Reports of Co-operative banks (CBs) being misused to turn black money into white has led RBI to restrict their transaction in old currencies. While these banks play an important role in meeting the needs of smaller section of society, particularly rural area, they certainly pose significant risk, many of them still running without computerisation. A look at the structure of CBs to better understand how they are prone to misuse..
Co-operative Bank, as the name suggests, are banks owned, operated by people and serving the needs of its members. These people normally belong to a region, district, community and share some commonality and started these CBs as self-help and mutual benefit organisation. CBs can be further classified into Urban (UCB), District (DCCB) and State co-operative banks (StCB). DCCB and StCBs primarily cater to rural India and formed with the support of the government.
CBs have certain peculiarity about them specially in contrast with scheduled commercial banks (SCBs). As per RBI, there are currently about 1,580 UCBs, 370 DCCBs and 30 StCBs in the country. This contrasts with only 150 SCBs. Yet, their share in total deposits and advances is considerably small. As per RBI data, CBs accounted for about Rs 4.5 lakh crore of loans extended at the end of FY15, just 7% of Rs 65 lakh crore by SCBs. Large number of banks and low deposits and advances lead to another more contrasting figure. Average advance per SCBs is 42,000 crore against barely Rs 225 crore for a CB.
This multiplicity of CBs and ‘too small to regulate’ syndrome makes it more difficult for RBI to govern them leading to disproportionate risk to banking system specially from UCBs. Risk also stems from the fact that they are governed by state govt regulations also and RBI has limited power for supervision. Role of state political leaders or local businessmen/industrialists in their functioning adds to questions surrounding their governance. These were the factors leading to failure of Madhavpura Mercantile Co-operative Bank and few others during 2000-2005 forcing RBI to bring them into stricter regulations. An RBI report on CBs has mooted the concept of an umbrella organisation to oversee the functioning of CBs.
Yet, CBs have a special utility as shown by another RBI report. Small loans (less than Rs 10 lakh) account for more than 80% of loan book of CBs against share of only 15% for SCBs. The goal of financial inclusion by providing access to credit to small borrowers is being met more successfully by CBs. However, there is an urgent need to bring more transparency in their functioning so that they can work without getting influenced by any pressure groups..