Cooperatives in India

In Context

• The Central Government has recently introduced Bill to amend the Multi-State Co-operative Societies Act, 2002.

About the Cooperative Societies

• About:
  • A co-operative society is a voluntary association of individuals having common needs who join hands for the achievement of common economic interest. 
  • Its aim is to serve the interest of the poorer sections of society through the principle of self-help and mutual help. 
  • The cooperative movement is as old as India’s Independence. 
• 97th Constitutional Amendment Act 2011:
  • It established the right to form cooperative societies as a fundamental right (Article 19).
  • It included a new Directive Principle of State Policy on the Promotion of Cooperative Societies (Article 43-B).
  • It added a new Part IX-B to the Constitution titled “The Co-operative Societies” (Articles 243-ZH to 243-ZT). 
  • It authorizes the Parliament to establish relevant laws in the case of multi-state cooperative societies (MSCS) and state legislatures in the case of other cooperative societies.
• Significance:
  • Co-operatives have great potential to rejuvenate growth, formalise the economy, and reduce inequality besides improving the standard of living of the poor.
• Ministry of Cooperation:
  • The Union Ministry of Cooperation was formed in 2021, its mandate was looked after by the Ministry of Agriculture before.

Financial cooperatives

• Status of financial cooperatives in India:
  • Currently, there are about 10 lakh cooperatives, of which 1.05 lakh are financial cooperatives. 
  • Among the financial co-operatives, rural co-operatives have a three-tier system with 
    • around 1.02 lakh primary agricultural cooperative societies (PACS), 
    • 351 District Central Cooperative Banks (DCCBs), 
    • 34 State Cooperative Banks (SCBs), 
    • besides 616 rural cooperatives for long-term lending. 
  • India has 1,514 primary urban cooperative banks (UCBs), of which, 52 are scheduled and the rest unscheduled, some are multi-State UCBs.
• Issues & challenges:
  • Dispute over jurisdiction:
    • The founding fathers of the Indian Constitution have kept ‘cooperatives’ in the State List while ‘banking’ is included in the Union List.
    • State governments have a great responsibility in promoting non-financial cooperatives without any dispute over jurisdiction. 
    • When it comes to cooperative banks, both urban and rural, there is dual control leading to jurisdictional disputes. 
      • While incorporation, management, audit, supersession of board and liquidation are administered by the Registrar of Cooperatives, 
      • Banking licence, prudential regulation, capital adequacy, etc., are prescribed by the RBI. 
    • Many expert committees have concluded that dual control over cooperative banks has not served them well for their orderly growth.
  • Poor corporate governance:
    • Poor corporate governance has been the main reason behind the failure of many cooperative banks.
      • Since 2004-05, there were 145 mergers of non-scheduled UCBs, nine in 2021-22. 
      • Since 2015-16, the RBI cancelled the licences of 54 UCBs, including 10 in 2021-22. 
      • The number of UCBs has declined from 1,926 in March 2004 to 1,514 in March 2022. 
    • The balance sheets of about one-third of the newly licensed UCBs are unsound. 
    • UCBs reported more than 1,000 cases of fraud in the last five years. 
    • The collapse of the Punjab and Maharashtra Cooperative (PMC) Bank in 2019 was mainly due to financial irregularities, failure of internal control, and under-reporting of exposures.
• Government’s measures:
  • The Central Government in December 2022 introduced Bill to amend the Multi-State Co-operative Societies Act, 2002.
  • The key features of this Bill are: 
    • The Central Government will establish the Cooperative Election Authority to conduct the election of board members; 
    • Provision for amalgamation of UCBs with other multi-State UCBs as decided by general meeting with two-thirds of its members present and voting; 
    • The Central Government will prepare a scheme and create a fund, to be contributed by profit-making multi-State UCBs, for rehabilitation of sick multi-State UCBs; 
    • There are restrictions on the redemption of government shareholding; and 
    • One or more Co-operative Ombudsman with territorial jurisdiction to be appointed by the Central Government for the redress of complaints.

Suggestions & way ahead

• UCBs have more than 8.6 lakh depositors involving over Rs. 5-lakh crore deposits. Rural cooperative banks have a deposit base of over Rs. 6-lakh crore. 
• As banking regulations are primarily governed by the protection of depositors’ interests, different principles cannot be applied to commercial banks and cooperative banks.
• Cooperative banks can raise money through public issues and private placements of equity or preference shares with prior RBI permission. 
• Amendments do not apply to PACS or cooperative societies lending for long-term requirements of agriculture.
• If cooperative banks want to grow in a competitive environment, they must lift their governance. 
• Alternatively, the State governments should concentrate on non-financial cooperatives rather than waste their time and energy on turf wars relating to financial cooperatives.