Mains Practice Questions

Approach:

• Introduce by mentioning why the issue is in the news.
• Tabulate the differences between Cooperative Banks and Scheduled Commercial Banks.
• Mention the advantages, challenges and suggestions.

Introduction:

Recently, the Reserve Bank of India (RBI) imposed restrictions on withdrawals from Punjab and Maharashtra Cooperative (PMC) Bank, which triggered a panic among bank customers. It has brought to the fore the issue of riskiness of banks, especially co-operative banks and the need to restore confidence among customers.

Body:

Difference between Cooperative Banks and Scheduled Commercial Banks:

Advantages of Cooperative Banking:

• Effective alternative to unregulated banking: Cooperative Banking provides effective alternative to the traditional defective credit system of the village money lender.
• Easy availability of credit: It provides cheap credit to masses in rural areas. Cooperatives Banks offers higher interest rate on deposits.
• Encouraged the culture of savings and investments: Instead of hoarding money, rural people tend to deposit their savings in the cooperative or other banking institutions.
• Improved agricultural practices: Cooperative societies have also greatly helped in the introduction of better agricultural methods. Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc

Challenges of Cooperative Banks:

• Organizational and financial limitations of the primary credit societies considerably reduce their ability to provide adequate credit to the rural population.
• Transparency issues: Banks show inadequate governance and financial irregularities which have multidimensional impacts.
  
  • For ex: financial irregularities, failure of internal control and system, and underreporting of exposures in case of PMC Bank issue.
• Resource constraints: Raising working capital has been a major hurdle in their effective functioning. Also, large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.
• Competition from other banks: With faster adaptability of technology and customer friendly services, people prefer taking credit from Scheduled Commercial Banks, Payments Banks, and Small-Finance Banks.
• Regional Disparities: Cooperatives in other states are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states which affects the working of cooperatives.

Suggestions for their better performance:

• Countering dual-regulation problem:
  
  • Setting up of an independent regulator for Urban Cooperative Banks.
  • Setting up a board of management of eligible and proper persons as opposed to elected Directors. (H Malegam committee)
  • Merging and converting some of the Co-operative Banks to Small Finance Banks (R. Gandhi Committee) as is being implemented under the voluntary transition scheme of RBI.
• Resolving capital issues by forming a Joint Stock Company: An umbrella organization should be promoted by the banks themselves to raise the capital from the market.
• Empowering RBI: RBI should be empowered to implement resolution techniques such as winding-up and liquidating banks, without involving other regulators under the cooperative societies’ laws.
• Regular scientific audit system: State governments should regularly conduct a forensic audit of the loan portfolios & purchases of a representative sample of cooperative banks. Accountability for erroneous audit along with penal action should also be ensured through appropriate statue.

Conclusion:

Hence, the RBI must ensure that Cooperative Banks adopt more professionalism in order to retain people’s confidence in the banking sector.