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Co-Operative Banks: A Critical Analysis

The banking business has undoubtedly done wonders for the economic world by following the simple method of accepting money deposits from one person and then lending the same money to the one who is in need. Banking activity encourages the flow of money to productive use and productive investments.

If the banking system did not exist then the savings of the people would sit idle in their homes, the entrepreneurs would not be in a position to raise the money and ordinary people who dream to purchase a new car or house or not be able to purchase as they would be no one to lend the money.

The Government of India decided to develop the cooperative as the institutional agency as to solve the problem of ruler indebtedness which by the time had become a curse for the population of India and in 1904 the Government of India had successfully started the corporative movement as in such situation's cooperative banks act like a balancing center.

These banks have made significant contributions to the various sectors of the national economy and have achieved a huge growth over the years and mean not to mention these banks also contribute the major part in India's banking and financial system. We can say that the cooperative banks have to act as a friend philosopher and guide us to the entire cooperative structure.

The role of cooperative banks in rural and urban areas has been increasing with a huge graph day by day however as the coins have two sides this growth has shown some weaknesses in safeguarding the interest of the members and full film and of objects for which these institutions are organized. Paper is an attempt to address some of the problems being faced by the cooperative sector in India and solutions for them and how important it is for the bank to adopt latest technology of the banking system like online banking credit cards and as to bring the bank at Par with the private banking sector Introduction

Cooperative Bank is a financial entity which basically belongs to the members who are at that time the owners are the customers of the bank. These banks often created by persons who belong to the same local or professional community or a person who shares the same common interest. Cooperative banks generally provide their members with a wide range of facilities that includes banking and financial services.

The cooperative banks are well known to provide services such as saving accounts current accounts saved deposit locals granting loan or mortgages to the private customers and customers with business. Parts from this these bags are mostly used by middle class users for whom a bank is a place where they can technically save the money and interest on the same all though these banks, I am not better than private banks in terms of providing facilities but the interest rates and definitely competitive. However, the documentation process is very lengthy and getting a loan approved is quite a task.

The term urban cooperative banks are not formally defined but generally they refer to the primary cooperative banks which are located in urban and semi urban areas. Corporative banks in rural areas mainly finance agriculturally based activities including farming, cattle etc. along with some small-scale industry and self employment driven activities where as cooperative banks in urban areas mainly finance various categories of people for self employment, industries, small scale unit and home finance.

Hence, we can say that the corporative credit system of India has the largest network in the world and cooperative banks have advanced more credit in the Indian agriculture sector then commercial banks corporation in a vast country like India is a great significance because:
  1. This organizations after the poor and unskilled people.
  2. It acts as an institution of mutual help.
  3. It helps to soften the conflicts between the different classes as a middle-class lower class and high class.

Characteristics of cooperative banks
  1. Customer owned entities.
    The corporate banks have two kinds of owners that is the owners of the bank and the customers of the bank thus we can say that the corporative bank is not there to maximum profits as commercial banks but to provide the best possible services to its members however some cooperative banks also try to admit non members so that they could provide them with the banking services.
  2. Democratic member control
    Needless to mention, cooperative banks are owned and controlled by the members who among themselves democratically elect the board of directors. The cooperative Bank runs with the basic principle of one man one vote. This principle is followed irrespective of the number of shares owned by a single member thus ensuring that there is no partiality between the members and no member enjoys any arbitrary power.
  3. Allocation of profits
    This characteristics simply states that minimum portion of the profits at transfer to Statutory reserves or some other reserves and then the rate of interest which is fair is paid on such capital subscribe by the members. A part of this profit can also be distributed to the corporative member but with certain limitations. D) Inclusion of rural masses.

    A significant role is played by cooperative banks in the inclusion of the financial sector of unbanked rural masses.

Principles of cooperative banks
  1. Voluntary and open membership.
    These banks are voluntarily organizations that means that these are open to all persons who are willing to use their services and who are ready to accept certain responsibilities related to the membership without any sort of discrimination be it gender, social, political, or religious.
  2. Democratic member control
    These banks are also democratic organizations as these are controlled by the members who actively participate in making certain policies or decisions.
  3. Independence and autonomy
    Creative bags are self-help organizations these are autonomous that means if they enter into any agreement with other organizations be it government or they try to raise the capital from any other external sources then they do it on the terms that ensure democratic control by the members and maintain autonomy.
  4. Cooperation amongst cooperative
    As all the members have to work with each other in a long-term corporation within the members kind of strengthen the cooperative movement as a work together through any structure be it National international regional or local showcasing the most effective working environment.
  5. Concern for the community
    Cooperative banks not only focus on the needs of their members but also contribute towards sustainable development of their communities by ensuring that there are certain policies which are accepted by the members.
  6. Education, training and information
    These banks try and provide training and education related to certain topics for the elected representatives, employees or managers for that matter so that they can together contribute effectively for the development of the corporation and help the general public or young people to be aware about the nature and the benefit of the bank.

Structure of cooperative banks
Are the structure your is divided into two types that is long term and short-term structure.

Speaking of this short-term structure it in itself has three levels:
  1. the one which works at the apex level that is State cooperative Bank.
  2. the one that works at the intermediate level or the district level that is Central cooperative Bank
  3. the one that works at base level or rather at village level that is primary cooperative credit society.

Speaking of the long-term structure it in itself has two levels:
  1. At the apex level they have State cooperative agriculture and rural development banks.
  2. And at the district level they have primary cooperative agriculture and rural development banks.

Types of cooperative banks
There are basically five categories into which the corporators banking structure in India is divided into.
  1. Primary cooperative banks
    These are basically an associate of borrowers and non borrowers who decide in a particular locality the primary cooperative credit society a well known to derive funds from the share capital and deposits of members and the loans from Central cooperative banks. In this case borrowing constitutes the most important element of the working capital the boring powers of the members as well as that of the society are fixed in a particular state but may differ from another state. In this case the loans are given to the members to buy or rather purchase cattle, fertilizers or pesticides for the farm.
  2. Central cooperative banks
    These are the federations of primary credit society's but on a district level and certainly are of two types namely: those who have a membership of primary society's only and those who have a membership of society as well as of an individual.

    The fans of such bags consist of loans overdraft deposits from the State cooperative Bank or the joint stocks. The main motive of such a bank is to provide finance to all those members of the society who are well within the limits of the borrowing capacity of the society.
  3. State cooperative banks
    These banks can be called as a federation of Central cooperative Bank and the banks which act as a watch dog of the entire cooperative banking structure in a particular state. This banks for kids funds from the share capitals deposits loans or over graphs from the reserve Bank of India that is the apex Bank. The main motive of the State cooperative Bank is to lend money to the Central cooperative Bank and primary society and these cannot directly lend money to the farmers.
  4. Land development banks
    These banks are organized in three tiers that are the state, Central and primary the basic objective here is to meet the long-term credit requirements faced by the farmers for the developmental purpose of their farm.
  5. Urban cooperative Bank
    These basically refers to the primary corporative banks but located in urban and semi urban areas speaking of the scope of the banks it was restricted earlier but now it has considerably widened. Search banks provide funds and services to the small bowlers and to the people who have small businesses.

Advantages of cooperative banks
Cooperative banks are easy to form that is it needs a base capital of 25 lakhs only which is very less as compared to 100 crores a small business banks apart from this it only takes a group of 10 adults to come together and form a cooperative Bank. The registration and the legal requirements are also very easy and something that can be done quickly.

One of the objectives of the corporate system is to provide easy funding to the rural section of the country and to protect them from the greedy money lenders who not only exploit the needy by providing credit facilities at higher interest rates but also why manipulating your accounts. And for safeguarding the agricultural people such banks provide cheap credit to rural masses along with a high rate of interest to members for their investment and low lending interest rates which protect the rural masses from any exploitation.

Such facilities encourage the people of rural areas that instead of hoarding money or spending it unnecessarily, invest or rather save the money more. And because of such practices of saving money the corporative Bank have helped farmers in developing the farming as they also often provide assistance to buy a cheap product or services and also help them to learn more about the modern technology for better farming methods and to improve their output.

Problem faced by Indian cooperative banks
  1. Small capital base
    Generally, all the cooperative banks have a small capital base because it is stated that a cooperative Bank can be started with the minimum base of 25 lakhs which makes it difficult for the banks to bifurcate the amount of such capital into as their working capital and raising working capital which has been major hurdle for almost all the cooperative Banks in India
  2. Interference of politics.
    Politicians in India use such cooperative banks to increase our vote bank and also to get some representatives elected over the board of directors of such banks as to gain some advantage over the sanctioning of loans and other banking things.
  3. Supervision of RBI
    As per banking regulation act the supervision of RBI in cooperative Bank is not as stringent as compared to the commercial bank but the RBI inspects the books of the corporate of banks once in a year.
  4. Dual control
    All the cooperative banks in India are controlled by the dual system that is it is controlled not only by RBI but also by the respect state government which results in a lot of problems in terms of coordination and management as a lot of times both the RBI and the state government have different approach towards any issue or have different opinions regarding the development of such banks.
  5. Advancement in technology and professional management
    All the cooperative banks are usually reluctant to adopt any new changes in technologies for example computerized data management. Hands professional management in such banks is missing because there is a lack of not only training of personnel but also there is a huge lack of funding.
  6. Dependence on finance
    All the cooperative banks are very heavily dependent on RBI or NABARD and the state government for the purpose of refinancing. However, it depends on the state government for capital and not on its members.
  7. Overdue loans
    Cooperative banks are well known for the loaning facility and hands the overdue of loans in such banks are increasing day by day which is resulting in resting the recycling of funds and it also has a negative impact on the landing and the borrowing capacity of such Bank.

Punjab and Maharashtra co-operative bank (Case law)
Indus well known case the Punjab and Maharashtra cooperative Bank had rupees 11617 crores as deposits loans is as on 2019 March 31.

The bank had London money to one of the real estate client who was the owner of firm housing development and infrastructure which in itself was facing lack of funds and was bankrupted, by landing loan to such a client the Bank has not only violated the rules of the RBI also extended 73% of their acids to the housing development and infrastructure limited firm.

The RBI had issued notices against the formal chiefs of bank and also the promoters of HDIL for cheating.

This case basically shows that how the auditors of the bank and the state government allow see and performing their jobs and full filling the responsibility they were assigned for.

Action under section 35a sub section 1 of the banking regulation act 1949 which is read along with the section 56 of the said act and which states that RBI has the power to give certain directions to the cooperative banks under certain circumstances and as a result of the case now the PMC Bank cannot grant any loans nor it can renew any loans or advantages neither can make any investments or accept any deposits from the customers without taking prior permission of the RBI and this will continue for the next 6 months.

Measures to be taken
The above mentioned case of PMC Bank was not the first instance with showcased the failures of the cooperative system in India before this in 2001 or 2002 there was a Madhavpura cooperative

Bank scam which indicated very clearly that it's high time to bring certain changes in the working or rather the supervisory structure of such pants but sadly there was no action taken and that time and since them all the urban cooperative banks are alarming regularity and as a result of negligence the numbers fell from 1926 to 1551 within 14 years as mentioned in the data provided by the RBI. Address all the issues and to provide remedies if the state government needs the public to invest their faith in the banking system of the country.

A panel was set up by the RBI in 2015 under our Gandhi who is former deputy governors at the Central Bank and who had proposed certain reforms for the cooperative banks and some of them are following:
  1. He is suggested there should be complete control and supervision of the RBI on corporative banks as it is on other banks in India.
  2. He suggested that there should be certain changes made in the banking regulation act 1949 in terms of increasing the Ambit of power of RBI to either while the or to liquidate all the banks without actually involving other regulators of the cooperative society's law.
  3. Suggest that we should create an umbrella organization so that the supervising and the coordinating of all the activities in corporators are under one roof and are not divided and such organization should be about all the board of directors and it should directly report to the RBI so that there is smooth management and the banks are under better control.
  4. He also suggested that all the banks and the financial institutions should be managed professionally. It simply means that like the board of directors in commercial banks tend to have certain delegates power the same thing should be applied by the board of directors of the corporative banks. Meaning the board of directors should have the power to conduct an independent assessment or inspection and supervisors the banks functioning without any hurdle and all the board of directors should be in a position to question any of the stake holder's representation if they find anything fishy in functioning of the bank.

Hence, we can say that the problems faced by the cooperative banks can come to an end if all the cooperative banks come under the RBI as all the other banks in India are in the recent amendment of the banking regulation act 2020 certain powers were given to RBI in relation to the cooperative banks.

It is very clear that the cooperative banks play an integral part not only in the implementation but also development plans of the country which are very important for the smooth and effective functioning of the banking system in India. If there is any failure of corporative banks then it would result in the failures of the best hope that rural India has.

India is known as a and the bank country for serve reasons some of them are related to these Scams happened with a corporative bank hence it is the need of an hour to make the necessary changes in the banking system and to take all those steps to improve the lucane and boost up the confidence level and the faith of the public in the banking system.

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