Cooperative Banks in India: Urban, Rural & Credit Societies Guide

Introduction: Banking by the People, for the People

In the textile hub of Surat, thousands of diamond traders bank with the Surat People’s Cooperative Bank—a bank owned not by distant shareholders but by its own members. In rural Maharashtra, a farmer gets his crop loan from the local Primary Agricultural Credit Society (PACS), an institution his grandfather helped establish decades ago.

Cooperative banks are India’s democratic financial institutions—owned by members, governed by members, and operated for members. They’re not about maximizing shareholder returns; they’re about serving community needs. This unique model has both enabled remarkable financial inclusion and faced significant challenges.

What Are Cooperative Banks?

Definition

Cooperative banks are financial institutions that operate on cooperative principles:

• Owned by members (not external shareholders)
• Democratic control (one member, one vote)
• Member benefit (not profit maximization)
• Voluntary membership
• Limited interest on capital

Legal Framework

Cooperative banks operate under:

• Banking Regulation Act, 1949 (as applicable to cooperative societies)
• State Cooperative Societies Acts (for state-level cooperatives)
• Multi-State Cooperative Societies Act, 2002 (for multi-state operations)
• Reserve Bank of India Act

Dual Regulation

RBI Regulates:

• Banking functions
• Interest rates
• Capital adequacy
• Asset classification
• Prudential norms

Registrar of Cooperative Societies Regulates:

• Registration
• Management
• Elections
• Dissolution
• Governance

Structure of Cooperative Banking

Three-Tier System

Apex Level:
├── State Cooperative Banks (StCBs)
│
Middle Level:
├── District Central Cooperative Banks (DCCBs)
│
Base Level:
└── Primary Agricultural Credit Societies (PACS)

Two-Tier Urban System

Apex Level:
├── State/Central Cooperative Banks
│
Primary Level:
└── Urban Cooperative Banks (UCBs)

Numbers at a Glance

Urban Cooperative Banks (UCBs)

What Are UCBs?

Urban Cooperative Banks serve urban and semi-urban areas, providing banking services to small traders, businesses, and middle-class individuals.

Characteristics

Membership:

• Open to individuals in geographic area
• Share capital from members
• Members can deposit and borrow

Services:

• Savings accounts
• Fixed deposits
• Current accounts
• Loans (personal, business, housing)
• Lockers
• Payment services

Major UCBs

Maharashtra dominates with 30%+ of all UCBs

UCB Categories

Based on Deposits:

UCB Challenges

PMC Bank Crisis (2019):

• Punjab & Maharashtra Cooperative Bank collapsed
• ₹11,000+ crore deposits affected
• Fraud and misgovernance exposed
• Triggered regulatory overhaul

Systemic Issues:

• Governance weaknesses
• Professional management lacking
• Political interference
• Concentration in few states
• NPAs higher than commercial banks

Rural Cooperative Credit System

Short-Term Credit Structure

State Cooperative Banks (StCBs):

• Apex institution in each state
• Refinances DCCBs
• Channels NABARD funds
• Coordinates cooperative movement

District Central Cooperative Banks (DCCBs):

• One per district (usually)
• Refinances PACS
• Lends to societies and individuals
• Links StCBs and PACS

Primary Agricultural Credit Societies (PACS):

• Village-level institutions
• Closest to farmers
• Provides crop loans
• Input supply (seeds, fertilizers)
• 95,000+ across India

Credit Flow

NABARD/Government
       ↓
State Cooperative Banks
       ↓
District Central Cooperative Banks
       ↓
Primary Agricultural Credit Societies
       ↓
Farmers and Rural Population

Long-Term Credit Structure

State Cooperative Agriculture and Rural Development Banks (SCARDBs):

• Long-term agricultural credit
• Land development
• Investment credit

Primary Cooperative Agriculture and Rural Development Banks (PCARDBs):

• Village/tehsil level
• Term loans to farmers

How Cooperative Banks Work

Membership Model

Becoming a Member:

1. Apply for membership
2. Purchase share capital (minimum shares)
3. Pay entrance fee
4. Get approved by board

Member Rights:

• Vote in elections (one member, one vote)
• Stand for board positions
• Receive dividends
• Access banking services
• Attend general meetings

Governance Structure

General Body (All Members)
       ↓
Board of Directors (Elected)
       ↓
Chairman/President
       ↓
Managing Director/CEO
       ↓
Management Team

Unique Features

Democratic Control:

• One member, one vote (regardless of shares)
• Board elected by members
• Members decide policies

Limited Returns:

• Dividend on shares limited
• Surplus used for community or reserves
• Not profit-maximizing

Community Focus:

• Serve member interests
• Local decision-making
• Knowledge of local conditions

Services Offered

Deposit Products

Savings Account:

• Basic savings facility
• Interest rates competitive
• For members and non-members (some banks)

Fixed Deposits:

Note: DICGC coverage now extended to cooperative banks

Recurring Deposits:

• Monthly savings schemes
• Popular in cooperatives

Current Accounts:

• For businesses
• Lower minimums often

Lending Products

Agricultural Loans (Rural Cooperatives):

• Crop loans (short-term)
• Term loans for equipment
• Dairy, poultry financing
• Kisan Credit Cards

Business Loans (UCBs):

• Working capital
• Term loans
• Trade finance

Personal Loans:

• Salary-backed
• Against deposits
• Personal needs

Housing Loans:

• Home purchase
• Construction
• Renovation

Gold Loans:

• Against gold ornaments
• Quick disbursement

Other Services

Payment Services:

• NEFT/RTGS (larger cooperatives)
• UPI
• Debit cards (RuPay)
• Bill payments

Lockers:

• Safe deposit lockers
• Often more available than commercial banks

Insurance:

• Distribution of insurance products
• Group insurance for members

Regulatory Framework

Dual Regulation Challenge

Cooperative banks faced regulatory gaps:

• RBI regulated banking aspects
• State regulated governance
• Gaps led to governance failures

Banking Regulation (Amendment) Act, 2020

Major Changes:

• RBI powers strengthened
• Can supersede UCB boards
• Direct control over management
• Approval needed for CEO/Directors
• Audit by RBI-approved auditors

Key RBI Regulations

Capital Requirements:

Asset Classification:

• 90-day NPA norm (aligned with banks)
• Provisioning requirements
• Income recognition norms

Exposure Limits:

• Single borrower: 15% of capital
• Group: 25% of capital
• Prevents concentration

DICGC Coverage

Extension to Cooperatives:

• Deposits now insured up to ₹5 lakhs
• Same as commercial banks
• Significant safety improvement

Umbrella Organization

NABARD Proposal:

• Create umbrella organization for UCBs
• Provide liquidity support
• IT infrastructure
• Regulatory coordination

Primary Agricultural Credit Societies (PACS)

The Village Banker

PACS are the foundation of rural cooperative credit:

Numbers:

• 95,000+ PACS
• 14+ crore members
• ₹2+ lakh crore deposits
• ₹3+ lakh crore advances

PACS Functions

Credit:

• Short-term crop loans
• Kisan Credit Card implementation
• Input financing

Non-Credit:

• Distribution of inputs (seeds, fertilizers)
• Marketing of produce
• Storage facilities
• Consumer goods distribution

PACS Computerization

Government Initiative:

• ₹13,000 crore allocation
• Digitizing 63,000 PACS
• Core Banking Solution
• Linkage with banks

Benefits:

• Transparency
• Faster services
• Better monitoring
• Financial inclusion

Model By-Laws

Government introduced model by-laws:

• Standardized governance
• Professional management
• Multiple activities allowed
• Better accountability

Challenges Facing Cooperative Banks

Governance Issues

Political Interference:

• Board elections politically influenced
• Lending decisions not always merit-based
• Delayed action against defaulters

Professional Management:

• Often lack qualified professionals
• Family/community loyalties affecting decisions
• Limited technology adoption

Asset Quality

High NPAs:

• Average NPA higher than commercial banks
• Agricultural loan defaults
• Willful defaulters shielded sometimes

Recovery Challenges:

• Social relationships complicate recovery
• Legal processes slow
• Political pressure to waive loans

Technology Gap

Legacy Systems:

• Many lack Core Banking Solutions
• Limited digital services
• Manual processes prevalent

Investment Constraints:

• Limited capital for technology
• Scale disadvantage
• Skilled IT staff shortage

Concentration Risk

Geographic:

• Maharashtra has 30%+ of UCBs
• Southern states dominate PACS
• Northeast underserved

Sectoral:

• Heavy real estate exposure (UCBs)
• Agricultural dependence (rural)

Competition

From:

• Commercial banks improving rural presence
• Small Finance Banks
• NBFCs in agricultural credit
• Fintechs

Recent Reforms

RBI Supervisory Action Framework (SAF)

Triggers:

• Capital adequacy breach
• NPA threshold exceeded
• Profitability issues

Actions:

• Restrictions on dividend
• Branch expansion stop
• Management changes
• Merger direction

Four-Tier Regulation (UCBs)

Tier-Based Approach:

• Proportionate regulation
• Larger UCBs face stricter norms
• Smaller ones get flexibility

Voluntary Transition to SFBs

RBI Pathway:

• UCBs can become Small Finance Banks
• Meet SFB requirements
• Voluntary scheme
• Shivalik UCB converted (2021)

Merger Framework

RBI Encourages:

• Weak UCBs to merge with strong ones
• Consolidation for strength
• Several mergers completed

NABARD Initiatives

For Rural Cooperatives:

• Recapitalization support
• IT infrastructure funding
• Training programs
• Model PACS development

Comparing Cooperative Banks

UCBs vs Commercial Banks

Rural Cooperatives vs Commercial Banks

Choosing a Cooperative Bank

When to Consider UCBs

Good For:

• Higher FD rates
• Local banking needs
• Community connection
• Small business banking
• Areas with limited bank branches

Be Careful About:

• Large deposits (spread across banks)
• Governance quality
• Financial health

Due Diligence Checklist

Before Opening Account:

• Check RBI registration
• Review recent financials
• Check NPA levels
• Understand deposit insurance
• Verify board composition
• Check audit reports
• Read recent news

Red Flags:

• Unrealistically high FD rates
• Frequent management changes
• Regulatory actions
• Large loan to single borrowers
• Political connections to board

Success Stories

Saraswat Cooperative Bank

Profile:

• India’s oldest UCB (1918)
• Multi-state operation
• ₹40,000+ crore deposits
• Professional management
• Consistently profitable

Success Factors:

• Strong governance
• Conservative lending
• Technology investment
• Member focus

SEWA Bank

Profile:

• Self-Employed Women’s Association
• Founded 1974
• Focus on women workers
• Microfinance pioneer

Impact:

• Serves 400,000+ members
• Women-led
• Financial empowerment
• Model for inclusion

Model PACS (Maharashtra)

Innovations:

• Multiple activities (dairy, retail, input supply)
• Computerized operations
• Direct benefit transfer
• Higher farmer engagement

Future of Cooperative Banking

Trends

1. Consolidation:

• Weak banks merging
• Fewer but stronger institutions
• Regional champions emerging

2. Digitization:

• Core Banking implementation
• Digital payments adoption
• Mobile banking

3. Regulatory Convergence:

• Moving toward bank-like regulations
• Better governance standards
• Professional management

4. PACS Transformation:

• Multi-service centers
• Direct banking access
• Common Service Centers linkage

5. Professionalization:

• External CEO appointments
• Training programs
• Governance improvements

Key Takeaways

1. Member-owned, member-governed – Democratic financial institutions
2. Deep reach – 95,000+ PACS across villages
3. Dual regulation – RBI + Registrar of Cooperatives
4. Governance challenges – Political interference, professional management gaps
5. DICGC covered now – Deposits insured up to ₹5 lakhs
6. Reforms ongoing – Stronger RBI oversight since 2020
7. PACS digitization – Major government initiative underway

Disclaimer

This article is for educational purposes only. Cooperative bank health varies significantly—do thorough due diligence before depositing. Check RBI’s website for regulatory status. This is not financial advice.

Frequently Asked Questions

Q: Are cooperative bank deposits safe? A: They’re now covered under DICGC up to ₹5 lakhs. However, governance quality varies—choose carefully.

Q: Can anyone open account in cooperative bank? A: For membership, usually geographic/community criteria apply. Some banks allow non-member deposits.

Q: Why do UCBs offer higher FD rates? A: They need to attract deposits and have smaller operations. But higher rates may indicate higher risk—evaluate carefully.

Q: What happened to PMC Bank depositors? A: RBI imposed moratorium, allowed limited withdrawals, and is pursuing resolution. Deposit insurance (DICGC) now covers cooperatives.

Q: Can cooperative banks give home loans? A: Yes, UCBs and larger cooperatives offer housing loans.

Q: What is PACS? A: Primary Agricultural Credit Societies—village-level cooperative institutions providing agricultural credit and services.

Q: Should I trust a cooperative bank? A: Do due diligence—check financials, governance, regulatory status. Well-run cooperatives like Saraswat are safe; poorly managed ones are risky.

Cooperative banking embodies the principle that finance can be democratic—owned by members, serving members. While challenges persist, their role in reaching the unreached remains invaluable. The key is choosing well-governed institutions.