided by the registrar of cooperative societies. The statement
& object &reason makes clear the legislative intent to bring cooperative
banks on par with regulation and development in Indian Banking Sector and
to have better management increased professionalism, access to capital,
improve governance & to protect depositors interest.
This bill gives right to RBI
to undertake scheme of amalgamation of bank without placing it under
moratorium. Few more amendments also made in sec 457 of the act that will
help central bank to develop a scheme to insure the interest of public, banking
company, account holder in bank and banking company’s proper
management. These amendments show that RBI is taking initiative to
improve conditions of cooperative bank.
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Sec 45 of banking regulation Act 1949

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F) Analysis of methodology followed by top cooperative banks and
suggested reforms:

The reform to improve condition of cooperative banks is more concern on

more interference of RBI and fulfilling professionalism in ability to run
cooperative banks, detailed review of capital management has to be done
more accountability and transference should be inculcated in management.
To find way and suggesting reform we have to compare cooperative banks
which are suffering from financial crisis with top level cooperative banks.

Technological support and well train staff is one of the key feature of
efficient cooperative banks in India.
Key features adopted by efficient cooperative banks:

1. Bank adopted latest technologies to sustain in cooperative market.

2. Provide ATM facilities to more no. of customers
3. Installation of onsite/offsite ATM’s at our branches /Extension counters.
4. Sweep facilities for transfer of funds of customers. Online net banking
5. Periodic interest on fixed deposits in disbursed through the electronic
6. Clearing scheme.
7. Availability of framing facilities.

Availably of online insurance premium are some of the key features of

efficient cooperative banks.

F) RBI new powers over cooperative banks and suggested majors:

RBI can ensure board of directors to include desirable person to
underraterole. For appointment of chairman, Managing director, and other
additional directors prior approval of RBI is important to amend provision of
appointment. Reporting of high level of information to RBI return of asset
and liabilities balance sheet and account to register of cooperative society.

Conclusion and suggestions:

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Cooperative banks are one of the unavoidable and important parts of the
Indian banking system which is specially meant for farmers and the weaker
sections of society. It helps to reduce the dominance of money lenders and
gives platform to many by forming small capital base. Many cooperative
banks at present are suffering from great losses and in position of winding up.
RBI cancelled licence of 6 cooperative banks in this year itself.
Cooperative banks should have to deal with many challenges and have to
improve their internal mechanism. merger is one of the best options to
improve condition of many cooperative banks in India. Supervision of RBI is
mandatory to improve condition of cooperative banking system.
Use of modern technology, efficient
staff and improved corporate governance can help to resolve challenges in
front of cooperative banks in India.

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 Printed Sources:
1. Akansha Pratik Sanker ‘Cooperative credit institutions and Rural
credit in India under Neolibralism’ vol.47 No 11/12 pp-3762
2. “Urban Cooperative Banks: Issues and prospects” vol.48 2003,(pp-
1505-1513)
3. K.S.Anandaram and Megha Dubhashi, “Role of cooperative in social
development” Vol.35 pp-108-133

Internet Sources:

https://www.inspirajournals.com/uploads/Issues/1260077817.pdfhttps://www
.ijeter.everscience.org/Manuscripts/Volume-4/Issue-4/Vol-4- issue-4-M-
16.pdf

https://www.moneycontrol.com/news/business/indias-big-co-operative-
banks-facing-a-trust-deficit-struggle-to-survive-6307271.html

https://www.mondaq.com/india/financial-services/966676/co-operative-
banks-in-india-heading-towards-reform
https://www.financialexpress.com/industry/banking-finance/district-co- oper
https://vidhilegalpolicy.in/wp-content/uploads/2020/06/Final-Report-
Cooperative-Banks.pdative-banks-bad-loan