Co-operatives Credit Societies : Daily Current Affairs

GS 3: Effects of liberalization on the economy, Inclusive growth and issues arising from it

Keywords- Co-operatives Credit Societies, Banking Regulation Act, Co-operative Banks, Banking Regulation Act, Multi-State Co-operative Societies Act, DICGC

Why in News ?

Recently, the RBI cautioned the public against some co-operative credit societies using the word “bank” in their names. Further, it has been clarified that these entities aren’t allowed to perform banking activities, as per the Banking Regulation Act, 1949, through acceptance of deposits from non-members, and nominal or associate members. Nor are their deposits protected under the deposit insurance cover of DICGC. The RBI has exhorted the public to be cautious with such misleading co-operative credit societies.

What are Cooperative Credit Societies?

Co-operative Credit Societies are financial entities established on a cooperative basis and, do banking functions with their members only.
Customers of a cooperative Societies are also its owners.
These societies provide a wide range of regular banking and financial services to their members only.

Co-operative credit societies vs Co-operative banks

Co-operative Banks are legal entities with proper regulatory and administrative mechanism, while Co-operative credit societies do not have any well established procedures. They simply registered under Registrar General
Both are registered under either Co-operatives societies act of respective states or Multi-State Co-operative Societies Act, 2002

What are Co-operative banks in India?

Co-operative Banks are divided into two categories – urban and rural.
Rural cooperative credit institutions could either be short-term or long-term in nature.
Short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
The long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled banks.

Co-operative Banks Regulation and Management

Cooperative banks are registered under the States Cooperative Societies Act.
They are registered and regulated by the Registrar of Co-operative Societies of the respective State governments and by the Central Registrar of Co-operative Societies if these entities function in more than one State.
These banks also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulation Act 1949 and the Banking Laws (Co-operative Societies) Act, 1955.

Issues in Co-operatives Credit Societies functioning

These societies do not come under the direct RBI scanner despite accepting deposits from and disbursing loans to their members.
Those co-operative credit societies with reserves and paid-up capital of over ₹1 lakh have to seek a licence from the RBI, but most of them operate with a lower capital to avoid RBI regulatory oversight.
Many co-operative credit societies offering exorbitantly high interest rates (say 12 per cent) on their deposits. In that case, they should be lending at least at 18-20 per cent. If so, who could be the borrowers? the borrowers of this high cost borrowing must be investing in highly risky and fragile assets, thus jeopardising the entire co-operative credit structure.
4. A major issue also with the type of depositors. Many money launderers exploiting cooperatives, since these societies are not subject to Know Your Customer rules and Anti-Money Laundering laws.

Measures to be taken

Many co-operative societies circumvent the provisions of Section 7 of the Banking Regulation Act. It is essential that appropriate legal action is initiated against the wrongdoers to safeguard the entire banking activities from Domino effect.
Registrars of Co-operative Societies should be ‘modernised’ enough. Ill-functioning societies need to be isolated and special precautionary investigations must be held by the RBI authorized controllers and supervisors.
Need to strengthen financial inclusion. There is strong evidences that such societies may be taking undue advantage of the poor in financially excluded areas and exploiting them.
Internal surveillance mechanism has to improve substantially, for example these credit societies can be brought under RBI SWIFT platform.

Conclusion

Thus, it is worthy to assume, Co-operative credit societies are governed by anachronistic and arcane laws, and their customers stand to lose if these societies go bust. There could be systemic repercussions too. This is buttressed by the fact that some of these societies registered under the Multi-State Co-operative Societies Act, 2002 have reportedly garnered public deposits running into thousands of crores during the last ten years.

A majority of the ills will be remedied if the State governments, along with RBI, regulate and supervise these societies. This will be good for both the common man and the financial sector at large. The ticking of the time bomb must be stopped fast and at any cost. To be forewarned is to be forearmed.

Prelims Question

Q. Consider the following statement regarding Co-operative Banks:

Cooperative banks are regulated by RBI under RBI Act, 1934.
Cooperative Banks come are under dual regulations of RBI and Registrar General.

Select the correct answer

A. 1 only

B. 2 only

C. 1 and 2

D. None

Answer : B

Mains question

Q. In the backdrop of recent warning issued by RBI on the functioning of cooperative credit societies. Examine the issues associated with cooperative credit societies and suggest some measures to regulate them.( 15 marks)

Sources: The Business Line