Long before the advent of the corporate structure, commerce and business were carried on by individual businessmen, traders and artisans. Financial intermediaries were also individuals, and loans in India were made by goldsmiths and sahukars.
With the advent of the colonial powers, banks were incorporated as joint stock companies to facilitate imports and to ensure that exports that had flourished for centuries were killed by strangling finances by eliminating their financiers – the loan companies of native money.
Since banks do not lend to ordinary people, financial intermediaries, in the form of cooperative credit institutions, have appeared. They were formalized in 1904 by law. Thus began the journey of the relationship between the cooperative credit system and the informal / unorganized sector.
Today, the unorganized sector is still a very important segment of the Indian economy, contributing almost 50 percent of its GDP and accounting for 90 percent of employment. Large commercial banks have a limited appetite to serve this sector. The few new Small Finance Banks (SFBs) that have emerged are a largely untested experience. Although they are intended to serve small borrowers, they are nonetheless not local institutions and, to this extent, they have limitations in effectively penetrating the local level.
The USP of UCBs
In this context, urban cooperative banks (UCBs) are largely localized financial service providers and have been in existence for over a century. Their niche is to reach the lower middle class and people of limited means, the self-employed and micro-enterprises. UCBs are more comfortable with these customers.
They hardly have large companies as clients. UCBs market share is very low (around 3%) as more than 90% of their loan note size is less than ₹ 5 lakh and historically they are only spread well in a few states. The states where UCBs are present are: Maharashtra, Gujarat, Karnataka, Tamil Nadu and Kerala. These states are better off economically and the UCB sector has contributed to their growth. Since UCBs are a proven model to meet the needs of the unorganized sector in all types of urban centers, they are ideally suited to be replicated in large numbers in all states.
It is unfortunate that the sector occasionally receives uncharitable treatment from both regulators / government and the media, for less of its own flaws or weaknesses and for more systemic bias of not receiving any support. government like other segments of banks. It is very important that local community-based financial intermediaries are present in large numbers in small urban centers to meet the needs of localized small businesses.
The idea that there are too many urban cooperative banks and that they should be consolidated is wrong. In recent times, cooperative banks, especially UCBs, have been in the limelight from the entanglements of the Punjab and Maharashtra Co-operative (PMC) Bank and Sri Guru Raghavendra Sahakara Bank. The RBI and the central government had to answer uncomfortable questions about it.
After the PMC Bank episode, it emerged that the interests of depositors could not be protected by the RBI, as it did not have sufficient regulatory powers in the Banking Regulation Act (BR).
Acting quickly, the government had the law amended by Parliament, giving the RBI almost identical powers to regulate cooperative banks as it regulates commercial banks. An interesting sight is that the said amendment has been challenged and the Madras High Court is hearing the arguments. The BR Act, 1949, is a law for banking companies.
More power for the RBI
The law was amended in 1965 to make cooperative banks subject to RBI regulation by inserting a special section – Article 56 (applicable to cooperative societies). This made certain selected sections applicable as such to cooperative banks, while others were made applicable with certain modifications, and a large number of sections were not made applicable at all.
Control of the RBI was partial and it shared control with the Registrar of State Cooperative Societies, giving rise to the much-discussed dual control and the difficulties it posed for the central bank.
The recent Banking Regulation (Amendment) Act 2020 allows the RBI to obtain all powers, including those hitherto exclusive of the register of cooperative societies. However, the powers of Registrar continue to belong to him, but the powers of RBI prevail over those of Registrar.
Although the amendment gives the necessary powers to the RBI to take action and timely action to prevent UCBs from going bankrupt so that depositors’ money is protected, which was the main purpose of the amendment. , it also directs the central bank to make regulations under the BR Act without compromise on the cooperative character and cooperative principles of banks.
The fact that the amendment was not intended to affect the cooperative nature of the operation of these banks was an assurance given by the Minister of Finance in the House when the bill was introduced.
The RBI is also supposed to interpret the provisions of the Act in such a way that they do not disrupt UCBs. How the RBI implements them remains to be seen. The exclusive Ministry of Cooperation is a milestone in the history of the cooperative movement in our country.
The ministry will be successful if it thinks it is independent from the Ministry of Finance, NITI Aayog, and RBI. With cooperation enshrined in the state roster in the Constitution, how the ministry reports and functions as a guide for state governments will be an important deciding factor in its success. It is up to the cooperative sector to rise above all other issues and compel the ministry to put cooperatives at the forefront so that they are as important as big business for the prosperity of the masses.
The UCB sector’s immediate request to the ministry should be that the reported movement of consolidation in the sector by NITI Aayog and the Ministry of Finance be stopped. Rather, the ministry must ensure the growth of UCBs and credit companies in all states in the years to come.
(The author is the former director general and adviser of the National Federation of Urban Cooperative Banks and Credit Societies)