Tuesday, March 31, 2015

Cooperative Banks

In normal commercial banking, the banking business is owned or maintained by government (in case of Public Sector Banks) or some private entity (in case of Private Sector Banks). In this case, banks, on behalf of government or that private entity, lends to other individuals or business, i.e., borrowers. The sole purpose of this commercial banking is profit.

But in case of cooperative banking, some small private entities or individuals come together, and form a small financial institution (by their own funds / member funds), and lend to the members of that institution. Note that the banking business here is on cooperative basis, i.e., one member is helping / lending to other member (now they do lend to non-member individuals or entities as normal banks). These financial institutions are known as Cooperative Banks.

Purpose of Cooperative Banks
Initially, cooperative banks were set up to meet the credit needs in rural area, especially to prevent money lenders, but now they have vast area of services as follows -
  • Agricultural and allied activities
  • Rural-based industries
  • Small trade and industry in Urban areas, etc.

Structure of Indian Cooperative Banks
Cooperative banks in India have a 3-tier structure -

  • Primary Credit Societies (village/town/urban centers) 
  • Central Cooperative Banks (district-level)
  • State Cooperative Banks (state-level)

Urban Cooperative Banks (UCBs)
Primary (urban) Credit Societies that meet certain criteria can apply to RBI for a banking license to operate as Urban Cooperative Banks (UCBs)
  • Managerial aspects, like registration, management, recruitment, administration, etc. are controlled by Registrar of Cooperative Societies (RCS) of the respective state governments (as per Co-operative Societies Acts)
  • Banking aspects are governed by RBI (as per Banking Regulation Act, 1949)

These banks cater to the needs of small borrowers including retail traders, small entrepreneurs, professionals, salaried persons, etc.

District Central Cooperative Banks (DCCB)
DCCBs are cooperative banks at the district-level. Each district generally will have only one DCCB. Following the establishment of NABARD in 1982, the supervisory function of these banks has been passed on to NABARD.

State Cooperative Banks (SCB)
SCBs are cooperative banks at the state-level. A number of DCCBs report to an SCB. NABARD has the supervisory authority over these SCBs.

Note that DCCB and SCB has three supervisors - RCS, RBI and NABARD, whereas UCBs are controlled by RCS and RBI.

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