What Is Cooperative Banking?

Cooperative Banking: Cooperative banking is a unique banking model developed to meet the financial needs of a specific community. Unlike traditional banks, cooperative banks are owned and operated by their members, who are also the bank’s customers. These banks operate on a democratic model where members select the board to manage operations.

Cooperative banks in India play an essential role in promoting rural development and financial inclusion, particularly in the agricultural sector. Therefore, these banks are known for their community-focused approach.

In this guide, we’ll explore cooperative bank meaning, types of cooperative banks, functions of cooperative banks, and discuss the pros and cons of this banking model.

What is Cooperative Bank?

A cooperative bank is a financial institution that is owned and operated by its members, who are also the bank’s customers. These banks aim to meet the specific financial needs of a community, offering services like savings accounts and loans at competitive rates. The members elect the board to oversee operations, and the bank’s primary goal is to serve them. Cooperative banks in India are regulated by the Reserve Bank of India (RBI) and follow the States Cooperative Societies Act.

A notable example of a cooperative bank is the Punjab and Maharashtra Cooperative (PMC) Bank, which recently made headlines due to RBI restrictions, raising concerns about the reliability of such institutions. Despite this, cooperative banks remain important for promoting financial inclusion in rural areas.

Features of Cooperative Banking

Cooperative banking operates with a unique model focused on community welfare rather than profit maximization. Here are some of its standout features:

Democratic Control: In cooperative banks, every member has an equal say in decision-making, following the principle of “one member, one vote.” This ensures transparent operations and democratic governance.
Profit Distribution: As non-profit entities, these banks distribute any surplus among their members, either as dividends or reinvestment to strengthen the bank.
Community Development: Cooperative banks support financial literacy, assist local businesses, and fund community projects, promoting a sense of solidarity and mutual support.
Member Ownership: The members are both owners and customers, and their needs shape the bank’s services, prioritizing quality over profit.
Rural Inclusion: Cooperative banks are vital in serving underserved rural populations, providing financial services to those often excluded from mainstream banking.

Also Read: What Is Commercial Banking? | Functions, Types, Careers and Examples

Functions of Cooperative Banks

Cooperative banks have an important role in promoting economic development and financial inclusion, especially in rural areas. The primary functions of cooperative banks are:

Providing Financial Services: Cooperative banks offer affordable banking services to their members, including savings accounts, loans, and other credit facilities. These services are aimed at fulfilling the financial needs of local communities.
Supporting Local Businesses: By providing credit to local businesses, farmers, and entrepreneurs, cooperative banks in India help boost economic growth and create job opportunities in rural and urban areas.
Promoting Rural Development: Cooperative banking plays a significant role in rural development by offering rural financing, and micro-financing, and helping reduce reliance on money lenders, thus fostering economic growth in these areas.
Serving Non-Members: Some cooperative banks extend their services to non-members, making their financial products accessible to a wider audience.
Encouraging Financial Inclusion: Cooperative banks reach underserved sections of society, particularly in rural regions, helping to promote financial inclusion and giving people access to essential banking services.
Participating in Wholesale Markets: Certain cooperative banks also engage in wholesale markets, such as bonds, money, and equities, to strengthen their financial position and provide better services to their members.

Through these functions, cooperative banks are central to improving access to financial services and promoting local development.

Types of Cooperative Banks in India

In India, cooperative banking is classified into urban and rural sectors, with each focusing on distinct financial needs. Let’s explore the main types of cooperative banks and their unique features:

1. Urban Cooperative Banks (UCBs)

Primarily located in cities and towns, these banks cater to the financial needs of urban communities. Moreover, they provide services like savings accounts, loans, and credit facilities to individuals, small businesses, and self-employed professionals.

For example, the Saraswat Cooperative Bank is a prominent urban cooperative bank in India. Regulated by the Reserve Bank of India, ensuring stability and compliance with banking standards.

2. Rural Cooperative Banks

Rural cooperative banks are essential for financial inclusion in villages and agricultural regions. They are further classified into:

a) State Cooperative Banks (StCBs)

Operate at the state level and serve as apex institutions for rural cooperatives.
Offer financial assistance to District Central Cooperative Banks and Primary Agricultural Credit Societies.
Governed by the State Cooperative Societies Act.

b) District Central Cooperative Banks (DCCBs)

They operate at the district level and serve as intermediaries between State Cooperative Banks and Primary Agricultural Credit Societies.
Offer credit facilities to farmers, small businesses, and self-help groups in the district.

c) Primary Agricultural Credit Societies (PACSs)

Grassroots-level cooperative institutions that directly serve rural populations.
Provide short-term loans for agricultural and allied activities to farmers and rural workers.

For example, PACSs play a vital role in financing small farmers for seeds and fertilizers.

3. National-Level Cooperative Banks

Operate across the country, addressing large-scale financial requirements. Regulated by the RBI and focuses on enhancing the cooperative banking framework in India.

For example, the National Cooperative Bank Limited provides services to cooperatives and individuals.

Therefore, Urban Cooperative Banks focus on urban populations, offering financial services to small enterprises and salaried individuals. On the other hand, Rural Cooperative Banks prioritize agricultural finance and rural development, addressing the needs of farmers and small-scale industries.

These types of cooperative banks in India collectively strengthen financial inclusion by providing customized banking solutions to urban and rural populations.

Pros & Cons of Cooperative Banking

Cooperative banking has brought significant benefits to many, especially in rural areas, but it also faces some challenges. Below, we’ve mentioned the both advantages and disadvantages of cooperative banking in India:

Pros of Cooperative Banking

Here are the top benefits and advantages of cooperative banking:

Affordable Credit Options

Cooperative banking offers loans at lower interest rates, making them more affordable than those provided by money lenders. This helps protect rural communities from high-interest charges and monopoly practices often imposed by private money lenders.

Encourages Savings and Investments

Cooperative banks help rural communities develop a savings habit, moving away from hoarding money. With the option to save and invest, people are better equipped for long-term financial planning, which ultimately boosts the local economy.

Support for Agriculture and Farming

Cooperative banks provide credit for agricultural activities at lower interest rates, allowing farmers to invest in better seeds, fertilizers, and improved farming techniques. This contributes to improving agricultural productivity and sustainability.

Promotes Financial Inclusion

Cooperative banks serve rural areas where traditional banks may not have a presence, helping to include underserved populations in the formal financial system.

Community-Oriented Banking

As member-owned entities, cooperative banks focus on serving their members’ needs rather than maximizing profit. They help foster a sense of mutual support and community development.

Cons of Cooperative Banking

You can find here some of the main disadvantages of cooperative banking in india:

Limited Coverage

Despite their benefits, cooperative banks in India have limited reach. Only about 45% of the rural population is covered by cooperative banking, and their services are mainly concentrated in states like Gujarat, Maharashtra, and Punjab.

Inefficiency in Operations

Many cooperative banks are managed by members themselves, which can lead to inefficiencies and a lack of professional management. This often results in financial losses, as seen with many primary agricultural credit societies operating at a loss.

Increasing Overdue

One of the major issues with cooperative banks is the growing number of overdue loans. In some regions, like the Northeastern states, overdue loans in short-term credit have become a serious concern, limiting the bank’s ability to function effectively.

Regional Imbalances

The distribution of credit is uneven, with certain states receiving a larger share of financial resources. For instance, 80% of cooperative bank credit is concentrated in just eight states, leaving many other regions under-served.

Political Influence

Cooperative banks are often subject to political interference, which can affect their management and operations, leading to inefficiencies and sometimes corruption.

Growing Competition

As new types of banks and financial institutions emerge, cooperative banks face increasing competition. Many customers are drawn to larger banks offering more modern services and better facilities, which may threaten the viability of cooperative banks.

Also Read: Understanding the Role of Central Bank in India’s Economic Development

However, cooperative banking in India has proven to be a valuable tool for financial inclusion, especially in rural areas. However, it also faces challenges such as limited coverage, inefficiency, and regional disparities. For cooperative banks in India to thrive, they must address these issues by improving management, expanding their reach, and ensuring better loan recovery practices.

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Cooperative Banking FAQs

Cooperative banking refers to financial institutions formed by a group of individuals to meet the financial requirements of their community. These banks are owned and managed by their members, with the board members elected through a democratic process.

What is the main aim of a cooperative bank?

The main aim of cooperative banks is to offer affordable financial services, such as savings and loans, to their members, supporting financial inclusion and promoting local economic development.

What is an example of a cooperative bank?

An example of a cooperative bank is the Punjab State Cooperative Bank, which offers services like online banking, loans, and savings accounts. It has been serving Punjab since its establishment in 1949.

What is the History of Co-operative Banks?

Cooperative banks in India originated in the early 1900s. The Cooperative Credit Societies Act, of 1904, marked the first step, followed by the Cooperative Societies Act, of 1912, and continued with various reforms, extending the reach of cooperative banks in rural and urban areas.

What is the Structure of Cooperative Banking?

Cooperative banking in India has a three-tier structure: State Cooperative Banks, Central Cooperative Banks, and Primary Agricultural Credit Societies (PACS). These layers work together to serve the banking needs of rural and urban populations.