All About Cooperative Banks in India - GK

Notes for SSC & Banking Exams in PDF!

Cooperative Banks in India play an important part in the Success story of Financial
Inclusion in India. The ease of access of these banks has made rural India more
empowered. When preparing for various Government Recruitment Exams like SSC
CGL, SSC MTS, IBPS PO, IBPS RRB, IBPS Clerk, IB ACIO, Insurance, Railways, etc.,
you will come across the Financial Awareness section. Read more about Co-operative
Banks, the Objectives, Structure, Difference between Co-operative & Commercial Banks
& more to have a hold on the Financial Awareness section!

The concept of cooperation is as old as mankind as it forms the basis for domestic
and social life. In India, there are a plethora of banks providing almost all services that
an individual requires. But most of the banks that people use are either private (which
makes up a major chunk of the numbers) or nationalized banks. However, there is
another sector of banks that is used by a large number of the middle-class
sections of the society co-operative banks.

A Co-operative bank is an institution consisting of a number of

individuals who join together to pool their surplus savings for the
purpose of eliminating the profits of the bankers or money
lenders with a view to distributing the same amongst the depositors and borrowers.

It is retail and commercial banking which take deposits and lends money. They are
small – sized units which operate both in urban and non – urban centers. They finance
small borrowers in industrial and trade sectors besides professional and salary classes.

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Cooperative Banks fall under the Co-operative Societies Act which is
regulated by the RBI and are governed by the Banking Regulations Act 1949
and Banking Laws (Co-operative Societies) Act, 1965. It is originated in
India with the enactment of the Co-operative Credit Societies Act of 1904.
The Anyoya Co-operative Bank was the first Co-operative Bank in Asia.

The members of the co-operative bank:

 Are of similar occupation or profession

 Must have common membership
 Must reside within the same geographical area

Objectives of Co-operative banks:

 Engage in rural financing and microfinancing

 To remove the dominance of common man by the middleman and money lenders
 Ensure credit services to farmers at low rate of interest providing socio-economic
condition to the people
 Provide financial support for the needy people and farmers in the rural areas
 Provides personal financial services for those engaged in small-scale industries and self-
employment driven activities for people in both rural and urban areas

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

1. State Co-operative banks: It is a federation of central Co-operative bank and acts as a

watchdog. They obtain their funds from share capital, deposits, loans and overdrafts
from the Reserve Bank of India and can lend money to central co-operative banks and
primary societies and not directly to the farmers.
2. Central Co-operative banks: These are the federations of primary credit societies in a
district and are of two types-those having a membership of primary societies only and
those having a membership of societies as well as individuals. The funds of the bank
consist of share capital, deposits, loans and overdrafts from state co-operative banks and
 joint stocks. These banks provide finance to member societies within the limits of the
borrowing capacity of societies. They also conduct all the business of a joint stock bank
3. Urban Co-operative banks: The function of Urban Co-operative Banks (UCBs) are:
1. Primarily, to raise funds for lending money to its members.
2. To attract deposits from members as well as non-members.
3. To encourage thrift, self-help ad mutual aid among members.
4. To draw, make, accept, discount, buy, sell, collect and deal in bills of exchange,
drafts, certificates and other securities.
5. To provide safe-deposit vaults.
4. Land Developments banks: The Land development banks are organized in 3 tiers
namely; state, central, and primary level and they meet the long term credit
requirements of the farmers for developmental purposes. The state land development
banks oversee, the primary land development banks situated in the districts and tehsil
areas in the state. They are governed both by the state government and Reserve Bank of
India. Recently, the supervision of land development banks has been assumed by
National Bank for Agriculture and Rural Development (NABARD). The sources of funds
for these banks are the debentures subscribed by both central and state government.
These banks do not accept deposits from the general public
5. Primary Co-operative Credit Society: The primary co-operative credit society is an
association of borrowers and non-borrowers residing in a particular locality. The funds
of the society are derived from the share capital and deposits of members and loans from
central co-operative banks. The borrowing powers of the members as well as of the
society are fixed. The loans are given to members for the purchase of cattle, fodder,
fertilizers, pesticides, etc.

Difference between Co-operative banks & Commercial banks:

Co-operative Bank Commercial Bank

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 Federal Structure in nature,
i.e. at the top level
State Co-operative Banks and
at the village level primary
Co-operative Credit Societies.
They are generally concentrating
on rural credit & provide credit
facilities to agricultural &
rural activities.
In co-operative Bank the borrowers
are usually their members.
The Co-operative Banks provide
a little higher rate of interest
on deposits as compared to
commercial banks.
They are functioning on branch
banking & the branches are located in all
areas rural, urban, etc., the head
office contain branches through
Zonal Office.
They are mainly concentrating
on the requirements of
trade & industry.
Borrowers can be any
including individual institutions.
The Commercial Banks provide a
lesser rate of interest as compared
to co-operative banks.

Co-operative banks also perform the basic banking functions but are different from
commercial banks in the following respect:

 Commercial banks are joint-stock companies under the companies’ act of 1956, or public
sector bank under a separate act of a parliament whereas co-operative banks were
established under the co-operative society’s acts of different states.
 Commercial bank structure is branch banking structure whereas co-operative banks have
a three-tier setup, with state co-operative bank at apex level, central / district co-
operative bank at the district level, and primary co-operative societies at rural level.
 Only some of the sections of banking regulation act of 1949 (fully applicable to
commercial banks), are applicable to co-operative banks, resulting only in partial control
by RBI of co-operative banks and
 Co-operative banks function on the principle of cooperation and not entirely on
commercial parameters.
Products of Cooperative Banks in India:

Functions of Cooperative Banks in India:

1. They function with the rule of "one member, one vote" and function on "no profit, no
loss" basis
2. It performs all the main banking functions of deposit mobilisation, supply of credit and
provision of remittance facilities
3. It provides financial assistance to the people with small means to protect them from the
debt trap of the moneylenders
4. It is engaged in tasks of production, processing, marketing, distribution, servicing and
banking in India
5. It supervises and guides affiliated societies

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 6. Mobilization of funds from their members
7. Advance loans to the members
8. Rural financing for farming, cattle, milk, hatchery, personal finance, etc.
9. Urban financing for Self – employment, Industries Small scale units, Home finance,
Consumer finance, Personal finance

Advantages of Cooperative Banks in India:

 Easy to form
 No obstruction for membership
 Limited liability
 Service motive
 Democratic management
 Stability and Continuity
 Economic operations
 State patronage

Weakness of Cooperative Banks in India:

 They are too small in size to be economical and viable; besides too many of them are
dormant, existing only on paper
 Co-operative banks are not doing well in all the states; only a few account for a major
part of their business
 These banks still rely very heavily on refinancing facilities from the government, the RBI,
and NABARD
 They suffer from dangerously low or weak quality of loan assets, and from the highly
unsatisfactory recovery of loans.
 They do not look like banks and do not inspire confidence in the potential members,
depositors and borrowers.
 Most of the Co-operative banks are suffering from the lack of professional management.
 Except for some Co-operative banks, technological development in Information
Technology or computerized data management is conspicuously absent.
  As there is no formal system of corporate governance in co-operative banks, many banks
have become the hotbed of political patronage, unscrupulous financial practice and gross
mismanagement.
 Another problem arises out of the duality of control over them i.e. these banks are
organized under the dual control of RBI and as well as respective state government.
 They unduly depend on government capital rather than member capital.

Cooperative Banks in India - Way Ahead

Cooperative Banks in India have become an integral part of the success of Indian
Financial Inclusion story. Now, it is very much clear that co-operative banks have very
much importance in national development. Without the help of co-operative banks,
millions of people in India would be lacking the much needed financial support.

Co-operative banks take an active part in local communities and local development with
a stronger commitment and social responsibilities. These banks are best vehicles for
taking banking to doorsteps of common men, unbanked people in urban and rural
areas. Their presence in the social, economic and democratic structure of the country is
essential to bring about harmonious development and that perhaps is the best
justification for nurturing them and strengthening their base. These banks are sure
to win in the race because they are from the people, by the people and of the
people.

Have a look at some more important articles from the General Awareness section to
keep hold of what is happening in & around the world.

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