COOPERATIVES

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 Cooperatives
A co-operative society is a voluntary association of individuals having common
needs who join hands for the achievement of common economic interest. Its aim
is to serve the interest of the poorer sections of society through the principle of
self-help and mutual aid. The main objective is to provide support to the
members. People come forward as a group, pool their individual resources, utilise
them in the best possible manner, and derive some common benefit out of it.
A cooperative is jointly owned and democratically controlled by their members
and users on the basis of one member, one vote. Essentially, cooperatives use
democratic, participatory and transparent decision-making processes and
organizational structures, so their members and users (i.e. owners, workers, and
consumers) may be directly responsible for benefiting themselves, each other and
the society at large. A cooperative society is owned by its members.

Types of Commercial Bodies

There are three types of economic organisations: private, public and cooperative.
The first works for maximising profit and serves the very limited number of
private owners. The second are public bodies providing merit goods like
electricity, transport etc. The third is cooperatives that exist to serve the needs of
the members, e.g. farm inputs, consumer goods, marketing, loans etc.

Cooperative Principles
Cooperative Principles are guidelines by which cooperatives put their values into
practice. They are:
● Voluntary and open membership
● Democratic member Control
● Member economic participation
● Autonomy
● Concern for community

History of cooperative movement in India

In India, the Co-operative movement gained strength after the enactment of “The
Co-operative Credit Societies Act, 1904.With that Act, the Co-operative
movement became a State sponsored/promoted institution. The main objective
was to relieve the impoverished agriculturists from the private moneylenders.

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During the 19th century, agriculture was nearly fully rain dependent and famines
were frequent, having occurred in 1861, 1866, 1873 and 1876. Farmers used to
take loan from money lenders at usurious rates and often failed to service the loan
and fought back the exploitation.
British Government took the following steps to mitigate the sufferings of the
agriculturists:
● Deccan Agricultural Relief Act in 1879.
● Indian Famine Commission in 1880.
● Land Improvement loans Act, 1883, and
● Agriculturists’ Loans Act, 1884.
But, all these efforts were grossly inadequate.

During this period (1885 – 1903) few mutual loan associations were formed in
Punjab, United Province (UP), Madras and Bengal. These were registered under
General Societies Registration Act 1860.
The Femine Commission received suggestions of establishing agricultural banks
and mutual credit societies.
In 1892, Lord Wenlock, Governor of Madras, directed Mr. Frederic Nicholson,
ICS, the then Collector of Madras, to study the problems of the agriculturists and
report. Mr. Nicholson summed up his report with “Find Raiffeisen”.
Mr. FW Raiffeisen (1818 – 1888), Mayor of a city in Germany established the
first ever Agricultural Credit Bank in Germany in 1862. By the words “Find
Raiffeisen” Mr. Nicholson suggested formation of agricultural credit banks of
German model in India. In 1901, an official committee recommended
establishing Co-operative credit societies. The Draft Bill was prepared on the
model of English Friendly Societies and Industrial and Provident Societies Act.
The bill was passed as “The Co-operative Credit Societies Act, 1904” in 1904.
The Triplican Urban Co-operative Society, Madras was registered first under this
Act.
Thus, the first Cooperative Society Act of 1904 was enacted to enable formation
of "agricultural credit cooperatives" in villages in India under Government
sponsorship. With the enactment of 1904 Act, Cooperatives were to get a direct
legal identity as every agricultural Cooperative was to be registered under that
Act only. The 1904 Cooperative Societies Act, was repealed by 1912 Cooperative
Societies Act which provided for formation of Cooperative societies other than
credit.

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In 1915, the Maclagan Committee advocated that there should be one cooperative
for every village and every village should be covered by a cooperative.
Under 1919 Administrative Reforms, Cooperatives was made a provincial subject
making each province responsible for Cooperative development. This was
continued by the Constitution of India cooperatives falling within Schedule VII
and List II, i.e., the State List as a part of entry 32.
In 1942, the Government of India enacted the Multi-Unit Cooperative Societies
Act, 1942 with an objective to cover societies whose operations are extended to
more than one state.
Armed with an experience of 42 years in the working of Multi Unit Cooperative
Societies and the Multi-Unit Cooperative Societies Act, 1942, the Central
Government enacted a comprehensive Act known as Multi State Cooperative
Societies Act, 1984, repealing the Act of 1942.
Based on the recommendation of the Mirdha Committee and the "Model
Cooperative Societies Act", Government of India enacted the Multi State
Cooperative Societies Act, 2002 which provided for democratic and autonomous
working of the Cooperatives.

Constitution of India and Cooperatives

Art 19. (1)(c) All citizens shall have the right to form associations or unions or
co-operative societies.
Art 43B. Promotion of co-operative societies: The State shall endeavour to
promote voluntary formation, autonomous functioning, democratic control and
professional management of co-operative societies.

Seventh Schedule (Article 246)

Cooperative societies are a State subject under Schedule VII List II Entry 32 to
the Constitution of India. Most of the States in India enacted their own
Cooperative Societies Act.
Cooperative societies working in more than one State fall under List I Entry 44
of the Constitution. Multi-State Cooperative Societies Act, 2002 was enacted by
Parliament under it.

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97th Constitution Amendment Act, 2011
The 97th Constitution Amendment Act, 2011 provided for amendment of
following:
● It amended Article 19(I) c by inserting, after the words ‘or unions’ the words
‘or Co-operative Societies’.
● It also inserted Article 43B in Part IV of the Constitution as “The State Shall
endeavor to promote Voluntary formation, autonomous functioning,
democratic Control and professional management of the Co-operative
societies” and
● After Part IX-A of the Constitution, Part IX-B was inserted. Part IX-B
extended from Article 243ZH to Article 243ZT.

The Major features of the Act are as follows:

● Incorporation, regulation and winding up of cooperative Societies based on
the principles of Voluntary formation, democratic member Control, member
economic participation and autonomous functioning;
● Maximum number of directors of a Co-operatives Society to not exceed
twenty-one members;
● A fixed term of five years from the date of election in respect of the elected
members of the board and its office bearers; and an authority or body for the
Conduct of elections to a Cooperative Society;
● A maximum time limit of Six months during which board of directors of a Co-
operative Society Could be kept under Supersession or suspension;
● Independent professional audit;
● Right of information to the members of the Co-operative Societies;
● Empowering the State Governments to obtain periodic reports of activities and
accounts of Co-operatives Societies;
● Reservation of one seat for the Scheduled Castes or the Scheduled Tribes and
two Seats for women on the board of every Cooperative Society, which have
individuals as members from Such Categories; and
● Penalties in respect of offences relating to Co-Operatives Societies.

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Status of 97th Amendment
Rajendra N Shah vs Union of India & Anr
High Court of Gujarat in 2013 in Rajendra N Shah vs Union of India & Anr,
struck down Part IX B containing Article 243ZH to 243 ZT of the Constitution
of India for want of ratification by the State Legislatures under Article 368(2).
Supreme Court upheld it in 2021 for the same reason. Supreme Court further said
that 73rd and 74th Constitution Amendments Acts, which inserted Part IX dealing
with Panchayats and Part IXA dealing with Municipalities was sent to states to
be ratified but the 97th was not.

Types of Cooperatives
Although all types of cooperative societies work on the same principle, they differ
with regard to the nature of activities they perform. Followings are different types
of co-operative societies that exist in our country:
Consumers’ Co-operative Society: These societies are formed to protect the
interest of general consumers by making consumer goods available at a
reasonable price. They buy goods directly from the producers or manufacturers
and thereby eliminate the middlemen in the process of distribution. Kendriya
Bhandar, Apna Bazar and Sahkari Bhandar are examples of consumers’ co-
operative society.
Producers’ Co-operative Society: These societies are formed to protect the
interest of small producers by making available items of their need for production
like raw materials, tools and equipments, machinery, etc. Handloom societies like
APPCO, Bayanika, Haryana Handloom, etc., are examples of producers’ co-
operative society.
Co-operative Marketing Society: These societies are formed by small producers
and manufacturers who find it difficult to sell their products individually. The
society collects the products from the individual members and takes the
responsibility of selling those products in the market. Gujarat Cooperative Milk
Marketing Federation that sells AMUL milk products is an example of a
marketing co-operative society. The marketing cooperatives at the national level,
such as Nafed and its affiliate cooperative marketing federations at the state level,
play an important role in agriculture development and marketing.
Co-operative Credit Society: These societies are formed to provide financial
support to the members. The society accepts deposits from members and grants
them loans at reasonable rates of interest in times of need. Village Service Co-
operative Society and Urban Cooperative Banks are examples of co-operative
credit society.

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Co-operative Farming Society: These societies are formed by small farmers to
work jointly and thereby enjoy the benefits of large-scale farming. Lift-irrigation
cooperative societies and pani-panchayats are some of the examples of co-
operative farming society.
Housing Co-operative Society: These societies are formed to provide residential
houses to members. They purchase land, develop it and construct houses or flats
and allot the same to members. Some societies also provide loans at low rate of
interest to members to construct their own houses. The Employees’ Housing
Societies and Metropolitan Housing Co-operative Society are examples of
housing co-operative society.

Characteristics
A co-operative society is a special type of business organisation, its
characteristics are as under:
Open membership: The membership of a Co-operative Society is open to all those
who have a common interest. A minimum of ten members are required to form a
cooperative society. The Co-operative Societies Act does not specify the
maximum number of members for any co-operative society. However, after the
formation of the society, the members may specify the maximum number of
members.
Voluntary Association: Members join the co-operative society voluntarily, that
is, by choice. A member can join the society as and when he likes, continue for
as long as he likes, and leave the society at will.
State control: To protect the interest of members, co-operative societies are placed
under state control through registration. It has to maintain books of accounts,
which are to be audited by government auditors.
Sources of Finance: In a co-operative society capital is contributed by all the
members. However, it can raise loans and secure grants from government after
its registration.
Democratic Management: Co-operative societies are managed on democratic
lines. The society is managed by a group known as “Board of Directors”. The
members of the board of directors are the elected representatives of the society.
Each member has a single vote, irrespective of the number of shares held. For
example, in a village credit society the small farmer having one share has equal
voting rights as that of a landlord having 20 shares.
Service motive: Co-operatives are not formed to maximise profit like other forms
of business organisation. The main purpose of a Co-operative Society is to
provide service to its members. For example, in a Consumer Co-operative Store,
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goods are sold to its members at a reasonable price by retaining a small margin
of profit.
Separate Legal Entity: A Co-operative Society is registered under the Co-
operative Societies Act. After registration a society becomes a separate legal
entity, with limited liability of its members.
Distribution of Surplus: Every co-operative society in addition to providing
services to its members also generates some profit while conducting business.
Profit generated is distributed to its members not on the basis of the shares held
by the members (like the company form of business), but on the basis of
members’ participation in the business of the society. For example, in a consumer
co-operative store only a small part of the profit is distributed to members as
dividend on their shares; a major part of the profit is paid as purchase bonus to
members on the basis of goods purchased by each member from the society.
Self-help through mutual cooperation: Co-operative Societies thrive on the
principle of mutual help. They are the organisations of financially weaker sections
of society. Co-operative Societies convert the weakness of members into strength
by adopting the principle of self-help through mutual co-operation. It is only by
working jointly on the principle of “Each for all and all for each”, the members
can fight exploitation and secure a place in society.

Advantages
A Co-operative form of business organisation has the following advantages:
Easy Formation: Formation of a co-operative society is very easy compared to a
stock company. Any ten adults can voluntarily form an association and get it
registered with the Registrar of Co-operative Societies.
Open Membership: Persons having common interest can form a co-operative
society. Any adult person with sound mind can become a member at any time
he/she likes and can leave the society at will.
Democratic Control: A co-operative society is controlled in a democratic manner.
The members cast their vote to elect their representatives to form a committee
that looks after the day-to-day administration. This committee is accountable to
all the members of the society.
Limited Liability: The liability of members of a co-operative society is limited to
the extent of capital contributed by them. Unlike sole proprietors and partners the
personal properties of members of the co-operative societies are free from any
kind of risk because of business liabilities.

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Elimination of Middlemen’s Profit: Through co-operatives the members or
consumers control their own supplies and thus, middlemen’s profit is eliminated.
State Assistance: Both Central and State governments provide all kinds of help to
the societies in the form of capital contribution, loans at low rates of interest,
exemption in tax, subsidies in repayment of loans, etc.
Thus, cooperatives are a vital plank of inclusive growth in rural areas, particularly
food security, poverty alleviation, and employment creation. The socio-economic
benefits of cooperative enterprises remain with the members and communities
that establish them and steer their economic future.

Promotional Institutions
The institutions working for the development of cooperative movement in India?
1. National Cooperative Union of India (NCUI) and
2. National Cooperative Development Corporation (NCDC)
are the important agencies working for promotion of cooperative movement in
India.
The National Cooperative Union of India and the National Cooperative
Development Corporation work for the promotion of the cooperative movement
in India. Initially tasked with planning, promotion and financing of agricultural
schemes, they were given a broader mandate to finance projects of rural
cooperatives in sectors like water resource development and conservation, agri-
insurance, rural credit, sanitation and animal husbandry.

Structure and Membership

A Co-operative Society can be formed as per the provisions of the Co-operative
Societies Act, 1912. At least ten persons above of 18 years, having the capacity
to enter into a contract with common economic objectives, like farming, weaving,
consuming, etc. can form a Co-operative Society. Cooperative Societies Act 1912
is a Central Act. However, ‘Cooperative Societies’ is a State Subject (Entry 32 of
List II of Seventh Schedule to Constitution, i.e. State List). Though the 1912 Act
is still in force, it has been specifically repealed in almost all the States and those
States have their own Cooperative Societies Act.

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Following can become members of a cooperative society:
Persons who may become members of a Cooperative society at State level (as per
the State Act) are
● an individual;
● a society under the Cooperative Societies Act; and
● the Government;

Persons who may become members of a Multi-State Cooperative Society: (As

per Multi-State Cooperative Societies Act, 2002).
● an individual,
● any multi-state Cooperative society or any Cooperative society,
● the Central Government,
● a State Government,
● National Cooperative Development Corporation (NCDC),
● any other Corporation of the Government.

Laws
Laws regulating Cooperative Societies in India are:
● State Cooperative Societies Acts of individual states
● Multi-State Cooperative Societies Act, 2002 for the multi-state Cooperative
societies with Area of operation in more than one State.

Cooperative Banking
The co-operative credit structure in the country can be divided into two broad
segments:
● the urban co-operative banks and the
● rural co-operative credit institutions.

While the urban co-operative banking system has a single tier comprising the
Primary Co-operative Banks (commonly known as urban co-operative banks –
UCBs), the rural co-operative credit system is divided into long-term and short-
term co-operative credit institutions which have a multi-tier structure.

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The short-term rural co-operative credit institutions have a three-tier structure
comprising
1. State Co-operative Banks (StCBs),
2. Central Co-operative Banks (CCBs), and
3. Primary Agricultural Credit Societies (PACSs) which are not banks but only
societies.
The long-term co-operative credit institutions have generally a two tier structure
comprising the State Co-operative Agriculture and Rural Development Banks
(SCARDBs) and the Primary Co-operative Agriculture and Rural Development
Banks (PCARDBs).
Primary agricultural credit societies (PACS) and long-term co-operatives are
outside the regulatory purview of the Reserve Bank and are not covered by the
Banking Regulation Act, 1949.
StCBs/DCCBs are registered under the provisions of State Cooperative Societies
Act of the State concerned and are regulated by the Reserve Bank of India as well.
Powers have been delegated to National Bank for Agricultural and Rural
Development (NABARD) under Banking Regulation Act (As Applicable to
Cooperative Societies) to conduct inspection of State and Central Cooperative
Banks.

State Cooperative Banks (SCBs)

Functions and Organisation
State cooperative banks are the apex institutions in the three-tier cooperative
credit structure, operating at the state level. State cooperative banks occupy a
unique position in the cooperative credit structure because of their three important
functions:
1. They provide a link through which the Reserve Bank of India provides credit
to the cooperatives and thus participates in the rural finance,
2. They function as balancing centers for the central cooperative banks by
making available the surplus funds of some central cooperative banks. The
central cooperative banks are not permitted to borrow or lend among
themselves
3. They finance, control and supervise the central cooperative banks, and,
through them, the primary credit societies.

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Finances:
State cooperative banks obtain their working capital from own funds, deposits,
borrowings and other sources:
Own funds include share capital and various types of reserves. Major portion of
the share capital is raised from member cooperative societies and the central
cooperative banks, and the rest is contributed by the state government. Individual
contribution to the share capital is very small;
The main source of deposits is also the cooperative societies and central
cooperative banks. The remaining deposits come from individuals, local bodies
and others.
Borrowings of the state cooperative banks are mainly from the Reserve Bank and
the remaining from state governments and others.

Loans and Advances:

State cooperative banks are mainly interested in providing loans and advances to
the cooperative societies. More than 98 per cent loans are given to these societies
of which about 75 per cent are for the short-period. Mostly the loans are given for
agricultural purposes.

Central Cooperative Banks (CCBs):

Functions and Organisation:
Central cooperative banks are in the middle of the three-tier cooperative credit
structure. Central cooperative banks are of two types:
1. There can be cooperative banking unions whose membership is open only to
cooperative societies.
2. There can be mixed central cooperative banks whose membership is open to
both individuals and cooperative societies.
The main function of the central cooperative banks is to provide loans to the
primary cooperative societies. However, some loans are also given to individuals
and others.

Capital:
The central cooperative banks raise their working capital from own funds,
deposits, borrowings and other sources. In the own funds, the major portion
consists of share capital contributed by cooperative societies and the state
government, and the rest is made up of reserves.
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Deposits largely come from individuals and cooperative societies. Some deposits
are received from local bodies and others. Deposit mobilisation by the central
cooperative banks varies from state to state.
Borrowings are mostly from the Reserve Bank and apex banks.

Primary Agricultural Credit Societies (PACSs):

Functions and Organisation:
Primary agricultural credit society forms the base in the three-tier cooperative
credit structure. It is a village-level institution which directly deals with the rural
people. It encourages savings among the agriculturists, accepts deposits from
them, gives loans to the needy borrowers.
It serves as the last link between the ultimate borrowers, i.e., the rural people, on
the one hand, and the higher agencies, i.e., Central cooperative bank, state
cooperative bank, and the Reserve Bank of India, on the other.
The members of the society have unlimited liability which means that each
member undertakes full responsibility of the entire loss of the society in case of
its failure.
The management of the society is under the control of an elected body.
Capital:
The working capital of the primary credit societies comes from their own funds,
deposits, borrowings and other sources. Own funds comprise of share capital,
membership fee and reserve funds. Deposits are received from both members and
non- members. Borrowings are mainly from central cooperative banks.
Borrowings make up the chief source of working capital of the societies.
Normally, people do not deposit their savings with the cooperative societies
because of poverty, low saving habits, and availability of better assets to the
savers in terms of rate of return and riskiness from these societies.

Land Development Banks (LDBs) or Cooperative Agricultural and

Rural Development Banks (CARDBs)
Besides short-term credit, the agriculturists also need long-term credit for making
permanent improvements in land, for repaying old debts, for purchasing
agricultural machinery and other implements. Traditionally, the long-term
requirements of agriculturists were mainly met by money lenders and some other
agencies. But this source of credit was exploitative of farmers.

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Cooperative banks and commercial banks by their very nature are not in a position
to provide long-term loans because their deposits are mainly demand (short-term)
deposits. Thus, there was a great need for a specialised institution for supplying
long-term credit to agriculturists. The establishment of land development banks
now known as cooperative and rural development banks (CARDBs) is an effort
in this direction.
Structure:
The land development banks are registered as cooperative societies.
Two-tier structure:
1. At the state level, there are land development banks, now known as state
cooperative agricultural and rural development banks (SCARDBs) generally
one for each state. They were previously known as central land mortgage
banks,
2. At the local level, there are branches of the state land development banks or
SCARDBs and primary land development banks now known as primary
cooperative agricultural and rural development banks (PCARDBs).
Capital:
Land development banks raise their funds from share capital, reserves, deposits,
loans and advances, and debentures. These debentures are subscribed by the co-
operative banks, commercial banks and the Reserve Bank of India.
Besides the ordinary debentures, the land development banks also float rural
debentures for the period upto 7 years. These debentures are subscribed by
farmers, panchayats, and the Reserve Bank. The Reserve Bank substantially
contributes to the finance of land development banks by extending funds to the
state governments for contributing to the share capital of these banks and by
subscribing to ordinary and rural debentures.
Loans and Advances:
The land development banks or SCARDBs provide long-term loans to the
agriculturists- (a) for redemption of old debt, (b) for improvement of land and
methods of cultivation, (c) purchasing costly machinery, and (d) in special cases,
for purchasing land. These banks give loans against the mortgage of land and the
period of loan varies from 15 to 30 years.

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Urban Cooperative Banks
Urban Co-operative Banks (UCBs) refer 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.
UCBs are registered as cooperative societies under the provisions of, either the
State Cooperative Societies Act of the State concerned or the Multi State
Cooperative Societies Act, 2002. They are regulated and supervised by the
Registrar of Cooperative Societies (RCS) of State concerned or by the Central
Registrar of Cooperative Societies (CRCS), as the case may be.
The applicability of banking laws to cooperatives societies since March 1, 1966
ushered in ‘duality of control’ over UCBs between the Registrar of Cooperative
Societies/Central Registrar of Cooperative Societies and the Reserve Bank of
India. The Reserve Bank regulates and supervises the banking functions of UCBs
under the provisions of Banking regulation Act, 1949. Within the Reserve Bank,
a separate department, viz. Urban Banks Department, has been entrusted with
these functions. Urban Banks Department functions in close coordination with
other regulators viz., RCSs and CRCS.
The Reserve Bank has powers to issues licence to UCBs under Banking
Regulation Act, 1949 to carry on banking business and to open new places of
business (branches, extension counters, etc.) respectively. For this purpose,
guidelines on the eligibility criteria for issue of banking licence / branch licence
are issued to UCBs from time to time. As a regulator, the Reserve Bank has
prescribed prudential norms in various areas, e.g. capital adequacy, income
recognition, asset classification and provisioning, exposure to single/group
borrowers, exposures to sensitive sectors, loans and advances, investments,
liquidity requirements, etc.
The Reserve Bank carries out on-site inspections and off-site surveillance of
UCBs. It also issues directions and operational instructions to UCBs, wherever
necessary to streamline the functioning and to protect the interests of the
depositors.
The co-operatives are under the control of State Governments in all matters
relating to registration, membership, election, financial assistance, loaning
powers, business operations, loan recovery and audit.
There is thus no clear demarcation of regulatory powers, which at times has
resulted in undermining the working of co-operatives.

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Regulation
Though the Banking Regulation Act came in to force in 1949, the banking laws
were made applicable to cooperative societies only in 1966 through an
amendment to the Banking Regulation Act, 1949. Since then there is duality of
control over these banks with banking related functions being regulated by the
Reserve Bank and management related functions regulated by respective State
Governments/Central Government.
The Reserve Bank regulates the banking functions of StCBs/DCCBs/UCBs under
the provisions of the Banking Regulation Act, 1949 (As Applicable to
Cooperative Societies).
The Department of Co-operative Bank Regulation (DCBR) of RBI regulates State
Co- operative Banks (StCBs), District Central Co-operative Banks (DCCBs) and
Urban Cooperative Banks (UCBs).
The legal framework for regulating State Co- operative Banks (StCBs), District
Central Co-operative Banks (DCCBs) and Urban Cooperative Banks (UCBs) is
● Reserve Bank of India Act, 1934
● Banking Regulation Act, 1949
● Deposit Insurance and Credit Guarantee Corporation Act
The Reserve Bank acts in close co-ordination with other regulators, such as,
Registrar of Co-operative Societies and Central Registrar of Co-operative
Societies. The Reserve Bank enters into Memorandum of Understanding (MoU)
with Central Government and all State Governments which have presence of
UCBs to ensure greater convergence of policies on regulation and supervision.
SLR, CRR and capital adequacy norms apply to State Co- operative Banks
(StCBs), District Central Co-operative Banks (DCCBs) and Urban Cooperative
Banks (UCBs).

Statistical Profile
There are 95,238 PACSs,363 DCCBs and 33 state cooperative banks in the
country. The state cooperative banks reported deposits of Rs 1,35,000 crore,
while the DCCBs’ deposits at Rs 3,79,000 crore. The DCCBs, whose main role
is disbursal of short-term loans to the farming sector (crop loan), distributed Rs
3,00,034 crore in loans. The state cooperative banks, which mainly finance agri-
processing industries disbursed Rs 1,48,625 crore in loans.
Urban cooperative banks (UCBs) extend banking services to many sectors that
would otherwise have found it difficult to get into the institutional credit structure.
There are 1,539 UCBs whose total loan portfolio was Rs 3,05,000 crore.

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RBI and Cooperatives
By virtue of the provisions of the RBI Act, the Reserve Bank was given a mandate
to closely associate with matters relating to rural credit and banking. RBI Act
provided for both the establishment of an Agricultural Credit Department in the
bank and extension of refinance facilities to the cooperative credit system. RBI
introduced credit facilities to provincial cooperative banks for seasonal
agricultural operations and marketing of crops from 1942.
A major initiative for pursuit of the mandate given to the Reserve Bank was taken
with sponsoring of All India Rural Credit Survey in 1951-52. The study
recommended an integrated approach to cooperative credit and emphasized the
need for viable credit cooperative societies by expanding their area of operation,
encouraging rural savings and diversifying business. The Committee also
recommended government participation in the share capital of the cooperatives.
The National Commission on Agriculture (1976) recommended setting up of
Farmers Service Cooperative Societies with the active collaboration of the
nationalized banks. The involvement of commercial banks was institutionalized
through nationalization of major commercial banks in 1969, causing
unprecedented penetration of commercial banks in the rural sector. The State has
used co-operatives to channel its development schemes, particularly subsidy-
based programs for the poor. As these institutions have a wide reach in the rural
areas and also deal with finances, the choice was natural.
By 1982, to consolidate the various arrangements made by the RBI to promote /
supervise institutions and channel credit to rural areas, NABARD was
established. The Agriculture Credit Review Committee (Khusro Committee,
1989) stressed the importance of encouraging members’ thrift and savings for the
cooperatives.
In recent decades, there has been an increasing realization of the adverse impact
of intrusive State patronage, politicization, and the consequent impairment of the
role of cooperatives in general, and of credit cooperatives in particular, leading to
a quest for reviving and revitalizing the cooperative movement. Several
Committees were set up to suggest cooperative sector reforms during this period.

Current Scenario
In 2019, 1,544 of UCBs, according to RBI, accounted for a balance sheet size of
Rs 6 lakh crore compared to the Rs 166 lakh crore of commercial banks. Of this
Rs 4.8 lakh crore were deposits (Rs 129 lakh crore for commercial banks) and net
worth of around Rs 0.5 lakh crore (Rs 13.3 lakh crore). On the assets side, loans
were at Rs 3 lakh crore (Rs 97 lakh crore) and investments Rs 1.57 lakh crore (Rs
43 lakh crore for commercial banks).
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Over the years, the Reserve Bank has undertaken several steps to strengthen the
sector, including
● entering into Memoranda of Understanding with State and Central
Governments to facilitate coordination of regulatory policies,
● formation of Task Force for Urban Co-operative Banks,
● a comprehensive set of capacity building initiatives, and
● measures to bring in efficiency through adoption of technology.

In spite of these initiatives, several structural issues confront the sector such as
● dual regulation by the Reserve Bank and the Central/ State governments,
● inability to combine the principles of co-operation with professionalism,
● lack of avenues to raise additional capital,
● the need of technological upgradation and more recently, incidences of frauds.
UCBs need to be more credible as after expanding consistently in the decade
following the consolidation drive, UCBs faced competition from other niche
players like small finance banks and non-banking financial companies (NBFCs).
Banking Regulation (Amendment) Act, 2020 is expected to address some of these
problems.

Dual Control
As we studied above, under the Indian Constitution, cooperation is a state subject.
Banking is a Union subject. The dual control has seen conflicts that weakened the
banks and the interests of the public suffered.
Further, during the mid-1960s, as demands for extension of the deposit insurance
scheme to co-operative banks became more vocal, banking laws were made
applicable to them so that the Reserve Bank may be able to exercise some control
over them. This led to the dual control of the sector in which the Registrar of Co-
operative Societies (RCS) or the Central Registrar of Co-operative Societies
(CRCS) were empowered to look after their incorporation, registration,
management, recovery, audit, supersession of Board of Directors and liquidation.
The Reserve Bank was vested with regulatory oversight on banking activities of
UCBs, State Co-operative Banks (StCBs) and District Central Co-operative
Banks (DCCBs). The Reserve Bank was also entrusted with the supervision of
UCBs.

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The Reserve Bank’s regulatory and supervisory powers were, however, limited
in many ways, which affected its ability to take prompt corrective actions in case
of irregularities.

Following are the changes to the Act

● narrows the regulatory difference between commercial banks and co-operative
banks by aligning many provisions applicable to them. These provisions
include norms for qualification of board members, appointment and removal
of Chairman/ Managing Director (MD)/ Chief Executive Officer (CEO) /
additional directors, and supersession of the Board. Through the amendment,
restrictions are also placed on loans or advances to directors, on whole-time
directors having substantial interest or employment in other firms, prohibition
on common directorship across banks, and approval of appointment or
removal of statutory auditors. The time limit granted to UCBs for submission
of their audited balance sheet and profit and loss statement to the Reserve
Bank has been shortened from six months to three months, thus aligning it
with commercial banks.
● In a major step towards granting more autonomy to these banks to raise capital,
urban co-operative banks are allowed to issue debentures or bonds with
maturity of not less than ten years, equity shares, preference shares, or special
shares on face value or at a premium, with certain conditions. That is, they can
now have access to capital in the form of both debt and equity after taking
permission from RBI. Hence, the due diligence process that has to be followed
for raising either equity capital or bond will automatically ensure that they
work towards maintaining a very good track record of performance and
governance.
● It enables the Reserve Bank to allow mergers, acquisitions and takeovers or
demergers with the approval of the Central Government. Thus, if it is observed
that some of them are too weak to survive on their own, action can be taken.
● The amendment also provides the Reserve Bank extensive powers to
supersede the management of the urban co-operative bank in consultation with
the state government concerned. These measures are intended to protect the
interest of the depositors while ensuring proper management and without
causing any disruption to the financial system.

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The Act is not applicable to Primary Agricultural Credit Societies (PACS) or co-
operative societies whose primary object and principal business is long-term
finance for agricultural development, if such societies do not use the word “bank”
or “banker” or “banking” and do not act as drawees of cheques. This provision
seeks ease of operational services to farmers and allied role players.
It thus seeks to protect the interests of depositors and strengthen co-operative
banks by improving governance and oversight by the Reserve Bank, while
enabling better access to capital.
These amendments are likely to improve the management and financial
performance of co-operative banks and enable the Reserve Bank to regulate them
more effectively.

Problems of cooperatives
Despite the phenomenal outreach and volume of operations, the health of a very
large proportion of rural credit cooperatives has deteriorated significantly. The
institutions are beset with problems like poor governance infrastructural
weaknesses, operational inefficiencies and the consequent impairment of their
financial health. Several factors such as low borrowing membership, low resource
base, lack of democratization and professionalism, high incidence of overdues
and almost stagnant recovery performance have led to the deterioration in the
financial soundness of cooperatives. There is an urgent need to find ways for
strengthening the cooperative movement to meet the credit needs of rural India,
especially the resource-poor and resource-less poor farmers. The revitalization
and strengthening of cooperative institutions at all levels should therefore be
considered urgent.
During 2019-20, the co-operative sector faced certain financial challenges.
Episodes of frauds during the year affected the asset quality and profitability of
urban co-operative banks (UCBs). During 2020-21 uncertainties related to
COVID-19 have affected the operations of this sector, as they did for the other
financial institutions. Despite these weaknesses, this period also witnessed the
amendment to the Banking Regulation Act 2020 which addressed the vexing
issue of dual regulatory control and the setting up of the Union Ministry of
Cooperation in 2021.

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Ministry of Cooperation
Union Budget 2021-22 announced the creation of the new ministry of
cooperation.
The Union Cabinet created the ministry in mid-2021 to deepen co-operatives as
a grassroots movement. It initiates a separate administrative, legal and policy
framework for strengthening the cooperative movement in India.
The new ministry will work to streamline processes for ‘ease of doing business’
for cooperatives and enable development of multi-state co-operatives (MSCS),
added the statement.
The vision statement of the Ministry is “Sahkar se samriddhi” (Prosperity from
cooperation).
The Department of Cooperation in the Ministry of Agriculture and Farmers
Welfare. But the scope of the Department was limited. The new Ministry of
Cooperation has larger scope and has to be read along with the amendment to the
Banking Regulation Act 2020 to see the rejuvenation of cooperatives.

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