Co-operative banks and their rural credit

Co-operative banks and their rural credit

Introduction

       Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. 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 banking

            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 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.

co-operative banks 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 maximize 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.

Rural Credit Cooperatives in India

                                                                          Rural Credit Cooperatives have existed in India for a long time. A shortage of supply of rural credit was prevalent in India. To meet the demand for short and long term rural credit the Co-operative Credit Structure (CCS) was set up. While short term credit is supplied by the State Cooperative Banks (SCB), District Central Cooperative Banks (DCCB) and Primary Agricultural Credit Societies (PACS), long term credit is supplied by the Primary Cooperative Agriculture and Rural Development Banks (PCARDB).

                                                                               Rural Credit Cooperatives were initiated in India long back, some of them, even before India's Independence in 1947. Post-independence the rural credit cooperative system was developed further. Moreover rural banks were set up. However in spite of such initiatives credit needs of the rural Indian people have not been met effectively. Supply of credit for agriculture too has not matched up to the demand levels.

The resultant effect has been widespread discontent and despair among the rural poor, sometimes leading to extreme actions like suicides by farmers. Measures were undertaken by the Indian government in 2004, to increase credit supply for agriculture by commercial banks. Moreover banks were also asked to re-organize repayment schedules of farmers who were affected by floods, droughts, etc.

                                                            According to World Bank estimates of 1994 and 1995; the average credit utilization was Rs 14,549 per family in a year. While 65% of rural credit in India was utilized for productive purposes, the remaining 35 % was utilized for consumption purposes. Out of the 65% utilization for productive purposes, short term utilization constituted 49%. Long term utilization (purchase of agricultural machinery, livestock) etc accounted for a mere 16%. Short term consumption (for purchase of consumer durables, clothes, etc) was 20% while long term consumption (for house building, marriage, etc.) was 15%.

The Co-operative Credit Structure (CCS) of India was set up to serve the needs of both short term and long term rural credit in India. Short term credit is supplied in rural India by three institutions -

• State Cooperative Banks (SCB)
• District Central Cooperative Banks (DCCB)
• Primary Agricultural Credit Societies (PACS)

                                                                                Long term credit is supplied by the Primary Cooperative Agriculture and Rural Development Banks (PCARDB).
In 2007, the World Bank has approved a project related to rural credit cooperatives in India. This project entitled "The Strengthening Rural Credit Cooperatives Project" involves a total cost of an estimated 600 million US dollars and is expected to be completed by June 2012. The National Bank for Agriculture and Rural Development (NABARD) will be implementing the project

Conclusion

                    The origins of the cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany, such societies were set up in India. Cooperative banks are an important constituent of the Indian financial system. They are the primary financiers of agricultural activities, some small-scale industries and self-employed workers. The Anyonya Co-operative Bank in India is considered to have been the first cooperative bank in Asia. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.