Before we start to learn about the Cooperative Banks in India, we need to understand the logic behind the cooperative banks. The word cooperative means involving mutual assistance in working towards a common goal. So, a Cooperative Bank is simply a banking entity which is owned and run jointly by its members. They also share the profit or loss as per their contribution and shareholdings.
Broader Classification of Cooperative Banks
The Structure of the Cooperative Banks in India can be broadly classified into two types i.e. Urban Cooperative Banks and Rural Cooperative Banks. Urban Cooperative Banks caters to the financial needs of the customers in the urban and semi-urban areas. While the Rural Cooperative Banks are primarily mandated to ensure the credit flow to the agriculture sector in the rural areas.
The Urban Cooperative Banks are primarily registered under the provisions of:
- Either the State Cooperative Societies Act of the concerned state.
- Or Under the Multi-state Cooperative Societies Act, 2002 if the area of the operation of the bank is also beyond the boundaries of one state.
These banks are licenced by the Reserve Bank of India to carry on banking operations. Hence, these are under the duel control of the Reserve Bank of India and the Registrar of Cooperative Societies.
However, the deposits of customers in the cooperative banks are not insured under the Deposit Insurance and Credit Guarantee Act by default. To be eligible, the concerned state needs to amend the Cooperative Societies Act which transfers some powers to the RBI from the Registrar of Cooperative Societies of the state. Click here to read about the Structure and Functions of DICGC before you read further.
Characteristics of Cooperative Institutions
- They have restricted area of operation.
- The Board of Directors is elected by shareholders in a domestic manner.
- The borrowing from these institutions is restricted only to its members.
- There is a share linking to borrowing i.e. a part of the amount borrowed will be contributed to the share capital of the institution.
- Members can cast only one vote irrespective of the number of shares held.
- The shares of these institutions cannot be listed and traded.
Detailed Classification of the Cooperative Banks in India
Can Urban Cooperative Banks be converted into Small Finance Banks?
The answer is Yes. Then the question arises why an Urban Cooperative Bank will want to convert into a Small Finance Bank? The reason is that the Urban Cooperative Banks cannot participate in the 12 core business activities owing to the tag ‘cooperative’. These activities are such as road constructions, offering bank guarantees, etc.
The High Powered Committee on Urban Cooperative Banks headed by R. Gandhi (former Deputy Governor of RBI) recommended the voluntary conversion of Urban Cooperative Banks into Small Finance Banks.
Taking these recommendations into consideration, the Reserve Bank of India has issued a notification on 27th September 2018 regarding that. In the notification, RBI has asked those Urban Cooperative Banks (UCBs) which are eligible as well as wish to convert into Small Finance Banks to forward their applications to RBI.
Only the UCBs with a good track record will be eligible for transition into Small Finance Banks. RBI will issue an in-principle approval for transitioning and will allow a maximum period of 18 months for the commencement of business as Small Finance Bank to the eligible applicants. Once the Urban Cooperative Bank will start its operation as a Small Finance Bank it has to surrender its licence to act Urban Cooperative Bank to the RBI.
The minimum net worth of the proposed Small Finance Bank shall be Rs. 100 crore from the date of commencement of business. Once the Urban Cooperative Bank will start functioning as the Small Finance Bank, it needs to maintain Capital to Risk Weighted Assets Ratio (CRAR) of 15 per cent. In addition to this, these banks need to lend 75 per cent of their total lending to the priority sector as applicable on Small Finance Banks.
Important Points related to Cooperative Banks
- In the Budget 2017-18, Rs. 1900 crore were allocated to NABARD for installation of Core Banking Solution (CBS) between District Central Cooperative Banks & Primary Agriculture Cooperative Societies.
- India’s co-operative banking sector is set to undergo a transformation with the concept of Umbrella Organisation (UO) of Urban Co-operative Banks (UCBs). Gujarat is the first state to implement this.
- The Reserve Bank of India (RBI) has cancelled the licence of Navodaya Urban Co-operative Bank Ltd, Maharashtra in October 2018.
- The Reserve Bank of India (RBI) has cancelled the licence of Rajasthan-based Bhilwara Mahila Urban Co-operative Bank in August 2018 as it does not have adequate capital and earning prospects.
- Earlier in July 2018, the Reserve Bank of India has cancelled the licence of Alwar Urban Cooperative Bank, Rajasthan.
Click here to read about Regional Rural Banks.