Cooperative Banking in India- An Overview
In this blog, we are going to brief the Cooperative Banking of India and by the end of this article you’ll be able to learn:
- What are Cooperative Banks?
- History of Cooperative Banking
- Structure/ Types of Cooperative Bank
- The function of Cooperative Bank
Let us first understand what is the meaning of cooperative society. When people or a group of individuals come together, contribute money and form an institution to fulfil the financial requirements of its members.
What are Cooperative Banks?
Cooperative Banks are the small-sized banks having the ability to operate in rural or urban or semi-urban for the purpose of mutual help and cooperation, operating on the basis of no profit no loss. These banks also classified as scheduled banks under RBI.
- Cooperative Banks are registered under the Cooperative Society Act 1912 in the State of a country.
- Cooperative Banks are also regulated by the Reserve Bank of India like Commercial Banks under the Banking Regulation Act 1949 and Banking Laws (Cooperative Society) Act 1965 which was established specially for cooperative banks.
History of Cooperative Banks India:
The concept of cooperative banks was emerged with the establishment of the Cooperative Society Act 1904 to fulfil the financial need of rural, semi-urban and remote areas. The Cooperative Society Act 1904 recommended that it is necessary to form a cooperative society to penetrate and to avail the banking services at the doorsteps of the remote and rural public.
Later in 1912, the Cooperative Society Act 1912 was launched under which new institutions or societies were initiated. This act also includes few guidelines about supervision, auditing, the supply of credit, the arrangement of funds etc for the cooperative banks.
Structure of Cooperative Banks:
Cooperative Banks can be categorised on the basis of short term, long term credit and type of financial need, for example, agricultural or non-agriculture. Thus Cooperative Banks can be of two types, Agriculture Cooperative Banks and Non-Agriculture Cooperative Banks. Further Agricultural Cooperative Banks is of two type first is Short term credit bank and second is long term credit banks.
Mostly cooperative banks are known for agricultural and short term credit. Therefore Short term agricultural cooperative banks can be classified on the basis of function and area of operations. You can see the following diagram to clarify and understand better about the structure of Cooperative Banks.
Thus Cooperative Banks is mainly of three types.
- Primary Credit Society
- Central Credit Society
- State Cooperative Bank
Let us discuss one by one.
Primary Credit Society:
The Primary Cooperative banks operate at the village/town level in which every member belongs to the same village or town or nearby. The area finance by these credit societies are individuals, personal finance, small scale business, home finance etc.
Primary credit societies consist minimum of 10 members, one secretory and working committee which ensures its proper functionality. Anyone who wants to become it’s a member can pay a nominal fee and become a member of the PCS.
These banks generate funds primarily from its members where the people with surplus money become the lender and earn some interest on the contributed amount, whereas people who need money pay interest.
Central Credit Society:
These credit societies operate at the district level and responsible for monitoring, auditing the primary credit societies and proper utilisation of surplus funds. In other words, we can say Central Credit society is the head office of primary Credit societies. There may be any number of primary credit society in a district and each PCs report and invest their surplus funds in CCs.
CCs works as a mediator between State Cooperative Banks and Primary Credit Societies. They help to regulate, inspect and operate PCs under the guidelines passed from State Cooperative Banks.
State Cooperative Banks:
State Cooperative Bank is the supreme institution (Apex Institution) for the Cooperative Credit Societies operating under RBI Banking Regulating Act 1949 at the state level. Thus State Cooperative Banks follows the guidelines of RBI and eligible to take advance from RBI at repo rate. This bank also raises funds from the State Government and the surplus fund from the Central Cooperative Society.
Land development Cooperative Banks:
These banks fulfil the long term need and provide long term credit to people in rural areas. The first-ever land development cooperative bank was originated in 1920 in Punjab with the name Land Mortage Bank. Later on, this bank was renamed to Land Development Bank in 1951.
Non-agricultural Credit Institution:
In this category the cooperative banks which provide credit facilities to the people other than agricultural needs known as Non-agricultural Credit institutions.
Functions of Cooperative Banks:
Cooperative banks play a key role in banking especially in developing countries like India. The main functions of cooperative banks are:
- The Cooperative Banks play a crucial role in short term rural financing for example agricultural, cattle, street vendors, shopkeepers etc.
- Cooperative banks establish a link between RBI and beneficiaries by a proper hierarchy of cooperative banking. In simple words, the money borrowed from cooperative society travels from state cooperative banks to central cooperative society to primary credit societies to individuals and state cooperative society take a loan from RBI.
- The Cooperative Banks protect its members form money lenders and agents who charge a high rate of interest and commission from borrowers.
- Cooperative banks provide credit facilities to the farmers at a lower level of interest because their objective is not to make a profit but provide service to its members.