Date: 12/04/2023

Relevance: GS-2: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Key Phrases: Cooperative Movement, Inequality, Constitution, State List, Union List, Banking, Non-Financial Cooperatives, Cooperative Banks, RBI, Primary Agricultural Cooperative Societies, Corporate Governance, Banking Regulation Act, 1949.

Context:

• The conflict between the Centre and the State has become a hindrance for cooperative banks. To unlock the full socio-economic potential of cooperatives, States should prioritize non-financial cooperatives.

Key Highlights:

• Cooperatives in India were established in the early 20th century to address the financial needs of rural communities.
  • These organizations, along with their non-financial counterparts, have played a significant role in India's development since independence.
• As cooperatives are predominantly non-financial organizations, they have great potential to rejuvenate growth, formalize the economy, and reduce inequality besides improving the standard of living of the poor.
• However, cooperatives, especially cooperative banks, face numerous challenges that have hindered their growth.

The Importance of Cooperatives in India

• Cooperatives are organizations that are owned and operated by the members they serve, who share responsibilities, risks, and rewards.
  • In India, cooperatives are primarily formed on the principle of self-help and mutual aid to address the social and economic needs of the members.
• Cooperatives have helped in creating self-employment opportunities, particularly in rural areas, and have been instrumental in improving agricultural productivity.
  • The founding fathers of the Indian Constitution recognized the importance of cooperatives and have rightly kept them in the State List while ‘banking’ is included in the Union List.
• State governments have an essential role in promoting non-financial cooperatives without any dispute over jurisdiction.
  • However, when it comes to cooperative banks, there is dual control leading to jurisdictional disputes.
• While incorporation, management, audit, supersession of boards and liquidation are administered by the Registrar of Cooperatives, banking licenses, prudential regulation, and capital adequacy are prescribed by the Reserve Bank of India (RBI).
• Many expert committees have concluded that dual control over cooperative banks has not served them well for their orderly growth.

Challenges Faced by Cooperative Banks in India

• Cooperative banks in India face numerous challenges. One of the major challenges is poor corporate governance, which has been the primary reason behind the failure of many cooperative banks.
• Since 2004-05, there have been 145 mergers of non-scheduled urban cooperative banks (UCBs), with nine in 2021-22.
  • Since 2015-16, the RBI has cancelled the licenses of 54 UCBs, including ten 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.
• To protect the interests of depositors and strengthen the functioning of cooperative banks, the central government promulgated an ordinance in June 2020.
  • It was followed by an amendment to the Banking Regulation Act, 1949, which applies to both UCBs and rural cooperative banks.
• According to the new provisions, banking regulations, as applicable to commercial banks, would now apply to cooperative banks for better governance.

Opportunities for Non-Financial Cooperatives

• While cooperative banks continue to face numerous challenges, non-financial cooperatives have many opportunities for growth.
• Government has made elaborate arrangements for the orderly growth of non-financial cooperates.
  1. First, there is a separate Ministry for Cooperation, which is responsible for promoting cooperatives across the country.
  2. Second, fiscal incentives are provided for farmer-producer organizations (FPOs) to promote their growth.
  3. Third, several schemes are available for handicrafts and handlooms.
  4. Fourth, after the electronic national agriculture market (eNAM), the Government’s electronic Marketplace (GeM), version 4, is a successful innovative online platform dedicated to the marketing of several goods and services produced by MSMEs and non-financial cooperatives.
• Opportunities exist for brand building and exports under a one-district-one-product scheme and cooperatives as a business model can be pursued in multiple areas such as post-harvest processing, warehousing, and packaging.
• The government has a vision to use technology for rural development under several schemes. Additionally, opportunities are growing for startups in rural areas, which can be pursued under non-financial cooperatives.

Conclusion:

• Cooperatives have great potential in promoting inclusive economic growth in India.
  • Although there are challenges in regulating cooperative banks, there are many opportunities for non-financial cooperatives to contribute to the country's economic growth.
• The central government must address the challenges faced by cooperative banks to ensure that depositors' interests are protected.
  • At the same time, State governments should allocate resources to promoting non-financial cooperatives to contribute to the country's economic growth.
• When promoted effectively, cooperatives can help India achieve its developmental goals and better the lives of its citizens.

Source: The Hindu BL

Mains Question:

Q. Cooperative banks are currently caught up in a jurisdictional battle between the central and state governments. To unlock the full socio-economic potential of cooperatives, state governments should prioritize non-financial cooperatives. Discuss (250 words).