Why cooperative banks in India are struggling ?

Generally co-operative bank is a small-sized, financial entity, where its members are the owners and customers of the Bank. They are regulated by the Reserve Bank of India (RBI) and are registered under the States Cooperative Societies Act. Cooperative banks runs with the cooperative principle of one person, one vote. Co-operative banks are often regulated under both banking and cooperative legislation.

These Banks have been opened with the motto of ‘no-profit-no-loss’ and thus, do not seek for profitable ventures and customers only. As the name suggests, the main objective of Co-operative Banks is mutual help. Cooperative banks have played a major role in providing financial support to the rural sector.

Cooperatives have a rich history in India and have been an integral part of the country's development since Independence. With over 10 lakh cooperatives, of which 1.05 lakh are financial cooperatives, India's cooperative movement has enormous potential to promote growth, formalize the economy, and reduce inequality.

Cooperative Bank Scams in India" gives an insight into the various scams and malpractices in cooperative banks in India and their implications on the Indian financial sector. There were several cases has come up over the alleged scams involving crores of money in cooperative banks of Maharashtra and Tamilnadu.

Finance minister Nirmala Sitharaman said urban cooperative banks reported 323 frauds in FY21 as against 568 in the previous year and 1,193 in FY19. Similarly, state cooperative banks witnessed 482 frauds in FY21, down from 508 in the previous fiscal but much higher than the FY19 level of 290.

Cooperative banks crisis came into the limelight after the Punjab and Maharashtra Cooperative (PMC) bank fiasco, which left frantic depositors visit the branches in attempts to withdraw their hard-earned money of 924,345 depositors.

The crisis happened, when the PMC bank’s exposure to bankrupt Housing Development and Infrastructure Limited (HDIL) has been pegged over Rs 6,500 crore or 73 per cent of its total assets worth Rs 8,880 crore. Whereas, the

Deposit Insurance and Credit Guarantee Corporation (DICGC) has settled the issues up to a level.

In fiscal 2023, the Reserve Bank of India (RBI) cancelled licenses of eight cooperative banks and imposed monetary penalties for 114 times and the Reasons for cancellation varied from inadequate capital to failure to comply with legal regulations under the Banking Regulation Act and lack of earning prospects in the future.

Recently, the Income Tax Department has detected bogus expenditures of about Rs 1,000 crore after raids on some cooperative banks in poll-bound Karnataka. These cooperative Banks have been found to be engaged in the routing of funds of various business entities of their customers, in a manner, so as to abet them to evade their tax liabilities.

In order to thrive in a competitive landscape, cooperative banks need to improve their governance. Alternatively, State governments should focus on supporting non-financial cooperatives instead of getting involved in conflicts over financial cooperatives.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA