Cooperative Banking | PuuchoIAS

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  • GS-3: Economy & Banking
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Cooperative Banking

Context: The RBI released a draft circular on ‘Issue and regulation of share capital and securities — Primary (Urban) Co-operative Banks’(UCBs), following the changes mandated by certain amendments to the Banking Regulation Act, 1949.

What is Cooperative Banking?

  • A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
  • It is registered under the State’s Cooperative Societies Act. 
  • The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by 
    • Banking Regulations Act 1949 
    • Banking Laws (Co-operative Societies) Act, 1955.
  • Features:
    • Customer Owned Entities
    • The members democratically elect a board of directors and they have equal voting rights
    • A significant part of the yearly profit is usually allocated to reserves and a part of it can also be distributed to the members
    • They have played a significant role in the financial inclusion of unbanked rural masses.

Structure of Cooperative Credit Institutions in Rural India

  • The short-term co-operative credit structure operates with a three-tier system – 
    • Primary Agricultural Credit Societies (PACS) at the village level
    • Central Cooperative Banks (CCBs) at the district level 
    • State Cooperative Banks (StCBs) at the State level. 
  • PACS are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by RBI. 
  • StCBs/DCCBs are registered under the provisions of State Cooperative Societies Act of the State concerned and are regulated by RBI. 
  • Powers have been delegated to National Bank for Agricultural and Rural Development (NABARD) under Banking Regulation Act to conduct inspection of CCBs & StCBs

About Urban Cooperative Banks (UCBs)

  • Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the financial needs of customers in urban and semi-urban areas.
  • UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation is two or more states.
  • Though the Banking Regulation Act came in to force in 1949, the banking laws were made applicable to cooperative societies only in 1966 through an amendment to the Banking Regulation Act, 1949. 
  • Since then there is duality of control over these banks with 
    • Banking related functions being regulated by RBI 
    • Management related functions regulated by respective State Governments/Central Government i.e by State Registrar of Co-operative Societies and Central Registrar of Co-operative Societies. 
  • RBI regulates the banking functions of StCBs/DCCBs/UCBs under the provisions of Sections 22 and 23 of the Banking Regulation Act, 1949.

Connecting the dots:

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