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Cooperative Banks: Cooperative Banking meaning, their limitations and how are they different from commercial banks

What are Cooperative Banks in India?

Cooperative Banks are registered under State Laws and primarily cater to rural poor & agriculturists. They provide term credit to agriculture & obtain refinance/concessional interest from RBI. All Cooperative Banks are governed by Banking Regulation Act. They have limited scope in branch expansion and cannot operate overseas. They require specific permission from State Govt/ RBI for opening branches outside the State
Consumer Voice compared the service charges of 10 Cooperative Banks to recommend the Best Cooperative Bank. Read More

What is their future in India’s cooperative sector?

Cooperative banking has come to stay & play a longer innings in India’s banking sector. They have contributed to improving & competing with the banks operating in the commercial sector segment, with more ‘presence’ in the rural and semi-urban belt than in the urban/metro environs.

But much of their success depends on them adopting modern methods of professional management, embracing advanced & consumer-friendly computer technologies coupled with stricter control on their operational losses & bad debts.

The multiple & overlapping of Regulatory Authority should be minimized so that the management control is vested with professionals rather than elected politicians as Governing Members, so that cooperative banks can look like the ‘single banking’ concept of the Western Countries with limited branch network or nil branch network but enjoying unlimited access to people & resources.

What is the difference between Cooperative Banks and Commercial Banks?

 Cooperative Banks also perform the basic banking functions of banking but they differ from commercial banks in the following respects-

  1. Commercial banks are joint-stock companies under the Companies’ Act of 1956, or public sector bank under a separate act of a parliament whereas co-operative banks were established under the co-operative society’s acts of different states
  2. Commercial bank structure is branch banking structure whereas co-operative banks have a three tier setup, with State Co-operative Banks at apex level, Central / District Co-operative Banks at District Level, and Primary Co-operative Societies at rural level
  3. Only some of the sections of banking regulation act of 1949 (fully applicable to commercial banks), are applicable to co-operative banks, resulting only in partial control by RBI of co-operative banks and
  4. Co-operative banks function on the principle of cooperation and not entirely on commercial parameters


What are the limitations of Cooperative Banks?

  • Duality of control system of co-operative banks: Banking related functions (viz. licensing, area of operations, interest rates etc.) were to be governed by RBI and registration, management, audit and liquidation, etc. are to be governed by State Governments as per the provisions of respective State Acts
  • A feature of the urban banking movement has been its heterogeneous character and its uneven geographical spread with most banks concentrated in the states of Gujarat, Karnataka, Maharashtra, and Tamil Nadu. While most banks are unit banks without any branch network, some of the large banks have established their presence in many states when at their behest multi-state banking was allowed in 1985. Some of these banks are also Authorized Dealers in Foreign Exchange
  • Urban cooperative banks do not issue Credit Cards. However, they may forge an arrangement with any one of the nationalized banks to sell the latter’s Credit Cards to their own constituted clients. However they are issuing Debit Cards & opening ATMs. These dent their popularity & affect their acceptability
  • Prepaid Cards cannot be issued by them. This severely affects their popularity & market presence. These cards are in the nature of Gift Cards which are bought by the public for presenting to their relatives/friends on occasions such as Birthdays, Anniversaries or Marriage functions. Though the business is only a small fraction of total business, these cards lend an air of trust & social acceptability-which the coop banks are losing out
  • The hike in service charges of coop banks within the last 1 year has compounded their problems multifold as they are expected to fight out their survival by expanding the customer-base while competing with commercial banks to offer competitive costs to banking services


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Divya Patwal


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