why-cooperative-banks-in-india-are-struggling

Context: Recently, the Central government announced the creation of a separate ‘Ministry of Co-operation’.

  • The Ministry will work to streamline processes for ‘Ease of doing business’ for co-operatives and enable development of Multi-State Co-operatives (MSCS).
  • Cooperative banks in India have been struggling to survive for the last few years. 
  • According to the Trends and Progress of Banking in India report published by the Reserve Bank of India, urban commercial banks have witnessed a decline in deposits from 6.1 per cent in 2018-19 to 3.5 per cent in 2019-20. 
  • By the end of March 2020, the sector comprised 1,539 UCBs and 97,006 rural cooperative banks, with a depositor base of 8.6 crore.

About Cooperative 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.
  • The  structure  of  commercial  banking  is  of  branch-banking  type;  while  the  co-operative  banking structure is a three tier federal one. 
    • A State Co-operative Bank works at the apex level (ie. works at state level). 
    • The Central Co-operative Bank works at the Intermediate Level. (ie. District Co-operative Banks ltd. works at district level) 
    • Primary co-operative credit societies at base level (At village level)
    • According to an RBI report, there were 1,551 urban cooperative banks as on 31 March 2018, and 96,612 rural cooperative banks as on 31 March 2017, with the latter accounting for 65.8% of the total asset size of all cooperative banks.
    • The UCBs, though constitute only 2% in number, they dominate the sector in financial powers (44% of deposits and 31% advances in FY17).
    • Regulated by the Reserve Bank of India, they are governed by the Banking Regulations Act 1949 and banking laws (co-operative societies) act, 1965. 

Govt. initiatives

  • Banking Regulation (Amendment) Act, 2020: The cooperative banks have been brought under the supervision of RBI after Parliament approved amendments to the Banking Regulation Act.
    • This gave adequate powers to the central bank to control the cooperative banks the same way it supervises scheduled cooperative banks. 
    • It also gave the RBI a say in key appointments.
  • RBI initiatives: Over the years, the Reserve Bank has undertaken several steps to strengthen the sector, including 
    • entering into Memoranda of Understanding with state and central governments to facilitate coordination of regulatory policies, 
    • formation of task force for UCBs,
    • A comprehensive set of capacity building initiatives, and 
    • measures to bring in efficiency through adoption of technology.
    • HR management: They have been permitted to hire experts, including former employees on a contractual basis, subject to conditions.
      • Further, the RBI prescribed educational qualifications and 'fit and proper' criteria for managing directors (MDs) and whole-time directors (WTDs) of primary urban cooperative banks and barred MPs and MLAs from these posts.

Challenges faced:

  • Sinking balance sheet: In recent years, Urban Cooperative banks (UCBs) have witnessed a sharper decline in terms of both loans and deposits. 
    • The average growth rate of deposits declined from 13.1 per cent in the first decade of the consolidation drive to 8 per cent during 2014-15 to 2019-20.
    • However, in 2019-20 the asset quality of both SUCBs and NSUCBs started to deteriorate with the later recording a significant rise in GNPA ratio.
  • Dual control: The UCBs are governed by both state co-operative bodies and the RBI.
    • Earlier, the Central Registrar of Cooperative Societies (CRCS) was empowered tolook after their incorporation, registration, management, recovery, audit, supersession of Board of Directors and liquidation. 
    • The Reserve Bank was vested with regulatory oversight on banking activities of UCBs, state cooperative banks (StCBs) and district central Cooperative banks(DCCBs).
    • However, the RBI's regulatory and supervisory powers were limited in many ways which impacted its ability to take prompt actions in case of irregularities.
  • Corruption issues: Investigations into the case of Punjab and Maharashtra Cooperative (PMC) Bank  scam have shown gross financial mismanagement and a complete breakdown of internal control mechanisms. 
  • Diminished share in agricultural lending: The RBI report noted that despite a crucial role played by the sector, its share in total agricultural lending diminished considerably over the years, from as high as 64 per cent in 1992-93 to just 11.3 per cent in 2019-20.
  • Fair Audit: It is well known that audits are done entirely by department officials & are neither regular nor comprehensive. Delays in the conduct of audits and submission of reports are widespread.
  • Government Interference: Right from the beginning the government has adopted an attitude of patronizing the movement. Cooperative institutions were treated as if these were part & parcel of the administrative set up of the government.
  • Absence of modern Banking Practices: They are not having the modern practices of banking in there working viz. net banking, mobile Banking, online banking, e-banking, ATM banking and all other modern banking practices. 
  • Abusing Power by the Leadership: Those who control cooperative societies are locally powerful, with strong political affiliations.
  • Limited Coverage: The size of these societies has been very small. Most of these societies are confined to a few members and their operations extended to only one or two villages. as a result their resources remain limited, which make it impossible for them to expand their means and extend their area of operations.

Way forward: Several committees - from Satish Marathe Committee of 1991 to R Gandhi Committee of 2015 - have diagnosed the problems with the UCBs and offered solutions.

  • Reorganization of Societies in order to become economically viable & efficient. To ensure this  small societies should be merged to build larger societies. 
  • Accountability: The cooperative societies should also be brought under the purview of the right to information act. 
  • Legislative Reforms: The Narasimham committee in its report had rightly observed that a legal framework that clearly defines the rights and liabilities of the parties to contracts. 
    • The amendment in the cooperative societies act may be made to ensure the fair & ethical behavior by the board of directors.
  • Corporate Governance: The Madhava Rao committee suggested that at least two directors with suitable professional qualification and experience should be present on the boards of ucbs.
  • Loan Sanctioning Measures: The loan from credit societies should be granted in such a manner and under such conditions that these are used productively and not misused. 

Failure of cooperatives would mean failure of best hope for rural India. The government should ensure the autonomous and Democratic Functioning of co-operatives, while maintaining the accountability of management to the members and other stakeholders.

Source https://timesofindia.indiatimes.com/business/india-business/explained-why-cooperative-banks-in-india-are-struggling/articleshow/84321360.cms