Posted in GS 2, Editorial Analysis, Governance

Fixing the rot in the cooperative sector

 October 4, 2023  Leave a comment

Syllabus
Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.(GS2)
Source
The Hindu,4/10/2023
Context
Financial irregularities in the Karuvannur Service Cooperative Bank in Thrissur,Kerala and corresponding investigation by the Enforcement Directorate.
Application: Where to Place?
Challenges of cooperative banks
Solutions to crisis of cooperative banks
Need or significance of cooperative banks
Status of Urban Co-operative Banks in India
Co-operative sector in General

Content

Cooperative Bank

  • A cooperative bank is a financial institution in which the members are both the owners and the clients.
  • Cooperative banks are registered under the States Cooperative Societies Act and regulated by the Reserve Bank of India (RBI).
  • They are regulated by the Banking Regulations Act, 1949 and the Banking Laws (Co-operative Societies) Act, 1955.
  • Cooperative Banks are instrumental in bringing the unbanked rural populace into the formal banking system.
  • Cooperative banks are not-for-profit entities & their primary focus is to serve the financial needs of their members.
  • It works for the economic welfare of poor or weaker sections of society.
  • Cooperative societies are based on the principles of cooperation, mutual help, democratic decision making and open membership.
  • Co-operative banks have a three tier structure.Primary Credit Societies-PCS(agriculture or urban),District Central Co-Operative Banks– DCCBS,State Co-Operative Banks-SCBC (at the apex level).

Urban Cooperative banks (UCB)

  • Urban Co-operative Banks (UCBs) refers to primary cooperative banks or primary credit societies located in urban and semi-urban areas of India.
  • Registered under the Cooperative Societies Act, these member-owned and run entities cater to banking requirements of small businesses, individuals, and communities, who find it difficult to access services of the mainstream banking segment.
  • Services include deposit accounts, loans, remittances, and other financial products and services.
  • Currently, there are 1,514 UCBs in India, accounting for 11% of the total credit to agriculture.
  • UCBs have the highest net NPA and gross NPA ratios across the banking sector. Even the provision coverage ratio of UCBs is considerably lower than that of public sector banks.

Important Features of Indian Cooperative Banks

  • Financial Inclusion:Providing banking services to people who do not have access to formal banking channels.
  • Agricultural Credit: Provide credit to farmers at reasonable rates of interest.
  • Small Business Loans: Provide loans to small businesses that may not be able to obtain credit from commercial banks.
  • Community Development:Promote community development by providing financial assistance for local projects.
  • Low-Cost Banking Services: Offer low-cost banking services, which makes them accessible to all people.
  • Customer-Focused: Cooperative banks are customer-focused and provide personalized services to their members.
  • Democratic Governance:Every member has equal voting rights     (One person, One Vote principle).The board of directors elected among the members oversee the bank’s operations and make key decisions.
  • Risk Sharing: Members of cooperative banks share the risks associated with the bank’s operations, which helps reduce the risk for individual members.
  • Profit Sharing:Surplus generated by the bank is distributed among the members or reinvested.
  • Social Responsibility: Cooperative banks are socially responsible and work towards the betterment of society(Social Welfare)

Constitutional Provisions related to cooperative society

  • Article 19(1)(c)(Fundamental Right):Right to form cooperative societies a fundamental right.
  • Article 43B(DPSP):The State shall endeavour to promote voluntary formation, autonomous functioning, democratic control and professional management of co-operative societies.
  • Part IXB(Articles 243-ZH to 243-ZT) of the Constitution grants constitutional status to co-operative societies and contains provisions for their democratic functioning. It was inserted by the Constitution (Ninety-seventh Amendment) Act, 2011.
  • The  “Cooperative Societies” is a State Subject in the 7th Schedule via entry 32 of the State List in the Constitution of India.

Issues/Challenges

  • Lack of a proper auditing mechanism and the absence of transparency in the functioning of cooperatives are other major failures responsible for the current crisis of cooperative banks.
  • Control of Societies and Urban banks by local politicians with no professional expertise, and backdoor appointments are other issues.
  • Lack of capital makes it difficult for them to expand their operations or invest in new projects.
  • Mismanagement of funds,Money laundering and corruption are other grave issues.Eg:Punjab and Maharashtra Cooperative (PMC) Bank scam.
  • Inefficient governance leads to poor decision-making and a lack of accountability .
  • Inadequate infrastructure also limits their ability to function effectively.

Govt Initiatives

  • Formation of the Ministry of Cooperation to strengthen India’s cooperative architecture and sync it with the country’s economic and social needs.
  • ‘Sahakar Se Samriddhi’ initiative is being proposed to strengthen cooperatives by bringing transparency, modernization, and creating competitiveness.
  • Setting up new Multi-State Cooperatives Societies (MSCS) for key farm-related operations.
  • Computerisation of Primary Agricultural Credit Societies(PACS).
  • Setting up a National Cooperative Database to consolidate data from cooperatives across the country.
  • Creating a National Cooperative Policy to guide the development and growth of cooperatives.

Successful Cooperative Banks: A case Study

  • Saraswat Cooperative Bank(Mumbai) is regarded as one of the largest Cooperative banks in the country,running successfully for over 100 years. The bank has a commendable revenue and great customer support .The transparent policies of the bank have helped the bank  to stay afloat for all these years.

Way Forward

  • Cooperative banks should focus more on the quality of governance, which is based on three pillars of compliance, risk management, and internal audit.
  • Professionalism and a proper auditing system will have to be put in place to restore public confidence in the sector.
  • Strengthen cooperative banks by enabling access to capital, improving governance and ensuring sound banking through the RBI.
  • Bank boards should democratize discussions and prevent excessive dominance by few members.The board should not be static and there should be new inductions, new minds and younger persons coming into the board.
  • Government should provide capital infusion to overcome their capital shortage.
  • Cooperative banks should follow the basic principles of Good Governance.

Reference

Practice Question
Cooperative banks have been instrumental in providing financial assistance to rural areas. However, they face several challenges in their functioning. Discuss the challenges faced by cooperative banks and suggest solutions to overcome them.

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