Urban Cooperative Banks

What are cooperative banks? What are urban cooperative banks? What is the significance of UCBs? Read here.

Urban cooperative banks are recently in news.

Reserve Bank of India (RBI) governor signalled reforms in the trouble-prone urban cooperative banks (UCBs).

RBI Governor indicated that the banking regulator will ring in sweeping regulatory changes to reform urban cooperative banks.

What are Cooperative banks?

It is an institution established on a cooperative basis to deal with the ordinary banking business. Like other banks, cooperative banks are founded by collecting funds through shares, accepting deposits, and granting loans.

They are Cooperative credit societies where members from a community group together to extend loans to each other, at favorable terms.

They are registered under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002.

The Cooperative banks are governed by the Banking Regulations Act, 1949 and Banking Laws (Cooperative Societies) Act, 1955.

They are broadly divided into urban and rural cooperative banks.

Features of cooperative banks:

• Customer Owned: Cooperative bank members are both the customer and owner of the bank. These banks are owned and controlled by the members, who democratically elect a board of directors.
• Profit Allocation: A significant part of the yearly profit, benefits, or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the cooperative members, with legal and statutory limitations.
• Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to the masses in rural areas.

What are Urban Cooperative banks (UCB)?

The term Urban Cooperative Banks (UCBs) is not formally defined but refers to primary cooperative banks located in urban and semi-urban areas.

The Urban Cooperative Banks (UCBs), the Primary Agricultural Credit Societies (PACS), the Regional Rural Banks (RRBs), and Local Area Banks (LABs) could be considered as differentiated banks as they operate in localized areas.

Till 1996, these banks were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.

These banks were traditionally centred on communities and local workgroups as they essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

History of Urban Cooperative Banks

The inspiration for UCB was the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany. The origins of the urban cooperative banking movement in India can be traced back to the 19th century when such societies were first set up in India.

Cooperative societies are based on the principles of cooperation, mutual help, democratic decision-making, and open membership. Cooperatives represented a new and alternative approach to organization as against proprietary firms, partnership firms, and joint-stock companies which represent the dominant form of commercial organization.

The first known mutual aid society in India was the ‘Anyonya Sahakari Mandali’ organized in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar.

The enactment of the Cooperative Credit Societies Act, 1904 gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October 1904.

The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906.

The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were suited to cater to the needs of the lower and middle-income classes of society and would encourage the principles of banking amongst the middle classes.

The Government of India Act in 1919 transferred the subject of “Cooperation” from the Government of India to the Provincial Governments.

The Cooperative Planning Committee (1946) and The Rural Banking Enquiry Committee (1950) recommended the establishment of such banks even in places smaller than taluka towns.

The first study of Urban Cooperative Banks was taken up by RBI in 1958-59. The Report published in 1961 acknowledged the widespread and financially sound framework of urban cooperative banks and emphasized the need to establish primary urban cooperative banks in new centers and suggested that State Governments lend active support to their development.

Recent developments related to UCB

In January 2020, the RBI revised the Supervisory action Framework (SAF) for UCBs.

In June 2020, the Central government approved an Ordinance to bring all urban and multi-state cooperative banks under the direct supervision of RBI.

Most recently RBI appointed a committee that suggested 4 tier structure for the UCBs.

• Tier 1 with all unit UCBs and salary earner’s UCBs (irrespective of deposit size) and all other UCBs having deposits up to Rs 100 crore,
• Tier 2 with UCBs of deposits between Rs 100 crore and Rs 1,000 crore,
• Tier 3 with UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore and
• Tier 4 with UCBs of deposits more than Rs 10,000 crore.

Challenges faced by cooperative banks:

1. Changing financial sector trends:

Changes in the financial sector and evolving microfinance, FinTech companies, payment gateways, social platforms, e-commerce companies, and NBFCs challenge the continued presence of the UCBs, which are mostly small in size, lack professional management, and have geographically less diversified operations.

2. The decline in deposits and loans:

The collapses in the management have led to people losing trust in cooperative banks slowly.

3. Declining contributions:

A 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% in 1992-93 to just 11.3 % in 2019-20.

4. Declining numbers:

After liberalization in licensing policy of 1993, nearly one-third of the newly licensed ones became financially unsound. In 2005, RBI merged the weaker ones together into one unit.

5. Dual control:

The UCBs were under dual regulation by the state registrar of societies and the RBI. But in 2020, all UCBs and multi-state cooperatives were brought under the supervision of RBI.

Way forward:

The establishment of the country’s dedicated Ministry of Cooperation is a crucial moment for the history of the cooperative movement.

Now, the establishment of a standard regulatory and supervisory framework, and an umbrella organization, should be given top importance in the advancement of UCBs.

The RBI is should interpret the Act’s provisions so that they do not disrupt UCBs and people’s faith is restored in the cooperative banking system.