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What is a cooperative bank?

- Economic Times

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http://articles.economictimes.indiatimes.com/2002-05-13/news/2735729...

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SPOTLIGHT
Corporate Dossier

Banks in India can be broadly classified under two heads commercial banks and co-operative banks.
While commercial banks (nationalised banks, State Bank group, private sector banks, foreign banks and
regional rural banks) account for an overwhelming share of the banking business, co-operative banks also
play an important role.
Initially set up to supplant indigenous sources of rural credit, particularly money lenders, today they mostly
serve the needs of agriculture and allied activities, rural-based industries and to a lesser extent, trade and
industry in urban centers. Co-operative banks have a three tier structure primary (agriculture or urban)
credit societies, district central co-operative banks and at the apex level, state co-operative banks.
What are urban co-operative banks? Who regulates them?
Primary (urban) credit societies that meet certain specified criteria can apply to RBI for a banking license to
operate as urban co-operative banks. Primary (urban) co-operative banks are registered and governed by
state governments under the respective co-operative societies acts of the concerned states.
Since they are also covered by the provisions of the Banking Regulation Act, 1949, they come under the
control of the RBI as well.

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While the managerial aspects of these banks, registration, management, administration, recruitment,
amalgamation, liquidation, etc are controlled by the state governments, matters related to banking are
governed by RBI directives. Traditionally, the area of operation of primary (urban) co-operative banks is
confined to metropolitan, urban or semi-urban centres and caters to the needs of small borrowers including
SSIs, retail traders, small entrepreneurs, professionals and the salaried class.

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However, there is no formal restriction as such and today UCBs can conduct business in the entire district in
which they are registered, including rural areas. Well managed primary UCBs with deposits of over Rs 50
crore are also allowed to operate in more than one state subject to certain norms. These banks are also
included in the Second Schedule of the RBI Act 1934.

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This confers certain rights and obligations on them rights such as the facility of obtaining accommodation
in the form of refinance and loans and advances from the RBI and obligations such as maintenance of cash
reserves, submission of returns to the RBI etc. At present, there are 29 scheduled UCBs.
What are district central co-operative banks and state co-operative banks (SCBs)?
These, as the name suggests, are co-operative banks at the district level and at the state level. Each district
will have not more than one DCCB with a number of DCCBs reporting to the SCB.
Earlier these two tiers were also under the supervision of the RBI. However, following the establishment of
the National Bank of Agriculture and Development (Nabard) in 1982, the supervisory function of these banks
has been passed on to Nabard.
What ails co-operative banks?
The biggest problem facing co-operative banks is the they have more than one master in the case of
UCBs, you have the RBI and the Registrar of Co-operative Societies (RCS) of the respective state and in the
case of the district and state co-operative banks, you have Nabard, the RBI and the RCS.
Given the close links between politicians and co-operatives and the fact that the RCS functions under the state
government, in practice this dual or triple custody of the health of co-operative banks has, in practice, led to
poor supervision and control. Also most co-operative banks are lacking in skill/expertise.
Recruitments are politicised as are appointments at most levels. Income recognition and prudential norms that
were introduced for commercial banks in the early 90s were also not extended to the co-operative sector.
Why are they in the news now?

07-Nov-14 9:00 PM

What is a cooperative bank? - Economic Times

2 of 2

http://articles.economictimes.indiatimes.com/2002-05-13/news/2735729...

Co-operative banks are in the news because of the uncovering of fraudulent deals at a number of co-operative
banks. These banks are reported to have paid brokers to buy government securities but have to date not
received these securities. Since the sums involved are large (though they are small in comparison to normal
deals in the G-Secs market!) and more than one co-operative bank is involved, it is feared that this may be only
the tip of the iceberg.

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