Cooperative Banking
Definition
Cooperative banking refers to retail and commercial banking organized on a cooperative basis, where institutions accept deposits and provide loans globally.
Types of Institutions
Cooperative banking includes various entities such as credit unions, mutual savings banks, building societies, and cooperatives. It also encompasses commercial services provided by mutual organizations to cooperative businesses.
Ownership and Governance
Cooperative banks are owned by their customers and operate on the principle of “one person, one vote.” They are regulated under both banking and cooperative legislation, providing savings and loan services to both members and non-members.
Market Presence
Many cooperative banks are publicly traded, which can dilute member control due to partial ownership by non-members. This can classify them as semi-cooperative institutions.
Structural Differences
Cooperative banking systems are generally more integrated than credit unions. Local branches manage their operations and elect their boards, but major strategic decisions typically require approval from a central office. In contrast, credit unions often retain local control over strategic decisions.
Criticism
Some cooperative banks face criticism for straying from cooperative principles, particularly when they raise capital through public markets, which creates competing interests among shareholders and can lead to a loss of member authority.
Cooperative Banking in India
Role in the Economy
Cooperative banks are crucial to India’s economy, especially in rural areas, and support small industries and self-employed workers in urban regions.
Regulation
These banks are registered under the Cooperative Societies Act of 1912 and regulated by the Reserve Bank of India under the Banking Regulation Act of 1949 and the Banking Laws (Application to Cooperative Societies) Act of 1965. The first cooperative credit union in India, Anyonya Sahakari Mandali, was established in 1889 in Baroda.
Credit System Structure
India’s Cooperative Credit System consists of both short-term and long-term credit institutions:
- Short-Term Credit: Typically organized in a three-tier structure:
- Primary Agricultural Cooperative Societies (PACS) at the village level
- District Central Cooperative Banks (DCCBs) at the district level
- State Cooperative Banks at the state level
- Long-Term Credit: Organized in a two-tier structure:
- Primary Agriculture and Rural Development Banks (PARDBs) at the village level
- State Agriculture and Rural Development Banks
Licensing and Regulation
State Cooperative Banks and Central Cooperative Banks are licensed by the RBI and focus on agricultural credit. The National Bank for Agriculture and Rural Development (NABARD) provides refinancing support and conducts inspections.
Primary Cooperative Banks
Also known as Urban Cooperative Banks, these institutions are registered under state laws or the Multi-State Cooperative Societies Act. They operate similarly to commercial banks and are licensed by the RBI, which serves as both the controlling and inspecting authority.