Co-op Societies are not banks, RBI cauti

Q Why is it in News ?

A The Reserve Bank of India (RBI) has cautioned members of the public not to deal with cooperative societies undertaking banking business by adding ‘bank’ to their names.

• It has also come to the notice of RBI that some co-operative societies are accepting deposits from non-members/nominal members/ associate members.
• This is tantamount to conducting banking business in violation of the provisions.

Q Who can use ‘Bank’ title?

A 

• The Banking Regulation Act, 1949 was amended by the Banking Regulation (Amendment) Act, 2020, which came into force on September 29, 2020.
• Accordingly, co-operative societies cannot use the words “bank”, “banker” or “banking” as part of their names, except as permitted under the provisions of BR Act, 1949 or by the RBI.

Q  What is Cooperative Banking?

A 

• Cooperatives are people-centred enterprises owned, controlled and run by and for their members to realise their common economic, social, and cultural needs and aspirations.
• Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business.
• Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits and grant loans.
• They are regulated by the Reserve Bank of India (RBI) and governed by the

1. Banking Regulations Act 1949
2. Banking Laws (Co-operative Societies) Act, 1955

Q What are Features of Cooperative Banks ?

A 

• Cooperative banks are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.
• Such banking in India is federal in structure. Primary credit societies are at the lowest rung.
• Then, there are central cooperative banks at the district level and state cooperative banks at the state level.
• Cooperative credit societies are mostly located in villages spread over the entire country.

Q What is history of Cooperative Banking in India ?

A 

• The cooperative movement in India was started primarily for dealing with the problem of rural credit.
• The history of Indian cooperative banking started with the passing of Cooperative Societies Act in 1904.
• The objective of this Act was to establish cooperative credit societies “to encourage thrift, self-help and cooperation among agriculturists, artisans and persons of limited means.”
• Many cooperative credit societies were set up under this Act.
• The Cooperative Societies Act, 1912 recognised the need for establishing new organisations for supervision, auditing and supply of cooperative credit.

Q What is Structure of Cooperative Banking ?

A 

• The whole structure of cooperative credit institutions is shown in the chart given.
• There are different types of cooperative credit institutions working in India.
• These institutions can be classified into two broad categories- agricultural and non-agricultural.
• Agricultural credit institutions dominate the entire cooperative credit structure.

Various facets of cooperatives in India

• Cooperatives in India have grown exponentially.
• In the banking sector, according to the RBI, their contribution to rural credit increased from 3.1 percent in 1951 to an impressive 27.3 percent in 2002.

Q What is Importance of Cooperative Banks ?

A 

• The cooperative banking system has to play a critical role in promoting rural finance and is especially suited to Indian conditions.
• Various advantages of cooperative credit institutions are given below:

(1) Alternative Credit Source:  The main objective of the cooperative credit movement is to provide an effective alternative to the traditional defective credit system of the village moneylender.

(2) Cheap Rural Credit: Cooperative credit system has cheapened the rural credit by charging comparatively low-interest rates, and has broken the money lender’s monopoly.

(3) Productive Borrowing:  The cultivators used to borrow for consumption and other unproductive purposes. But, now, they mostly borrow for productive purposes.

(4) Encouragement to Saving and Investment: Instead of hoarding money the rural people tend to deposit their savings in cooperative or other banking institutions.

(5) Improvement in Farming Methods: Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc.

(6) Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to the masses in rural areas.