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EDITORIAL ANALYSIS–Co-operative banks : Is dual regulation the problem?

The Editorial covers GS paper 3 [Inclusive growth and issues arising from it.]

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  • Cooperative banking in India and the recent Punjab and Maharashtra Cooperative (PMC) Bank crisis.
  • In late September, the Reserve Bank of India (RBI) imposed restrictions on withdrawals from the Punjab and Maharashtra Cooperative (PMC) Bank, one of the largest urban cooperative lenders. 
  • The RBI has imposed lending restrictions on PMC Bank, at Rs 10,000 per customer for six months, creating panic among depositors. 

What is the history of Co-operative Movement in India?

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  • The co-operative movement in India is century old which was primarily for dealing with the problem of rural credit.
  • It was aimed at concentrating the efforts in releasing the exploited classes out of the clutches of the money lenders.
  • During British rule, based on the recommendations of Sir Frederick Nicholson (1899) and Sir Edward Law (1901), the Co-operative Credit Societies Act was passed in 1904, paving the way for the establishment of co-operative credit societies in rural and urban areas.
  • Under this Act, only primary credit societies were permitted to register and non-credit and federal organisations of primary co-operative credit societies were left out.
  • The first urban co-operative credit society was registered in October 1904 at Kanjeepuram now in Tamil Nadu State.
  • This Act was amended in 1912 to facilitate the establishment of central co-operative banks at the district level, thereby giving it a three tier federal character.

What do we understand Co-operative 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 of sharing a common interest.
  • Cooperative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts, etc.).
  • Co-operative banks differ from stockholders bank by their organization, their goals, their values and their governance.
  • In most countries, they are supervised and controlled by banking authorities and have to respect prudential banking regulations, which put them at a level playing field with stockholders banks.
  • The co-operative banks in India are regulated by the Reserve Bank of India (RBI) and governed by Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.

What are the types of Co-operative banks?

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  • The primary co-operative credit society is an association of borrowers and non-borrowers residing in a particular locality. 
  • These are the federations of primary credit societies in a district and are of two types-those having a membership of primary societies only and those having a membership of societies as well as individuals. 
  • The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the co-operative banking structure in the state. 
  • The Land development banks are organized in 3 tiers namely; state, central, and primary level and they meet the long term credit requirements of the farmers for developmental purposes.
  • The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary co-operative banks located in urban and semiurban areas. 

What are the functions?

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  • Commercial banks are joint-stock companies under the companies’ act of 1956, or public sector bank under a separate act of a parliament whereas co-operative banks were established under the co-operative societies acts of different states.
  • Commercial bank structure is branch banking structure whereas Cooperative banks have a three tier setup, with State Co-operative Bank at Apex level, Central / District Co-operative Bank at district level, and Primary Co-operative Societies at rural level.
  • Only some of the sections of Banking Regulation Act of 1949 (fully applicable to commercial banks), are applicable to co-operative banks, resulting only in partial control by RBI of co-operative banks.
  • Co-operative banks function on the principle of cooperation and not entirely on commercial parameters.

What are the existing regulations?

  • The urban co-operative banks are regulated and supervised by State Registrars of Co-operative Societies, Central Registrar of Co-operative Societies in case of Multi-state co-operative banks and by Reserve Bank.
  • The Registrars of Co-operative Societies of the States exercise powers under the respective Co-operative Societies Act of the States in regard to incorporation, registration, management, amalgamation, reconstruction or liquidation.
  • In case of the urban co-operative banks having multi-state presence, the Central Registrar of Co-operative Societies, New Delhi, exercises such powers.
  • The banking related functions, such as issue of license to start new banks / branches, matters relating to interest rates, loan policies, investments, prudential exposure norms etc. are regulated and supervised by the Reserve Bank of India under the provisions of the Banking Regulation Act, 1949(AACS).

What is the Vision document?

  • There was a proliferation of licences issued between 1991 and 1998. 
  • RBI to deal with the problems of cooperative banks issued a vision document in 2004-05 and stopped all licences of new branches and new bank entities.
  • Under the vision document, a Memorandum of Agreement was entered into by the RBI with each of the States, where the State accepted an audit by professional auditors, and constituted a Task Force for urban cooperative banks which was co-chaired by the RCS and the RBI Regional Director.
  • This worked very well and a number of cooperative banks were delicensed, merged or liquidated. 
  • As per the RBI Financial Stability Report (2017-18), there were only four urban cooperative banks with capital adequacy ratios below the regulated threshold.


  • The RBI has announced a scheme for voluntary transition of urban cooperative banks into small finance banks, in line with the recommendations of a high-powered committee chaired by former Deputy Governor of the RBI, R. Gandhi.
  • RBI has given the choice to urban cooperative banks to convert to small finance banks. 
  • That option is there for those players with more than ₹50 crore capital and 15% capital adequacy. 
  • This is an incentive as they will then be able to grow their capital by issuing shares at a premium. 
  • RBI has also said that for urban cooperative banks there could be an umbrella organisation promoted by the banks themselves to raise capital as a joint stock company can from the markets.

Source: The Hindu.