Co-Operative Banks

Co-operative banks, another component of the Indian banking organization, originated in India with the enactment of the Co-operative Credit Societies Act of 1904 which provided for the formation of co-operative credit societies. Under the Act of 1904,

a number of cooperative credit societies were started. Owing to the increasing demand of cooperative credit, a new Act was passed in 1912, which provided for the establishment of cooperative central banks by a union of primary credit societies.

A co-operative bank is an institution established on the cooperative basis and dealing in ordinary banking business. Like other banks, the co-operative banks collect funds through shares. They accept deposits and grant loans. They are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.

3.3.1. Structure of Co-operative Banks

Co-operative banking in India is federal in its structure. It has three sections. At the top there is the State Cooperative Bank which is the apex bank at the state level. At the intermediate level there are the central unions or the central cooperative banks. There is generally one central cooperative bank for each district. At the base of the pyramid there are the primary credit societies which cover the small towns and villages. Each higher level institution is a federation of those below, with membership and loan operations restricted to the affiliated units.

A.   Primary Agricultural Credit Societies

A co-operative credit society, commonly known as the Primary Agricultural Credit Society (PACS) is an association of persons residing in a particular locality. It can be started with ten or more persons. The members generally belong to a village. The membership is open to all the residents of the locality or village. Hence people of different status are brought together into the common organization Each member contributes to the share capital of the society. The value of each share is generally nominal so as to enable even the poorest farmers to become a member. The members have unlimited liability, that is, each member is fully responsible for the entire loss of the society, in the event of failure. This will mean that all the members should know each other fully well. The management is honorary, the only paid member normally being the secretary - treasurer. Loans are given for short periods, normally for one harvest season, for carrying on agricultural operations, and the rate of interest is fixed about 6 per cent. Dividends are not declared and profits are generally used for the welfare and improvement of the village. The village co-operative society was expected to attract deposits from among the well-to-do members and non-members of the village and thus promote thrift and self-help. It should give loans and advances to needy members mainly out of these deposits. However, the village societies failed to attract deposits and therefore, the Government had to bring into existence two other credit institutions, known as the Central and State Co-operative Banks, whose main function is to provide funds to the primaries which, in turn, will lend to the farmers.

Provides in a nutshell an idea of the co-operative banking system in India. Progress of PACS (Primary Farmers Agricultural Service, Credit Societies). The PACS occupy a strategic position in the co-operative credit structure of the rural economy.

Shortfalls of PACS

Though the PACS have made remarkable progress in the area of rural finance, their shortfalls may be enlisted as under:

1.   They have failed to adequately fulfill the credit needs of the small farmers and tenants.

2.   A large number of them lacked potential viability.

3.   The Banking Commission (1972) observes that PACS neither provided credit for all       productive activities of the farmers nor fulfilled their credit needs adequately.

The National Bank for Agriculture and Rural Development (NABARD) has recently stressed the need for a time-bound program for improving the contents of services rendered by the PACS. It has been suggested that the PACS should:

(a) provide diversified credit facilities to their members

(b) extend marketing facilities, and

(c) mobilize rural deposits.

B.   Central Co-operative Banks

The central co-operative banks are federations of primary credit societies in a specific area, normally a district and are usually located in the district headquarters or some prominent town of the district. These banks have a few private individuals as shareholders who provide both finance and management. The central co-operative banks have three sources of fund via, their own share capital and reserves, deposits from the public and loans from the State Co-operative Banks.

The Central Co-operative Banks (CCB) are of two types: (a) pure, and (b) mixed. A pure CCB confines its membership to co-operative organizations only. It is called the Banking Union. A mixed CCB keeps its membership open to co-operatives as well as individuals. Mixed CCBs are found in the states of Assam, Andhra Pradesh, Tamil Nadu, Karnataka and others.

Functions

The major functions of the CCBs are:

1.   They finance the primary credit societies. By furnishing credit to the primary      societies, CCBs serve as an important link between these societies at the base level and the money market of the country.

2.   They accept deposits from the public.

3.   They grant credit to their customers on the security of first class gilt edged securities,      gold etc.

4.   They provide remittance facilities.

5.   They act as balancing centers by shifting the excess funds of a surplus primary society to the deficit ones.

6.   They keep watch on their debtor primary societies working and progress of recovery      of loans.

7.   To take up non-credit activities like the supply of seeds, fertilizers and consumer            goods necessary to the farmers.

8.   To prepare proposals for better utilization of the financial resources of PACS.

Defects of CCBs

The following are the major defects of the CCBs:

1.   They violate the principle of co-operation by working on the lines of commercial           banks.

2.   They do not appoint experts to examine the creditworthiness of the primary societies.     Hence, there has been problems of recovery and over dues.

3.   They combine financing and supervisory work together. As a result supervisory work has been a failure in many cases.

4.   Some CCBs have been utilizing their reserve funds as working capital. This is not a        very sound practice.

5.   Mixed CCBs vitiate the very purpose of federation of the primary societies.

6.   The CCBs charge very high interest rates to meet their high administration costs of          small and uneconomic units.

7.   Many CCBs are financially and organizationally weak.

To rehabilitate the weak CCBs, the Government of India formulated a scheme called the Central Sector Plan in 1972. Under the scheme, selected by CCBs were to be provided financial assistance for writing off bad debts. But the operation of the scheme has failed to bring about the desired results for two reasons.

(a)   Nobody (including the concerned CCBs) took the Program seriously.

(b)   There  was  no  effective  functioning  of  the  state  and  district  level  committees       constituted for monitoring the Program.

C.   State Co-operative Banks

The state co-operative banks, also known as apex banks, from the apex of the co-operative credit structure in each state. They obtain their funds mainly from the general public by way of deposits, loans and advance from the Reserve Bank and their own share capital and reserves. Any where between 50-90 per cent of the working capital of the SCBs are contributed by the Reserve Bank. Like the CCBs, SCBs are also pure or mixed.

Functions of State Co-operative Banks

The following are the major functions of SCBs:

1.   The SCB acts as a banker to CCBs.

2.   They have no power to supervise or control the activities of the affiliated CCBs.

3.   A SCB serves as a leader of co-operative movement in a state.

4.   In the absence of a district co-operative bank in a state, the SCB may give district financial assistance to the primary credit societies.

5.   It co-ordinates the policy of the government with the co-operative principles.

6.   It also brings about co-ordination between RBI, money market and co-operative credit societies.

7.   It gives a number of subsidies to DCBs for improving co-operative credit societies.

8.   It simplifies loan distribution system to enable its member to get loans very easily.

9.   It helps the government in framing the schemes for the development of co-operatives     in the state.

Defects

SCBs also have the same defects of the CCBs. The following are the major defects of SCBs:

1.   They mix up commercial banking activities with co-operative banking.

2.   They have insufficient share capital.

3.   They utilize their reserve funds as working capital.

4.   Some SCBs are not pure federations as they permit individual membership along with affiliation to the CCBs.

3.3.2 Importance or Benefits of Co-operative Banks

The co-operative movement has become a powerful instrument for rapid economic growth. It has resulted in several benefits. The expansion of co-operative banks has resulted in several benefits. They are:

1.   They  have  provided  cheap  credit  to  farmers.  They  discouraged  unproductive         borrowing.

2.   They have reduced the importance of money-lenders. More than 60% of the credit         needs of agriculturists are now met by co-operative banks. Thus, co-operative banks have protected the rural population from the clutches of money-lenders.

3.   Small and marginal farmers are being assisted to increase their income.

4.   They have promoted saving and banking habits among the people, especially the rural people. Instead of hoarding money, the rural people tend to deposit their savings in the co-operative or commercial banks.

5.   They have undertaken several welfare activities. They have also taken steps to improve the morals, polity and education.

6.   They have played an important part in changing the old customs and traditions of the people which are an obstacle to progress and economic betterment.

7.   They have greatly helped in the introduction of better agricultural methods. Co-operative credit is available for purchasing improved seeds, chemical fertilizers and modern implements cheaply and sell their produce at good prices.

3.3.3 Problems or Weaknesses of Co-operative Banks

Various committees and commissions have reviewed the working of the co-operative banking system. They pointed out a number of weaknesses of the system. Major weaknesses or problems are given below:

1.   Excessive Over dues: The borrowers from the co-operative banks are not repaying        the loans promptly and regularly. There are heavy overdue. Besides overdues at       all levels are increasing alarmingly. Lack of will and discipline among the farmers to repay loans is the principal factor responsible for the prevalence of overdues of     co-operatives. Large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the co-operative societies.

2.   Inefficient Societies: The co-operative credit societies are managed by people who         have no knowledge of co-operation. They do not have necessary experience and           training. As a result most of the societies are inefficient.

3.Regional Disparities: Co-operative benefits are not evenly distributed as between different states. There is the problem of regional disparities in the distribution of co-operative credit. The loans advanced per member varies widely. The farmers of Gujarat, Punjab, Haryana and Tamil Nadu are getting much more than those in Orissa, Bihar and West Bengal. Besides, the production loans and investment credit supplied in most of the tribal and hill areas is comparatively very less.

 4. Benefits to Big Land Owners: Most of the benefits from co-operative have been cornered by the big land owners because of their strong socio-economic position .Small farmers are neglected by co-operative societies. Poor farmers are not able to get enough credit.

5. Dependence  on  Outside  Resources:  Co-operative societies or banks depend     heavily on outside resources. State Governments and NABARD are the main sources of funds to co-operative societies. This heavy dependence on outside resources will be a great problem in future.

6. Political Interference: The co-operative societies are dominated by political parties and politicians. There is favoritism and nepotism in the granting of loans.

7. Inadequate Coverage: Co-operatives have now covered almost all the rural areas of        the country. But the membership is only around 45% of the rural families. 55% of rural   families are thus still not covered under the co-operative credit system. Agricultural laborers and rural artisans constituted only 10% of the total membership of the co-operative credit system. The weaker sections of the rural community are still not       adequately represented in the membership roll.

8. Lack of Other Facilities: Besides the provision of adequate and timely credit the small and marginal farmers also need other facilities in the form of supply of better     seeds, fertilizers, pesticides etc. and marketing services. Very little attention is paid    on the provision of such facilities.

9. Dual Control: There is dual control of the co-operatives, on the one side the NABARD and on the other by the State Government under the Co-operative Societies Act. Co-operative societies are treated as part and parcel of the Government has discouraged   initiative in management.

10. Competition from Private Agencies: Co-operative banks are facing stiff competition

from money-lenders and traders. Because of this competition, co-operatives could not make much progress.

11.Credit Linked to Assets: The credit given to a member is based on his assets .Those who do not have assets or those who have small assets do not get enough credit.

3.3.4 Suggestions for the Improvement of the Co-operative Credit Structure

1.   The resources of the co-operative banks should be improved. Their dependence on outside resources must be reduced considerably.

2. The primary societies should be made more viable and economically strong units.

3. The liability of the members of the primary co-operatives should be made limited.

4. Loans should be given not on the basis of the assets of the member but on the basis of the estimated value of production. Although this method is introduced, it is not functioning properly, and not all societies have implemented it.

5. Loans given should be enough to meet agricultural and other expenses so that the members need not approach the money-lenders.

6. Agricultural inputs like fertilizers, seeds etc., should be supplied by the co-operatives.       Credit and marketing should be integrated. Marketing and processing activities should be undertaken by the co-operatives.

7. The co-operatives should be given freedom to adopt management practices, rules and regulations to suit the local needs and conditions.

8. Co-operative training facilities should be expanded and the co-operatives should be          manned by well trained personnel. Management should be professionalized.

9. Co-operative movement should become peoples movement. They should be made to      realize the benefits of co-operations.

10.They should be made agents of commercial banks wherever possible.

11.Steps must be taken for effective audit and inspection.

12.Political interference in the affairs of the co-operatives must be put to an end.

13. Co-operative should take steps to commercialize agriculture to increase the income level to the members and introduce appropriate technologies in agriculture. Members should be encouraged to take up subsidiary occupations. Co-operative banks should diversify their activities and take up banking related services  just  like  commercial  banks.  The  credit  societies  or  banks  should  be reorganized into multi-purpose societies.

OBJECTIVES OF CO-OPERATIVE BANKS:

•      Not for profit

•      Common good of the members and the society at large.

•      No single ownership but ownership is spread over members.

•      Non-political

•      Cooperative Terms Defined

·         Normally there are three words commonly encountered by any reader regarding cooperative system in India. One should understand the meaning of:

·         What is the meaning of co-operative?

·         What is a cooperative society? And

·         What is cooperative movement?

·         Following paragraphs explain the meaning of these words.

·         Working together for common goal through cooperation is called cooperative. While working together all goods and bad of the results are shared by a group. Cooperative or cooperation is based on principle of oneness, selflessness, democratic values, self help, understanding ones responsibility, equality among members and democratic way of working. Every member understands his/her responsibilities towards members and society.

·         Cooperative Society is a body or an association, formed by group of like minded people, having common cause, and common purpose. All the members formulate the policies and rules that they themselves follow.

·         Cooperative Movement means a movement that is based on the socio-economic aspect of the society. Such movement touches the lives of large number of people.

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