CHAPTER 4

CO-OPERATIVE BANKING IN INDIA

4.1 Introduction
4.2 Co-operative Banks
4.3 Features of Co-operative Banks
4.4 Types of Co-operative Banks
4.5 Issues Facing the Co-operative Banking Segment in India.
4.6 Co-operative banks in Satara City
 SHIVAJI UNIVERSITY, KOLHAPUR M.Phil

CHAPTER 4
CO-OPERATIVE BANKING IN INDIA

4.1 Introduction
Co-operative banks have completed 100 years of existence in India. They play a very
important role in the financial system. The cooperative banks in India form an integral part
of our money market today. Therefore, a brief resume of their development should be taken
into account. The history of cooperative banks goes back to the year 1904. In 1904, the co­
operative credit society act was enacted to encourage co-operative movement in India.
For the co-operative banks in India, co-operatives are organized groups of people and
jointly managed and democratically controlled enterprises. They exist to serve their
members and depositors and produce better benefits and services for them.
Professionalism in co-operative banks reflects the co-existence of high level of skills and
standards in performing, duties entrusted to an individual. Co-operative bank needs current
and future development in information technology. It is indeed necessary for cooperative
banks to devote adequate attention for maximizing their returns on every unit of resources
through effective services.10

4.2 Co-operative Banks

A co-operative bank is a financial entity which belongs to its members, who are at the same
time the owners and the customers of their bank. Co-operative banks are often created by
persons belonging to the same local or professional community or sharing a common
interest. Co-operative banks generally provide their members with a wide range of banking
and financial services (loans, deposits, banking accounts etc.). Co-operative banks differ
from stockholder banks by their organization, their goals, their values and their
governance. In most countries, they are supervised and controlled by banking authorities
and have to respect prudential banking regulations, which put them at a level playing field
with stockholder banks. Depending on countries, this control and supervision can be
implemented directly by state entities or delegated to a co-operative federation or central
body.

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Co-operative banking is retail and commercial banking organized on a co-operative basis.

Co-operative banking institutions take deposits and lend money in most parts of the world.
Co-operative banking, includes retail banking, as carried out by credit unions, mutual
savings and loan associations, building societies and co-operatives, as well as commercial
banking services provided by manual organizations (such as co-operative federations) to
co-operative businesses.
The structure of commercial banking is of branch-banking type; while the co-operative
banking structure is a three tier federal one.
1) A State Co-operative Bank works at the apex level (ie. works at state level).
2) The Central Co-operative Bank works at the Intermediate Level, (ie. District
Co-operative Banks ltd. works at district level).
3) Primary co-operative credit societies at base level (At village level).

Co-operative banks are deeply rooted inside local areas and communities. They are
involved in local development and contribute to the sustainable development of their
communities, as their members and management board usually belong to the communities
in which they exercise their activities. By increasing banking access in areas or markets
where other banks are less present, farmers in rural areas, middle or low income
households in urban areas - co-operative banks reduce banking exclusion and foster the
economic ability of millions of people. They play an influential role on the economic
growth in the countries in which they work in and increase the efficiency of the
international financial system.

4.3 Features of Co-operative Banks

The following are the features of Co-operative Banks
4.3.1 Customer-owned Entities
In a co-operative bank, the needs of the customers meet the needs of the owners, as co­
operative bank members are both. As a consequence, the first aim of a co-operative bank is
not to maximize profit but to provide the best possible products and services to its
members. Some co-operative banks only operate with their members but most of them also
admit non-member clients to benefit from their banking and financial services.

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4.3.2 Democratic Member Control

Co-operative banks are owned and controlled by their members, who democratically elect
the board of directors. Members usually have equal voting rights, according to the co­
operative principle of “one person, one vote”.

4.3.3 Profit Allocation

In a co-operative bank, a significant part of the yearly profit, benefits or surplus is usually
allocated to constitute reserves. A part of this profit can also be distributed to the co­
operative members, with legal or statutory limitations in most cases.
Profit is usually allocated to members either through a patronage dividend, which is related
to the use of the co-operative’s products and services by each member, or through an
interest or a dividend, which is related to the number of shares subscribed by each member.

4.4 Types of Co-operative Banks

The co-operative banks 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. Regulated by the Reserve Bank of India, they are governed by the
Banking Regulations Act 1949 and banking laws (co-operative societies) act, 1965. The co­
operative banking structure in India is divided into following 5 components:

4.4.1 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.

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4.4.2 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.

4.4.3 State Co-operative Banks

The state co-operative bank is a federation of central co-operative bank and acts as a
watchdog of the co-operative banking structure in the state. Its funds are obtained from
share capital, deposits, loans and overdrafts from the Reserve Bank of India. The state
cooperative banks lend money to central co-operative banks and primary societies and not
directly to the farmers.

4.4.4 Land Development 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.

4.4.5 Urban Co-operative Banks

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to
primary co-operative banks located in urban and semi-urban areas. These banks, till 1996,
were allowed to lend money only for non-agricultura! purposes. This distinction does not
hold today. These banks were traditionally centered on communities, localities, work place

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 SHIVAJI UNIVERSITY, KOLHAPUR M.Phil

groups. They essentially lend to small borrowers and businesses. Today, their scope of
operations has widened considerably.1112

4.5 Issues Facing the Co-operative Banking Segment in India

Following are the issues facing the Co-operative Banking Segment in India

4.5.1 Governance Issues - Dual Control and Borrower Driven Structure

“Cooperation” is a State subject under the Indian Constitution; hence all cooperative
societies are governed by the Cooperative Societies Act of the State. Registration,
incorporation, management, amalgamation etc are governed by the RCS of the particular
State. At the same time, certain provisions of the Banking Regulation (BR) Act, 1949, are
applicable to the cooperative banks that accept public deposit. In the rural structure, StCBs
and the DCCBs and in the urban structure, PCBs are covered by these provisions of the BR
Act. This “duality” of control and regulation has given rise to serious problems in the
governance structure (such as interference by the State Govt, due to its combined role as
dominant shareholder, manager, regulator, supervisor and auditor; further the precise
demarcation of the powers between the two regulators is ambiguous.)

4.5.2 Management and HR Issues

Major problem related to HR is ageing staff and inadequate qualification of existing
employees. Another problem is lack of training facility to the existing employees. Co­
operative banks also face heavy competition in the market and they are unable to attract
young talent.

4.53 Issues Relating to Finance

The poor recovery of outstanding credit by the rural cooperative banks makes the whole
system unsustainable and lack of standardised business model and risk management

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system. Over exposure to the agri sector and lack of diversification of the loan portfolio are
major problems relating to finance.13

4.6 Co-operative Banks in Satara City

Following table shows number of co-operative banks and total number of employees
working with these banks in satara city.
Table 4.6.1

No. of
Sr. Name of Cooperative Bank
Employees
1 Satara D.C.C Bank, Satara 315
2 Sharamik Co-op Bank Ltd, Satara 11
3 Krishna Co-op Bank Ltd,Satara 4
4 Rayat Sevak Co-op Bank, Satara 52
5 Ajinkyatara Mahila Co-op Bank, Satara 51
6 Baramati Co-op Bank,Satara 8
7 Col.R.D Nikam Sainik Co-op Bank, Satara 130
8 Janata Co-op Bank, Satara 134
9 Malojiraje Co-op Bank, Satara 12
10 Jijamata Co-op Bank,Satara 21
11 Koyana Co-op Bank Ltd,Satara 5
12 Janaseva Co-op Bank, Satara 8
13 Shikshak Co-operative Bank, Satara 45
14 Rahimatpur Co-op Bank,Satara 3
15 Mandeshi Mahila Co-op Bank, Satara 7

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