Urban Cooperative Banks won’t be treated as second-class: Shah
GS Paper- 3, Banking Sector and NBFCs.


UCBs account for just 3.25 percent of total bank deposits and 2.69 percent of total advances in the country. The cooperative sector bears the burden of development. It is our obligation to develop our credibility and acquire people’s confidence. Shah directed UCBs to execute critical institutional reforms such as openness in recruiting and the creation of a rigorous accounting system.

What exactly are cooperative banks?

  • It is a cooperatively run agency that handles everyday financial transactions. Cooperative banks, like other banks, are established by collecting capital through shares, accepting deposits, and issuing loans.
  • They are cooperative credit unions in which members of a community band together to provide loans to one another on advantageous conditions.
  • They are governed by the Cooperative Societies Act of the respective state or the Multi-State Cooperative Societies Act of 2002.
  • The Banking Regulations Act of 1949 and the Banking Laws (Cooperative Societies) Act of 1955 control cooperative banks.
  • They are basically classified as urban or rural cooperative banks.

Cooperative Banks Have the Following Characteristics:

  • Customer Owned: Members of cooperative banks are both customers and owners of the bank. Members own and operate these banks, and they elect a board of directors democratically.
  • Profit Allocation: Typically, a considerable portion of the yearly profit, benefits, or surplus is allocated to reserves, and a portion of this profit can also be transferred to cooperative members, according to legal and statutory constraints.
  • Financial Inclusion: They have played an important role in bringing the unbanked rural masses into the financial mainstream. They offer low-cost financing to rural residents.

What exactly is an Urban Cooperative Bank (UCB)?

  • The term Urban Cooperative Banks (UCBs) is not technically defined, although it refers to principal cooperative banks situated in cities and towns.
  • Because they operate in specialised regions, urban cooperative banks (UCBs), primary agricultural credit societies (PACS), regional rural banks (RRBs), and local area banks (LABs) might be termed differentiated banks.


  • Until 1996, these banks were only permitted to lend money for non-agricultural reasons. This distinction is no longer valid today.
  • Because they primarily financed to small borrowers and enterprises, these banks were usually centred on communities and local workgroups. Their scope of business has now significantly expanded.
  • The urban cooperative banking movement in India may be traced back to the nineteenth century, when such organisations were initially established in India.
  • Cooperation, mutual aid, democratic decision-making, and open membership are the guiding ideals of cooperative societies. Cooperatives provided a fresh and alternative method to organisation in contrast to the main forms of commercial organisation, which were proprietary enterprises, partnership firms, and joint-stock corporations.
  • The earliest recorded mutual help association in India was the ‘Anyonya Sahakari Mandali,’ founded in 1889 in the erstwhile princely state of Baroda by Vithal Laxman, popularly known as Bhausaheb Kavthekar.
  • The Cooperative Credit Societies Act of 1904 was the catalyst for the movement. In October 1904, the first urban cooperative credit society was established in Kanjivaram, Madras province.
  • The issue of “Cooperation” was moved from the Government of India to the Provincial Governments by the Government of India Act in 1919.
  • The Cooperative Planning Committee (1946) and the Rural Banking Enquiry Committee (1950) both advised that such banks be established in areas smaller than taluka towns.
  • The RBI conducted the first study on urban cooperative banks in 1958-59. The 1961 Report acknowledged the extensive and financially solid structure of urban cooperative banks, underlined the necessity to establish primary urban cooperative banks in new locations, and recommended that state governments actively assist their expansion.

The distinction between UCBs and Commercial Banks:

  • Unlike commercial banks, UCBs are only partially regulated by the RBI. The RBI regulates their banking activities, establishing capital sufficiency, risk management, and lending standards.
  • However, their management and resolution in times of difficulty is governed by the Registrar of Co-operative Societies, who works for either the state or the federal government.
  • Borrowers can be Shareholders: With most commercial banks, there is a clear divide between shareholders and borrowers, but in a UCB, borrowers can also be shareholders.

Cooperative Banks Confront the Following Challenges:

  • Changing tendencies in the financial sector: Changes in the financial sector, as well as evolving microfinance, FinTech companies, payment gateways, social platforms, e-commerce companies, and NBFCs, pose a threat to the continued presence of UCBs, which are mostly small in size, lack professional management, and have less geographically diverse operations.
  • Decrease in deposits and loans: People’s faith in cooperative banks has gradually eroded as a result of management failures.
  • Contributions are declining: According to the research, despite the sector’s critical importance, its percentage of overall agricultural financing has decreased significantly over the years, from as high as 64 percent in 1992-93 to only 11.3 percent in 2019-20.
  • Falling numbers: Following the 1993 licencing policy liberalisation, roughly one-third of the newly licenced ones were financially unstable. The RBI consolidated the weaker ones into one entity in 2005.
  • Dual command: The state registrar of society and the RBI both have jurisdiction over UCBs. However, by 2020, all UCBs and multi-state cooperatives would be subject to RBI monitoring.

Way Forward:

  • The formation of the country’s specialised Ministry of Cooperation represents a watershed milestone in cooperative history.
  • Now, the development of a common regulatory and supervisory framework, as well as an umbrella organisation, should be prioritised in the evolution of UCBs.
  • The RBI should interpret the Act’s requirements such that they do not disrupt UCBs and that people’s trust in the cooperative banking system is restored.
  • UCBs should execute critical institutional reforms such as openness in recruiting and the creation of a rigorous accounting system.


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