In this article, Param Veer Chahal, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the co-operative banking system in India.

In the modern technical sense, the birth of the cooperative movement and its applications in the economic field have been traced after the Industrial Revolution in England during the second half of the 18th and the first half of the 19th century. Cooperation, understood as an economic system today, was born as a peaceful reaction to the mercantile and industrial economic revolution. Now cooperation occupies a position of fundamental importance as a form of commercial organization in almost every country in the world.

Introduction

Cooperation means to live, think and work together to achieve a common goal through the cooperative principles. It provides a group of people with one or more common economic needs, voluntarily accepting to combine their human and material resources and to use them for mutual benefit, through a company / organization managed by the group in itself in the democratic line.

Subsequently, any organization formed by a group of people working together to achieve the goals for which it is formed through cooperative principles is called a cooperative society.

History of co-operative banks in India

The cooperative movement was started in India to encourage and promote savings and mortgage in order to help for the development of people with few resources, such as farmers, artisans and other segments of society. During the British Government, based on Sir Frederick’s recommendations, Nicholson (1899) and Sir Edward Law (1901), paved the way for the creation of credit unions in rural and urban areas. Under this law, only primary credit companies were allowed to register and without credit and federal primary credit union organizations were excluded.

After independence, during the first 3 years, i.e. until 1949, it was not possible to achieve significant development. It was mainly due to the problem created by the partition and the absence of a concrete program for national reorganization. However, the leaders of free India could see the importance of the cooperative movement for a successful democracy. The importance was given to strengthen the cooperative structure of the country and different provisions were made through a different five-year plan.

While the initial Five Year plans couldn’t shape up the co-operative banks to function, it was given greater importance from then on. The Sixth Plan established a points program for cooperative societies. Its goal was to transform the societies of primary peoples into polyvalent societies:

1. Rebuild the policies and the cooperative so that it can generate the economic development of people
2. Extend cooperation activities in the areas of food processing, poultry breeding, milk production, fisheries and many other related fields.
3. Provide training and guidance necessary for the development of qualified and efficient personnel.

The Seventh Plan has also given more importance to the growth and expansion of cooperative societies to ensure public participation and achieve its main objective, that is, the movement towards social justice must be faster and must focus more on employment and the alleviation of poverty.

What are co-operative banks?

A cooperative bank is a financial entity that belongs to its members, who are both owners and customers of their bank. Cooperative banks are often created by people belonging to the same local or professional community who share a common interest. Cooperative banks generally provide their members with a wide range of banking and financial services (loans, deposits, bank accounts, etc.). Cooperative banks differ from the action bank by their organization, their objectives, their values ​​and their governance. In most countries, they are controlled by banking authorities and must comply with prudential bank regulations, which place them on an equal footing with shareholder banks. Depending on the countries, this control and supervision can be implemented directly by state or delegated entities in a cooperative federation or a central organization.

Characteristics of a co-operative bank

All cooperative banks share common characteristics as described below:

Customer Owned Entities

In a cooperative bank, the needs of the clients meet the needs of the owners, since the members of the cooperative bank are both, i.e. the customer and the owner. As a result, the cooperative bank’s first goal is not to maximize profits but to provide the best products and services available to its members. Some cooperative banks operate only with their members, but most of them also allow non-member customers to benefit from their banking and financial services.

Democratic Member Control

Cooperative banks are owned and controlled by members, who democratically elect the board of directors. Members usually have the same voting rights, in accordance with the cooperative principle of “one person, one vote”.

Profit Allocation

In a cooperative bank, a significant portion of annual profits, profits or surpluses are generally allocated to build up reserves. Part of this benefit can also be distributed to members of the cooperative, with legal and legal limitations in most cases. In general, benefits are allocated to members through the employer’s dividend, which is related to the use of cooperative products and services by each member, or through an interest or dividend, which is related to the number of shares subscribed by each member.

Co-operative banking in the Indian context

The structure of the cooperative bank in India is divided into a short-term structure and a long-term structure. Although the short-term structure is three levels, the structure of long-term cooperative banks is two-tier, as follows:

Short Term Co-operative structure

• A state cooperative bank works at the highest level (i.e. it works at the state level).
• The Central Cooperative Bank operates at an intermediate level (e.g. District Bank Cooperatives Ltd. District-level works)
• Primary credit unions at the grassroots level (at village level)

Long Term Co-operative bank structure

• State agricultural cooperatives and rural development banks (SCARDB) at the highest level.
• Primary cooperative banks for agriculture and rural development (PCARDB) at the district or block level.

Part played by co-operative banks in India

Cooperative banks in India play an important role in rural financing. Even the activity of cooperative banks in urban areas has increased phenomenally in recent years due to the sharp rise in the number of popular cooperative banks. Cooperative banks should carry out some tasks, i.e. extend all types of credit lines to customers in cash and in kind, to anticipate consumer loans, extend banking services in rural areas, mobilize deposits, control the use of loans, etc. The needs of the cooperative bank are different.

Cooperative banks in India fund rural areas under:

• Agriculture
• Livestock
• Milk
• Nursery
• Personal finance

Cooperative banks in India finance urban areas by virtue of:

• Self-employment
• Industries
• Small-scale units
• Home finance
• Consumer finance
• Personal finance

Types and functioning of Co-operative Banking System in India

Cooperative banks are small units that operate in urban and non-urban centres. They finance small debtors in industrial and commercial sectors as well as professional and salary classes. Regulated by the Reserve Bank of India, they are governed by the Banking Act of 1949 and bank laws (cooperative societies) operate in 1965. The structure of the cooperative bank in India is divided into the following 5 categories:

Primary Co-operative Credit Society

The primary credit cooperative society is an association of borrowers and non-borrowers residing in a particular locality. The company’s funds derive from the share capital and members’ deposits and loans from cooperative central banks. The debt powers of members and society are fixed. Loans are granted to members for the purchase of livestock, fodder, fertilizers and pesticides.

Central Co-operative Banks

These are federations of primary credit societies in a district and are of two types:

• those that have membership only in primary societies and
• those that belong to companies and individuals.

The bank’s funds consist of equity capital, deposits, loans and bank overdrafts of state-run cooperative banks and joint ventures. These banks provide loans to associated companies within the limits of the company’s debt capacity. They also perform all the activities of a stock exchange.

State Co-operative Banks

The state cooperative bank is a federation of the central cooperative bank and acts as custodian of the cooperative banking structure in the State. Its funds are obtained from the social capital, deposits, loans and overdrafts of the Reserve Bank of India. State-owned cooperative banks lend money to cooperative central banks and to primary companies and not directly to farmers.
Land Development Banks

The banks for the development of the territory are organized in 3 levels, that is to say; State, central and primary level and meet the long-term credit requirements of farmers for development purposes. They oversee state development banks, the main land development banks located in the districts and areas of Tehsil in the state. They are governed by the state government and the Reserve Bank of India. Recently, the supervision of banks for land development has been taken over by the National Bank of Agriculture and Rural Development (NABARD). The sources of financing of these banks are the obligations underwritten by central and state governments. These banks do not accept deposits from the general public.

Urban Co-operative Bank

The term Urban Cooperatives Banks (UCB), although not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. Until 1996, these banks were authorized to lend money for non-agricultural purposes only. This distinction is not satisfied today. These banks traditionally focused on communities, localities and workplace groups. Basically, they lend to small borrowers and businesses. Today, its operating environment has greatly increased.

Functions of Co-operative Banks

Co-operative banks also perform the basic banking functions of the banking sector, but differ from commercial banks in the following aspects:

• Commercial banks are companies under the Companies Act of 1956, or the public sector bank under a separate law from the parliament, while cooperative banks have been established under the laws of cooperative societies of different states.
• The structure of the commercial bank is the banking structure while the cooperative banks have a configuration of three tiers, with the State Cooperative at the Apex level, the central / district cooperative bank at the district level and the primary rural Cooperatives.
• Only some of the sections of the 1949 Banking Regulation Act (fully applicable to commercial banks) are applicable to cooperative banks, with the sole result of partial control by RBI cooperative banks.
• Cooperative banks operate according to the principle of cooperation and not completely in the commercial parameters.

Conclusion

The concept of cooperation is as old as humanity and forms the basis for domestic and social life. Cooperation is just a group instinct in human beings that allows us to live with others, work with others and help each other in moments of stress and tension. Without cooperation, the social and economic progress would not be possible. It’s impossible for anyone civilization to thrive unless cooperation completes competition in human society, if there is one. This is because human beings have developed of group life and, therefore, naturally respond to group and social stimuli. Thus, the cooperative spirit is innate and intrinsic in human beings.

It is with this in mind that the current system of Co-operative banking has evolved itself over the years and is still in the process of getting better by adapting to the changing world scenario as well as catering to the needs of people at the national level.