T.Y.Bcom (Banking & Insurance) Co-operative Banking CH. 1.

INTRODUCTION TO CO-OPERATIVEBANKING DEFINATION: A Co-operative bank, as its name indicates is an institutionconsisting of a number of individuals who join together to pool their surplussavings for the purpose of eliminating the profits of the bankers or moneyl e n d e r s w i t h a v i e w t o d i s t r i b u t i n g t h e s a m e a m o n g s t t h e d e p o s i t o r s a n d borrowers.The Co-operative Banks Act, of 2007 (the Act) defines a co-operativebank as a co-operative registered as a co-operative bank in terms of the Actwhose members 1. are of similar occupation or profession or who are employed by a c o m m o n e m p l o y e r o r w h o a r e e m p l o y e d w i t h i n t h e s a m e b u s i n e s s district; or 2. have common membership in an association or organisation,including a business, religious, social, cooperative, labour or educationalgroup; or 3. have common membership in an association or organisation,including a business, religious, social, cooperative, labour or educational group; or 4 . Reside within the same defined community or geographical area. Page 1

T.Y.Bcom (Banking & Insurance) Co-operative Banking CO-OPERTIVE BANKING - AN INTRODUCTION: Co-operative bank, in a nutshell, provides financial assistance to thep e o p l e w i t h s m a l l m e a n s t o p r o t e c t t h e m f r o m t h e d e b t t r a p o f t h e moneylenders. It is a part of vast and powerful structure of co o p e r a t i v e institutions which are engaged in tasks of production, processing, marketing,d i s t r i b u t i o n , s e r v i c i n g a n d b a n k i n g i n I n d i a . A c o o p e r a t i v e b a n k i s a financial entity which belongs to its members, who are at the same time theo w n e r s a n d t h e c u s t o m e r s o f t h e i r b a n k . C o o p e r a t i v e b a n k s a r e o f t e n created by persons belonging to the same local or professional community or sharing a common interest. These b anks generally provide their members with a wide range of banking and financial services (loans, deposits, bankinga c c o u n t s ) . C o o p e r a t i v e b a n k s d i f f e r f r o m s t o c k h o l d e r b a n k s b y t h e i r organization, their goals, their Values and their governance.T h e C o o p e r a t i v e B a n k i n g S y s t e m i n I n d i a i s c h a r a c t e r i z e d b y a relatively comprehensive network to the grass root level. This sector mainlyfocuses on the local population and micro banking among middle and lowincome strata of the society. These banks opera te mainly for the benefit of rural areas, particularly the agricultural sector. Page 2

T.Y.Bcom (Banking & Insurance) Co-operative Bankingmembers. The co-operative banks are the organizations of and for the people . CH. 3. ROLE OF CO-OPERATIVE BANKING ROLE OF CO-OPERATIVE BANKING IN INDIA: Co-operative Banks are much more important in India than anywhereelse in the world. The distinctive character of this bank is service at a lower cost and service without exploitation. It has gained its importance by the roleassigned to them, the expectations they are supposed to fulfill, their number,a n d t h e n u m b e r o f o f f i c e s t h e y o p e r a t e . C o - o p e r a t i v e b a n k s r o l e i n r u r a l financing continues to be important day by day, and their business in theurban areas also has increased phenomenally in recent years mainly due to t h e s h a r p i n c r e a s e i n t h e n u m b e r of primary co -operative banks. In ruralareas, as far as the agricultural and r e l a t e d a c t i v i t i e s a r e c o n c e r n e d , t h e supply of credit was inadequate, and money lenders would exploit the poor people in rural areas providing them loans at higher rates. So, Co-operativebanks mobilize deposits and purvey agricultural and rural credit with a wider outreach and provide institutional credit to the farmers. Co -operative bank have also been an important instrument for various development schemes, particularly subsidy-based programmes for poor.The Co-operative banks in rural areas mainly finance agriculturalbased activities like: Page 7 T.Y.Bcom (Banking & Insurance) Co-operative Banking Farming Cattle Milk Hatchery Personal financeThe Co-operative banks in urban areas finance in activities like: Self-employment Industries Small scale units Home finance

 Consumer finance Personal financeS o m e o f t h e f o r w a r d l o o k i n g C o o p e r a t i v e b a n k s h a v e d e v e l o p e d sufficient core competencies to such an extent that they are able to challengestate and private sector banks.The exponential growth of Co-operative banks is attributed mainly totheir much better contacts with the local people, personal interaction withcustomers, and their ability to catch the nerve of the local clientele. The totaldeposits and lendings of Co-operative banks are much more than the Old Private Sector Banks and the New Private Sector Banks. Page 8

T.Y.Bcom (Banking & Insurance) Co-operative Banking IMPORTANCE OF CO-OPERATIVE BANKING Co-operative bank forms an integral part of banking system in India.T h i s b a n k o p e r a t e s m a i n l y f o r t h e b e n e f i t o f r u r a l a r e a , p a r t i c u l a r l y t h e agricultural sector. Co-operative bank mobilize deposits and supplya g r i c u l t u r a l a n d r u r a l c r e d i t w i t h t h e w i d e r o u t r e a c h . T h e y a r e t h e m a i n source for the institutional credit to farmers. They are chiefly responsible for breaking the monopoly of moneylenders in providing credit to agriculturists.C o o p e r a t i v e b a n k h a s a l s o b e e n a n i m p o r t a n t i n s t r u m e n t f o r v a r i o u s de velopment schemes, particularly subsidy-based programmes for the poor.Cooperative banks operate for non-agricultural sector also but their role issmall.Though much smaller as compared to scheduled commercial banks,co -operative banks constitute an important segment of the Indian banking s ys t e m . T h e y h a v e e x t e n s i v e b r a n c h n e t w o r k a n d r e a c h o u t t o p e o p l e i n remote areas. They have traditionally played an important role in creating banking habits among the lower and middle income groups and instrengthening the rural credit delivery system. Page
T.Y.Bcom (Banking & Insurance) Co-operative Banking CH. 4. HISTORY OF CO-OPERATIVE BANKING HISTORY OF CO-OPERATIVE BANKING T h e o r i g i n s o f t h e c o o p e r a t i v e b a n k i n g m o v e m e n t i n I n d i a c a n b e traced to the close of nineteenth century when, inspired by the success of theexperiments related to the cooperative movement in Britain and thec o o p e r a t i v e c r e d i t m o v e m e n t i n G e r m a n y , s u c h s o c i e t i e s w e r e s e t u p i n India.Now, Co-operative movement is quite well established in India. Thefirst legislation on co -operation was passed in 1904. In 191 4 the Maclagenc o m m i t t e e e n v i s a g e d a t h r e e t i e r s t r u c t u r e f o r c o o p e r a t i v e b a n k i n g v i z . Primary Agricultural Credit Societies (PACs) at the grass root level, CentralC o - o p e r a t i v e B a n k s a t t h e d i s t r i c t l e v e l a n d S t a t e C o - o p e r a t i v e B a n k s a t state level or Apex Level.In the beginning of 20th century, availability of credit in India, morep a r t i c u l a r l y i n r u r a l a r e a s , w a s a l m o s t a b s e n t . A g r i c u l t u r a l a n d r e l a t e d activit

ies were starved of organised, institutional credit. The rural folk had todepend entirely on the mone y lenders, who lent often at usurious rates of interest. Page 10

T.Y.Bcom (Banking & Insurance) Co-operative BankingT h e c o - o p e r a t i v e b a n k s a r r i v e d i n I n d i a i n t h e b e g i n n i n g o f 2 0 t h Century as an official effort to create a new type of institution based on theprinciples of cooperative organisation and management, suitable for p r o b l e m s p e c u l i a r t o I n d i a n c o n d i t i o n s . T h e s e b a n k s w e r e c o n c e i v e d a s substitu tes for money lenders, to provide timely and adequate short-term andlong-term institutional credit at reasonable rates of interest.The Anyonya Co-operative Bank in India is considered to have beenthe first co-operative bank in Asia which was formed nearly 100 years back in Baroda. It was established in 1889 with the name Anyonya SahayakariMandali Co-operative Bank Limited , with a primary objective of p r o v i d i n g a n a l t e r n a t i v e t o e x p l o i t a t i o n b y m o n e y l e n d e r s f o r B a r o d a ' s residents. In the formative stage Co -operative Banks were Urban Co -operativeSocieties run on community basis and their lending activities were restrictedto meeting the credit requirements of their members. The concept of UrbanCo-operative Bank was first spelt out by Mehta Bhansali Committee in 1939which defined on Urban Co-operative Bank . Provisions of Section 5 (CCV)of Banking Regulation Act, 1949 (as applicable to Co -operative Societies)defined an Urban Co-operative Bank as a Primary Co-operative Bank other than a Primary Co-operative Society were made applicable in 1966.With gradual growth and also given philip with the economic boom, urban banking sector received tremendous boost and started diversifying itscredit portfolio. Besides giving traditional lending activity meeting the creditr e q u i r e m e n t s o f t h e i r c u s t o m e r s t h e y s t a r t e d c a t e r i n g t o various sorts of Page 11 T.Y.Bcom (Banking & Insurance) Co-operative Bankingcustomers viz.self-employed, small businessmen / industries, house finance,consumer finance, personal finance etc. CH. 5. FEATURES OF CO-OPERATIVE BANKING FEATURES OF CO-OPERATIVE BANKING 1.Co-operative Banks are organized and managed on the principal of co -operation, selfhelp, and mutual help. They function with the rule of "one member, one vote". function on "no profit, no loss" basis. Cooperativeb a n k s , a s a p r i n c i p l e , d o n o t p u r s u e t h e g o a l o f p r o f i t m a x i m i z a t i o n . 2. Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities.3. Co-operative Banks provide limited banking products and are functionallyspecialists in agriculture related products. However, co-operative banks nowprovide housing loans also. 4. Co-operative banks are perhaps the first government sponsored,governmentsupported, and government-subsidised financial agency inIndia. They get financial and other help

from the Reserve Bank of India,NABARD, central government and state governments. They constitute the"most favoured" banking sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender of last resort, butco-operative banks it is the lender of first resort which provides financial Page 12

T.Y.Bcom (Banking & Insurance) Co-operative Bankingr e s o u r c e s i n t h e f o r m o f c o n t r i b u t i o n t o t h e i n i t i a l c a p i t a l ( t h r o u g h s t a t e government), working capital, refinance.5. Co-operative Banks belong to the money market as well as to the capitalmarket. Primary agricultural credit societies provide short term and mediumterm loans.6. Co-operative banks are financial intermediaries only partially.The sources of their funds (resources) are:(a) Central and state government,(b) The Reserve Bank of India and NABARD,(c) Other co-operative institutions,(d) Ownership funds and,(e) Deposits or debenture issues.7 . S o m e c o - o p e r a t i v e b a n k a r e s c h e d u l e d b a n k s , w h i l e o t h e r s a r e n o n scheduled banks. Coo p e r a t i v e B a n k s a r e s u b j e c t t o C R R a n d l i q u i d i t y requirements as other scheduled and non-scheduled banks are. However,their requirements are less than commercial banks.8. As said earlier, co-operative banks accept current, saving, and fixed or time deposits from individuals and institutions including banks.9. In the recent past, the RBI has introduced changes in interest rates of co-operative banks also, along with changes in interest rates of commercialbanks. The interest rates structure of co -operative banks is quite complex. The rates charged by them depend upon the type of bank, the type of loans, Page 13 T.Y.Bcom (Banking & Insurance) Co-operative Bankingand vary from state to state.10. Since 1966 the lending and deposit rate of commercial banks have beendirectly regulated by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have beenexercised only after 1979 in respect of non-agricultural advances they werefree to charge any rates at their discretion. Although the main aim of the co-o p e r a t i v e b a n k i s t o p r o v i d e c h e a p e r c r e d i t t o t h e i r members and not tom a x i m i z e p r o f i t s , t h e y m a y a c c e s s t h e m o n e y m a r k e t t o i m p r o v e t h e i r income so as to remain viable.11. Co-operative banks (COBs), in short, have played a pivotal role in thedevelopment of short-term and long-term rural credit structure in India over the years. The co-operative credit effort is said to be the first ever attempt atmicro-credit dispensation in India. Co-operative Banks share some common features for theircustomer benefit: Customer's owned entities :In a co-operative bank, the needs of the customers meet the needs of the owners, as co-operative bank members are both. As aconsequence, the first aim of a co -operative bank is not to maximisep r o f i t b u t t o p r o v i d e t h e b e s t p o s s i b l e p r o d u c t s a n d s e r v i c e s t o i t s Page 14

T.Y.Bcom (Banking & Insurance) Co-operative Bankingmembers. Some co-operative banks only operate with their membersbut most of them also admit non-member clients to benefit from their banking and financial services. Democratic member control :Co-operative banks are owned and controlled by their members, whodemocratically elect the board of directors. Members usually haveequal voting rights, according to the co -operative principle of "oneperson, one vote". Profil allocation :In a co-operative bank, a significant part of the yearly profit, benefitsor surplus is usually allocated to constitute reserves. A part of thisprofit can also be distributed to the co-operative members, with legalor statutory limitations in most cases. Profit is usually allocated to members either through a patronage dividend, which is related to theuse of the co-operative's products and services by each member, or through an interest or a dividend, which is related to the number of shares subscribed by each member. Page 15 T.Y.Bcom (Banking & Insurance) Co-operative Banking CH. 6. TYPES OF CO-OPERATIVE BANKS TYPES OF CO-OPERATIVE BANKS Page 16

T.Y.Bcom (Banking & Insurance) Co-operative Banking CLASSIFICATION OF CO-PERATIVE BANKS: The Co-operative banking structure in India comprises of:1. Urban Co-operative Banks2. Rural CooperativesSome co-operative banks are scheduled banks, while others are non -scheduled banks. For instance, State Co -operative banks and some UrbanCo -operative banks are scheduled banks but other co -operative banks arenon-scheduled banks.S c h e d u l e d b a n k s a r e t h o s e b a n k s w h i c h h a v e b e e n i n c l u d e d i n t h e second schedule of the Reserve bank of India act of 1934. The banks included in this schedule list should fulfill two conditions. 1. The paid capital and collected funds of bank should not be less than Rs. 5lac.2.Any activity of the bank will not adversely affect the interests of depositors. Every Scheduled bank enjoys the following facilities. Page 17

T.Y.Bcom (Banking & Insurance) Co-operative Banking CH. 6. TYPES OF CO-OPERATIVE BANKS TYPES OF CO-OPERATIVE BANKS Page 16

T.Y.Bcom (Banking & Insurance) Co-operative Banking CLASSIFICATION OF CO-PERATIVE BANKS: The Co-operative banking structure in India comprises of:1. Urban Co-operative Banks2. Rural CooperativesSome co-operative banks are scheduled banks, while oth ers are non-scheduled banks. For instance, State Co -operative banks and some UrbanCo -operative banks are scheduled banks but other co -operative banks arenon-scheduled banks.S c h e d u l e d b a n k s a r e t h o s e b a n k s w h i c h h a v e b e e n i n c l u d e d i n t h e second schedule of the Reserve bank of India act of 1934. The banks included in this schedule list should fulfill two conditions. 1. The paid capital and collected funds of bank should not be less than Rs. 5lac.2.Any activity of the bank will not adversely affect the interests of depositors. Every Scheduled bank enjoys the following facilities. Page 17

T.Y.Bcom (Banking & Insurance) Co-operative Banking1. Such bank becomes eligible for debts/loans on bank rate from the RBI2. Such bank automatically acquire the membership of clearing house. 1. Urban Co-operative Banks: Urban Co-operative Banks is also referred as Primary Co -operativeb a n k s b y t h e R e s e r v e B a n k o f I n d i a . A m o n g t h e n o n - a g r i c u l t u r a l c r e d i t societies urban co-operative banks occupy an important place. This bank iss t a r t e d i n I n d i a w i t h t h e o b j e c t o f c a t e r i n g t o t h e b a n k i n g a n d c r e d i t r equirements of the urban middle classes.T h e R B I d e f i n e s U r b a n C o o p e r a t i v e b a n k s a s s m a l l s i z e d c o - operatively organized banking units which operate in metropolitan, urbanand semi-urban centers to cater mainly to the needs of small borrowers, viz.owners of small scale industrial units, retail traders, professional and salariesclasses.U r b a n C o - o p e r a t i v e b a n k s m o b i l i z e s a v i n g s f r o m t h e m i d d l e a n d lower income groups and purvey credit to small borrowers, including weaker sections of the society. These banks organize on a limited liability basis,generally extend their area of operation over a town. The main functions of these banks are to promote thrift by attracting deposits from members andnon-members and to advance loans to the members. It is registered under Co-operatives Societies Act of the respective state Governments. Prior to1 9 6 6 , U r b a n C o operative banks were exclusively under the purview of State Government. From M a r c h 1 , 1 9 6 6 c e r t a i n p r o v i s i o n s o f B a n k i n g Regulation Act have been made applicable to these banks. Consequently, the Page 18

T.Y.Bcom (Banking & Insurance)

Co-operative BankingRBI became the regulatory an supervisory authority of Urban CooperativeB a n k s f o r t h e i r r e l a t e d o p e r a t i o n s . M a n a g e r i a l a s p e c t s o f s u c h b ankscontinue to remain with State Governments under the respective C o - operative Societies Act. These banks with multi -presence are regulated byt h e C e n t r a l G o v e r n m e n t s a n d r e g i s t e r e d u n d e r M u l t i - S t a t e C o o p e r a t i v e Societies Act. The RBI extends refinance to Urban Co -operative Banks atbank ate against their advances to tiny and cottage industrial units. These banks grants sizeable loans and advances under priority sector for lending tosmall business enterprises, retail trade, road and water transport operatorsand professional and self-employed persons. Urban Co-operative banks aremostly located in towns and cities and cater to the credit requirement of theurban clientele. The objectives and functions of the Urban Co-operative banks: Primarily, to raise funds for lending money to its members. To attract deposits from members as well as non-members. To encourage thrift, self-help ad mutual aid among members. To draw, make, accept, discount, buy, sell, collect and deal in bills of exchange, drafts, certificates and other securities. To provide safe-deposit vaults. Page 19

T.Y.Bcom (Banking & Insurance) Co-operative Banking Area of Operation : T h e a r e a o f o p e r a t i o n o f t h e s e b a n k s a r e u s u a l l y r e s t r i c t e d b y i t s byelaws to a municipal area or a town. In some occasions it exceeds this limit. The study group on Credit Cooperatives in Non-Agricultural Sectorsh a s r e c o m m e n d e d t h a t n o r m a l l y , i t w o u l d b e advisable for an urban co -operative bank to restrict its area of operation to the m u n i c i p a l i t y o r t h e taluka town where it operates. 2. Rural Co-operatives: Rural Cooperative Banking plays an important role in meeting thegrowing credit needs of rural population of India. It provides institutionalcredit to the agricultural and rural sector. The inadequacy of rural creditengaged the attention of RBI and Government throughout the 1950s and1960s. One important feature of providing agriculture credit in India hasbeen the existence of a wid espread network of rural financial institutions.The rural credit structure consists of many types of financial institutions aslarge scale branch expansion was undertaken to create a strong institutionb a s e d i n r u r a l a r e a . I t h a s s e r v e d a s a n i m p o r t a n t i n s t r u m e n t o f c r e d i t delivery in rural and agricultural areas. The separate structure of rural Co operative sector for long-term and shortt e r m l o a n s h a s e n a b l e d t h e s e institutions to develop a specialized institution for rural credit delivery. The Page 20

T.Y.Bcom (Banking & Insurance) Co-operative Bankingvolume of credit flowing through these institution has increased. The RuralCooperative structure has traditionally been bifurcated into two parallelwings, i.e.I. Shortterm Rural Co-operatives,II. Long-term Rural Co-operatives.There is a larger network of co-operative banks in the rural sector,c o n s i s t i n g o f 2 9 S t a t e C o - o p e r a t i v e B a n k s a n d 3 6 7 D i s t r i c t C e n t r a l C o - operative Banks, with 13,025 branches. In addition, there are 92,000 PrimaryAgricultural Co-operative Credit Societies , 19 State Land DevelopmentB a n k s a n d 7 4 5 P r i m a r y L a n d D e v e l o p m e n t B a n k s , a l o n g w i t h 1 , 8 4 7 branches, which are not strictly banks as they are not covered under t h e B a n k i n g R e g u l a t i o n A c t , 1 9 4 9 . T h e R B I G o v e r n o r ' s p r o p o s a l s s h o u l d , therefore , encompass the entire Co-operative banking system. I. Short-term Rural Co-operatives: The short-term rural co-operatives provide crop and other workingcapital loans to farmers and rural artisans primarily for short-term purpose.These institutions have federal three-tier structure.At the Apex of the system is a State Co-operative bank in each state.At the middle (or district) level, there are Central Co-operative Banksalso known as District Co-operative banks. Page 21 T.Y.Bcom (Banking & Insurance)

Co-operative Banking Multiple delivery channels The bank was able to provide Any Branch Banking service to its rural and semi urban customers since 1997 by using high-end software and hardwareequipment and network. The people at SUCO Bank appreciate the value of t i m e a n d e n e r g y o f t h e c u s t o m e r s . B y i n t r o d u c i n g T e l e - b a n k i n g f a c i l i t y , SUCO Bank has ensured that the customers can access their account detailsthrough telephone lines without leaving the comfort of their home and not having to travel long distances. Extended Transaction Hours S U C O B a n k i s t h e o n l y b a n k t o i n i t i a t e t r a n s a c t i o n f a c i l i t i e s b e y o n d t h e regular banking transaction hours. This amply displays the commitment of the bank to customer service. Page 51