Hyderabad: Cooperative Development has somehow not synchronised with economic development in the seventy five years of independent history of India. Till the Third Five Year Plan, Cooperative Development was an integral part of the Five Year Plan Document. Cooperative Development was viewed as part of agricultural and rural development.
Even the Reserve Bank of India was reviewing the same as part of Agriculture and Rural Development Department until the formation of National Bank for Agriculture and Rural Development in 1982 following the recommendations of the Committee to review the Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD).
Though cooperatives owe their origin to agriculture through the establishment of Primary Agriculture Cooperative Credit Societies (PACS), they have spread subsequently to different spheres of economic activity – Fishery, Dairy Producer, Processing, Marketing, Tourism, Education, Hospitals, Housing and real estate, Transport, Petrol bunks, Retail trade (Consumer Cooperative Societies – Super Bazars), Credit and Banking Industry - District and State Cooperative Central Banks (DCCBs/SCBs), and Urban Cooperative Banks (UCBs).
The rough estimate of all the types of cooperative societies is around 5 lakhs. During the current NDA regime, Union Government recognised the need for giving boost to the cooperative sector with the formation of separate Ministry in 2021 although clubbed with the Union Ministry of Home Affairs. A National Cooperative Policy has been formulated.
At a time when we are celebrating the Cooperative Week, a review of the progress of this sector would be in order. It is no exaggeration to say that every political leader of Indian democracy had his/her roots in the village cooperatives.
Concept of Cooperatives
A Cooperative with its ability to aggregate resources for production and service with a well-defined federated structure can forge partnerships and collaborations from grassroot to global scale when given a spirited impetus in terms of policy support. The sector also has the potential to identify and connect the intellect, energy, and creativity of youth, to mould them into entrepreneurial ventures while enabling the benefits to percolate down to the people, ensuring that the last person in the queue is not untouched.
The basic tenet of cooperative is ownership, member centricity and democratic setup. This framework is critical in achieving rapid, equitable and inclusive growth. National Cooperative Policy starts with a vision of “Sahakar Se Samriddhi” (Prosperity through Cooperation) as a way forward for economic, social, and cultural transformation based on the fundamental cooperative principles to put values into practice.
The policy recognizes that the cooperative societies are embedded in the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. The Constitution of India also enshrines the right to form cooperative societies as a fundamental right under Article 19. “The 21st Century has changed the way people, organisations, and government function.
The policy aims to advance a cooperative-based economic development model, incorporating the current socio-economic context and creating a sustainable model that brings prosperity to the nation.”
The National Cooperation Policy claims to “encourage the best talents in entrepreneurship, business, and market to augment sustainable livelihoods and prosperity through cooperation.” The Policy admits several challenges that cooperatives of the day face: lack of access to capital, lack of member awareness and cohesion, poor management and governance, lack of understanding of regulations, improper accounting, inadequate appreciation of the technological advancements benefitting the members and cooperative organisations.
Overcoming such challenges is a humongous task. There is also inherent conflict of interest between the individual members and institutions of which they are members. It also admits the need for change in legal and regulatory norms governing cooperatives since this is a subject under the dual control of the union and state governments.
Each state government has its own statute. Several attempts in the past to bring a modicum of uniformity in legislation across the states proved a failure. Cooperatives are viewed as power centers and not as development centres of the economy. The national policy has many laudable objectives: Increasing the share of cooperatives in the GDP substantially by 2028 – the present share is not benchmarked, however; creating more employment opportunities, mitigating regional imbalances, improving governance, developing cooperative brand image, establishing a national cooperative university, bringing about uniformity in diverse cooperative practices, training, development and education, strengthening membership, improving market access and leveraging technology for their upliftment.
Demonstrating its sincerity and commitment to the enshrined policy, it has initiated technology development of 63000 grassroots cooperatives in rural areas with a budgetary commitment of around Rs.2500 crores till 2024 and NABARD is entrusted with the task of leading the tech stack. The goal is to cover all the rural cooperatives within the next three years.
It is difficult to cover the entire gamut of cooperatives in one single article. I would restrict this article to covering financial cooperatives with greater focus on the Urban Cooperative Banks which are also known as neighbourhood banks in common parlance. Financial Cooperatives broadly fall under two segments: rural and urban.
According to the Annual Report of the Reserve Bank of India 2023, as of March 2021, there were 98,042 co-operatives, consisting of 1,534 UCBs and 96,508 rural co-operatives. The aggregate balance sheet size of the co-operative banking sector at Rs.18.8lakh crore at the end of March 2020 was close to 10 percent of the scheduled commercial banks’ consolidated balance sheet down from 19.4 percent in 2004-05.
Urban Cooperative Banks (UCBs) occupy nearly 8 percent of the financial sector space. UCBs are neighbourhood banks coming under the regulations of both the State Cooperative Acts and the Banking Regulation Act 1949 and its amendments. Financial Stability Report June 2023 acknowledges their contribution to the financial sector.
Credit growth of UCBs both scheduled and non-scheduled UCBs reaching 6.7 percent and 4.9 percent respectively. These UCBs were in the media and the press for several reasons: 1. failure of PMC Bank, RBI raising the threshold of guarantee limit of deposits from Rs. One lakh to Rs.5 lakhs; 2. depositors’ interests occupied the prime interest of the regulator after a series of failures and irregularities;3. consolidation of banks through merging of weak banks with strong banks, 4. introduction of 4-tier structure in UCBs based on their business levels considering their heterogeneity, 5. implementing some of the Viswanathan Committee recommendations – particularly to help raising capital beyond the membership through setting up National Urban Cooperative Finance and Development, an Umbrella Organisation, 6. Board of Management with functional experts as a support mechanism for the elected Boards has been put in place; 7.inter-cooperative agency cooperation in strengthening the sector, increasing number of penalties on good number of banks for several regulatory breaches; 8.new threshold of lending to priority sector by 2026 depending on the tier to which they belong, 9. poor governance and 10. risk management standards.
Urban Cooperative Banks were divided into four tiers: Tier I UCBs are defined as: i) Banks with deposits below Rs.100 crore operating in a single district, ii) Banks with deposits below Rs. 100 crore operating in more than one district will be treated as Tier I provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95 per cent of the total deposits and advances respectively of the bank, and iii) Banks with deposits below Rs.100 crore, whose branches were originally in a single district but subsequently, became multi-district due to reorganisation of the district may also be treated as Tier I UCBs. (b) All other UCBs are defined as Tier-II UCBs.
It has been noticed that majority of the Tier-3&4( Banks with deposits of above Rs.100cr) UCBs have been conforming to the regulatory directives, introduced core banking solutions (CBS), opened ATMs, integrated with the larger payment systems like the UPI through appropriate technologies, and mostly compliant with the prudential norms prescribed by the RBI.
All the UCBs follow the regulation of submitting their Annual Business Plans to the RBI. This is more ritualistic. Business Development Plans are not prepared with bottom-up approach. There is no Board approved strategy for preparation of such plans annually. Even after the constitution of the Boards of Management as adjuncts to the Board (These BoMs do not have any discretion and they perform only advisory role).
The credit to risk weighted assets ratio (CRAR) of scheduled UCBs (around 52 banks) remained stable at 15 percent and the non-scheduled UCBs at 17.8 percent. Financial Stability Report (FSR) acknowledges that ‘tier-wise CRAR of UCBs is well above the minimum regulatory requirement.’ Net worth of all the UCBs is stated to be comfortable.
Yet there are continuing concerns on their contribution. Some of the financially sound and well managed banks (FSWM) have been attempting total transformation akin to commercial banks relating to technology, like internet banking, mobile banking, one-stop solutions etc. Capacity building at various levels in this regard and cyber security are the challenges they are facing.
Three important aspects that seized my attention while reviewing their performance are: 1. The role of Board of Management, 2. Priority Sector lending imperative, and 3. Umbrella Organization. Board of Management is supposed to guide and assist the Board of Governance with no delegation or commitment to them.
They are outside the actual Board of Directors and yet in it. Instead of such ambiguity, there can be negotiation with the State Governments to adopt certain rules to facilitate the elected Boards to have nominated Directors from professional cadres satisfying the fit and proper criteria for such nominations too.
This would settle the issue of enhancing the capability of the Boards. Further, training of the Board of Directors, measuring the performance of the Board of Directors on the basis of a written statement of what value addition they would like to bring to the Board and how they would like to participate in the stability and sustainable growth of the institution, annual Board retreats etc., should receive the attention of the regulators.
Agenda of the Task Force on Cooperative banks (TAFCUB) in several states is being prepared by the RBI while the concerned Registrar of Cooperatives of the State and the Associations as the other constituents are not being consulted mostly, save exceptions. Its functioning has become too routinised during the last ten years.
Since the purpose of the TAFCUB is to resolve local regulatory issues without escalating them to higher levels, and improving the functional efficiency of UCBs, it is desirable and necessary that the agenda becomes more consultative. Viswanathan Committee ‘s view is that “there is ample space for financial institutions that operate on the principles of co-operation and the inclusivity that they get.
As such, the Vision for the UCB sector should be to emerge as the neighbourhood bank of choice powered by passion for inclusive finance as the core of the business model. This can happen only if their operations are founded on financial strength, strong branding, cutting edge technology driven processes, and skilled human resources coupled with an enabling regulatory environment.
These internal drivers can be available to a bank either on a stand-alone basis or acquired through network arrangements. There are now several enabling factors, both for the UCBs themselves and the RBI as the regulator, to actualise this vision.” Action still awaits the validated recommendations of the above Committee.
In fine, technology interventions in the rural cooperatives, development of industrial cooperative societies to provide greater employment opportunities, particularly the micro and small enterprises, cleaning up of the urban cooperative banks, and encouraging the cooperative form as an economic organization in every other sphere of activity of the economy would enhance the scope of this sector qualitatively and could create a brand image akin to Amul in the dairy industry.
(The views expressed are personal. The author is an economist and risk management specialist. He was the Expert Member of the RBI Committee on Rural Cooperative Credit Structure in 2011-12.)