DEFINITION OF CO-OPERATIVE BANKS

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. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts ). Co-operative banks differ from stockholder banks by their organization, their goals, their values and their governance. In most countries, they are supervised and controlled by banking authorities and have to respect prudential banking regulations, which put them at a level playing field with stockholder banks. Depending on countries, this control and supervision can be implemented directly by state entities or delegated to a co-operative federation or central body. All the cooperative banks share common features : Customer-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 a consequence, the first aim of a co-operative bank is not to maximise profit but to provide the best possible products and services to its members. Some co-operative banks only operate with their members but 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, who democratically elect the board of directors. Members usually have equal voting rights, according to the co-operative principle of one person, one vote . Profit allocation: In a co-operative bank, a significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves. A part of this profit can also be distributed to the co-operative members, with legal or statutory limitations in most cases. Profit is usually allocated to members either through a patronage dividend, which is related to the use 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. 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. Co-operative banks, as a principle, do not pursue the goal of profit maximization. Co-operative bank performs all the main banking functions of deposit mobilization, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. Co-operative Banks belong to the money market as well as to the capital market.

Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans. 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. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank HISTORY The Bank was formed in 1872 as the Loan and Deposit Department of Manchester's Cooperative Wholesale Society, becoming the CWS Bank four years later. However, the bank did not become a registered company until 1971. In 1975, the bank became the first new member of the Committee of London Clearing Banks for 40 years, and thus able to issue its own cheques. Since 1974 the Co-operative Bank has consistently offered free banking for personal customers who remain in credit. It was also the first Clearing Bank to offer an interest bearing cheque account called Cheque & Save, in 1982. In 1991 the Bank shook the credit card market when it introduced a guaranteed "free for life" Gold Visa card. The Co-operative banks in INDIA have a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfil, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary co-operative banks. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Establishment of Cooperative Banks in India INTRODUCTION

Co-operative movement is quite well established in India. The first legislation on co-

operation was passed in 1904. In 1914 the Maclagen committee envisaged a three tier structure for co-operative banking viz. Primary Agricultural Credit Societies (PACs) at the grass root level, Central Co-operative Banks at the district level and State Co-operative Banks at state level or Apex Level. The first urban co-operative bank in India was formed nearly 100 years back in Baroda. The co-operative banks arrived in India in the beginning of 20th Century as an official effort to create a new type of institution based on the principles of co-operative organisation and management, suitable for problems peculiar to Indian conditions. These banks were conceived as substitutes for money lenders, to provide timely and adequate short-term and long-term institutional credit at reasonable rates of interest. In the formative stage Co-operative Banks were Urban Co-operative Societies run on community basis and their lending activities were restricted to meeting the credit requirements of their members. The concept of Urban Co-operative Bank was first spelt out by Mehta Bhansali Committee in 1939 which 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 was made applicable in 1966.

MAIN FUNCTIONS OF CO-OPERATIVE BANKS 1. Co-operative Banks are organised and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of "one member, one vote" function on "no profit, no loss" basis. Co-operative banks, as a principle, do not pursue the goal of profit maximisation. Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. UCBs provide working capital loans and term loan as well. 2. Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural. Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. 3. Cooperative banks in India finance rural areas under: Farming Cattle Milk Hatchery Personal finance

4. Cooperative banks in India finance urban areas under: Self-employment Industries Small scale units Home finance Consumer finance Co-operative Banks Types There are two types of co-operative banks in INDIA. 1. The first is the short term lending oriented Co-operative Banks. In this category there are again three sub categories of banks which are the State Co-operative banks, District Cooperative banks and the Primary Agricultural Co-operative societies. 2. The second is the long term lending oriented Co-operative banks. In this second category there are land developments banks which are at three levels. First is the state level, the second is district level, and the third is the village level. Again the Co-operative banking structure in India is divided into five main categories and these categories are: 1. Primary Co-operative Credit Society. 2. Central Co-operative Banks. 3. State Co-operative Banks. 4. Land Development Banks. 5.Urban Co-operative Banks.

It is very much clear that co-operative banks have very much importance in national development. Without the help of co-operative banks, millions of people in INDIA would be lacking the much needed financial support.

y Primary Co-operative Credit Society : The primary co-operative credit society is an association of borrowers and non-borrowers residing in a particular locality. The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks. The borrowing powers of the members as well as of the society are fixed. The loans are given to members for the purchase of cattle, fodder, fertilizers, pesticides, etc. y Central co-operative banks : These are the federations of primary credit societies in a district and are of two types- those

having a membership of primary societies only and those having a membership of societies as well as individuals. The funds of the bank consist of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks. These banks provide finance to member societies within the limits of the borrowing capacity of societies. They also conduct all the business of a joint stock bank. y State co-operative banks : The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the co-operative banking structure in the state. Its funds are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of India. The state cooperative banks lend money to central co-operative banks and primary societies and not directly to the farmer. y Land development banks : The Land development banks are organized in 3 tiers namely; state, central, and primary level and they meet the long term credit requirements of the farmers for developmental purposes. The state land development banks oversee, the primary land development banks situated in the districts and tehsil areas in the state. They are governed both by the state government and Reserve Bank of India. Recently, the supervision of land development banks has been assumed by National Bank for Agriculture and Rural development (NABARD). The sources of funds for these banks are the debentures 42subscribed by both central and state government. These banks do not accept deposits from the general public.

y Urban Co-operative Banks : The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centered on communities, localities, work place groups. They essentially lend to small borrowers and businesses. Today, their scope of operations has widened considerably. The origins of the urban co-operative banking movement in India can be traced to the close of nineteenth century. Inspired by the success of the experiments related to the cooperative movement in Britain and the co-operative credit movement in Germany, such societies were set up in India. Co-operative societies are based on the principles of cooperation, mutual help, democratic decision making, and open membership. Cooperatives represented a new and alternative approach to organization as against proprietary firms, partnership firms, and joint stock companies which represent the dominant form of commercial organization. They mainly rely upon deposits from members and non-members and in case of need, they get finance from either the district central co-operative bank to which they are affiliated or from the apex co-operative bank if they work in big cities where the apex bank has its Head Office. They provide credit to small scale industrialists, salaried employees, and other urban and semi-urban residents.

CLASSIFICATION OF CO-OPERATIVE BANKS

Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative banks are nonscheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act. Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and nonscheduled banks are. However, their requirements are less than commercial banks.

Sr.No.

Category of bank

1. 2.

Scheduled banks Non-Scheduled banks a) with NDTL of Rs.25 crore & above b) with NDTL of less 15% than Rs.25 crore 10%

Minimum SLR holding in Government and other approved securities as percentage of Net Demand and Time Liabilities (NDTL) 25%

Recent Developments.

Over the years, primary (urban) cooperative banks have registered a significant growth in number, size and volume of business handled. As on 31st March, 2003 there were 2,104 UCBs of which 56 were scheduled banks. About 79 percent of these are located in five states, Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. Recently the problems faced by a few large UCBs have highlighted some of the difficulties these banks face and policy endeavours are geared to consolidating and strengthening this sector and improving governance.

y y

The cooperative banks/credit institutions constitutes the second segment of Indian banking system, comprising of about 14% of the total banking

y y y y y y y

sector asset (March 2007). Bulk of the cooperative banks operate in the rural regions with rural coop banks accounting for 67% of the total asset and 67% of the total branches of all cooperative banks. Share of rural cooperatives in total institutional credit was 62% in 1992-93, 34% in 2002-03 and 53% in 2006-07. Cooperative banks have an impressive network of outlets for institutional India, particularly in rural India.

There are more than total 297 co-operative banks in INDIA IN STATES Andhra Pradesh Assam Bihar Chhattisgarh Goa Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Meghalaya Orissa Rajasthan Tripura Tamil Nadu Uttarakhand Uttar Pradesh West Bengal IN UNION TERRITOREIS Andaman and Nicobar Islands Chandigarh Pondicherry 2 2 6 24 1 24 1 11 21 1 3 2 8 43 35 67 5 2 13 1 2 1 8 14