Co-Operative, Still Competitive

The cooperative movement in India has a long history since British rule. The first known cooperative society in India was probably “Anyonya Sahakari Mandali” organised in the erstwhile State of Baroda in 1889 from the inspiration and guidance of Vithal Laxman commonly known as Bhausaheb Kavthekar.

Inclusion as a concept has gained ground of recent. But look at the cooperative movement. It was started with an objective to meet common economic, social and cultural needs through a jointly owned and democratically controlled society. So does that not sound too familiar with what we define today as ‘inclusivity’? The genesis of cooperative banking which was articulated to take care of the financial and credit needs of the members of such societies can hence be very closely related to the concept of promoting inclusive growth. Incidentally, the year 2012 was declared by the UN as the International Year of Cooperatives. This in itself speaks volumes about an age old movement which even today has the same significance in terms of the purpose it was supposed to achieve. 

Since inception, cooperative banks have been playing an important role in the socio-economic development of India by making available institutional credit at affordable cost, predominantly in the rural and urban and semi-urban areas. Recognition of the importance of cooperative banks as an integral part of the economic schema came in around 1966 when these institutions were brought within the ambit of the Banking Regulation Act, 1949. They form a small part of the overall banking system in India, but their importance, particularly as units that can help spread banking in all four corners of India cannot be underestimated. 

Broadly classified into urban cooperative banks (UCBs) and rural cooperative banks (RCBs), the 1618 urban cooperative banks and the 94531 rural cooperative banks together form a considerable number which can be far more instrumental in helping spread banking and bring in a larger part of the Indian population from being unbanked into being banked. 

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Challenges 

The Indian cooperative movement, as anywhere else in the world, has essentially been a child of distress. The main challenge to the cooperative banking movement came in with the opening up of the banking sector to the private players in 1991. Also, the norms allowing the opening of new branches being liberalised, created a direct competition for cooperative banks, especially from the private and the public sector banks. Due to their bigger size and prudent risk management strategies, these banks turned to be aggressive in retail banking, which was the main business of the cooperative banks. 

Over a period, technology became the backbone of the banking industry. The training and educating not only of their employees but also their customers about technology-based banking and financial services has come to be a big challenge for these cooperatives. 

But the biggest challenge for the cooperative banking movement in the country has been the issue of governance. Coming to be controlled by smaller groups of powerful local area big guns these institutions have never been able to garner a larger base of customers. In fact, a lot of cooperative banking is seen to be like proprietary and discretion-based customer centricity.  

Another area where cooperative banks face a challenge in particular is on the capital management front. There is very limited control over cooperative capital. Members can withdraw their membership which may lead to shrinking of the capital of a cooperative. Furthermore, they also face severe difficulties in raising capital in times of need. As against Commercial banks which can issue new shares or offer to sell shares at market prices when there is a need to shore up their equity capital, the cooperatives can only raise new capital by increasing their membership or by asking existing members to buy more shares. 

Most of the cooperative banks have virtually no loan and investment policy. The result of this type of mismanagement is non-recovery of loans, which leads to the banks' assets becoming more of a substandard, doubtful nature and increases non-recoverable losses. 

Cooperative banks also face issues related to dual control of the state and central bodies. The high number of regulations and controls from central and state levels hampers the smooth and efficient functioning of the cooperatives. On the other hand, the absence of administrative control of government bodies tends to arbitrary usage of funds deteriorating the cooperatives' capital. 

Borrowers have significant influence on their management which potentially results in the managements’ not always being in the interest of their depositors. 
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Opportunities

Financial inclusion may or may not be considered to be fully developed in urban and semi-urban areas but for a sure fact, the large number of population in rural areas are a far cry away from being benefitted by the development of the financial markets in the country. Farmers, small vendors, agricultural and industrial labour, people engaged in unorganized sectors, the unemployed, women, older and physically challenged people have stayed much beyond the purview of the financial services that are on offer today. These segments can be best addressed by cooperative banks due to their advantage of a widespread network in the rural and sub-urban areas. Moreover, the employee cost of the cooperative banks is considerably lower than that of the commercial banks. Interestingly, the local nature and the informational advantages of both, the business opportunity and the borrower quality, puts cooperative banks in a much better position as compared to their public and private sector counterparts. Further, these banks can offer flexible banking services to their local clientele. Greater responsiveness to the needs of the local community of the cooperative banks provides a massive competitive advantage to them.

A Case For Consolidation

Most of the cooperative financial institutions are running their businesses in losses due to several operational, governance and technological issues for past several years. Consolidation may act a good mechanism toward strengthening of the cooperative banks across the country. Providing the financial and technological help to strengthen the health of cooperative banks is a very essential issue considering their nature of business of catering to the weaker sections of the society. Consolidation is required for greater organizational restructuring aimed at improved corporate governance in banks.

A committee formed under the chairmanship of Jagdish Capoor suggested a voluntary amalgamations or mergers of these cooperatives based on various criteria such as economies of scale, especially in areas where the operations of these banks have become unviable and there are no more in a position to supply credit to the agricultural sector. In 1999, another committee had recommended that UCBs which are sick should be liquidated in a time bound manner as the operation of large number of financially sick banks is devastating for UCBs and also for the interest of depositors. Due to this more mergers are expected in future and the RBI too has taken a lot of new initiatives for restructuring of these banks including the issuance of guidelines in May 2005. The RBI has put in mechanisms in place to help the distressed UCBs. The financially sound UCBs too are allowed for these kinds of takeovers and mergers, but with the consent of state government. 
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There has been some action on the consolidation front in the cooperative banking sector in the past. Mumbai headquartered Abhyudaya Cooperative Bank had acquired another cooperative bank Sant Janabai Urban Co-operative Bank based in Parbhani district of Marathwada in 2006. The Cosmos Bank took over four urban cooperative banks including Secunderabad-based Premier Urban Co-operative Bank and Annapurna Mahila Co-operative Bank, Baroda-based Unnati Co-operative Bank and Co-operative Bank of Ahmedabad. Shamrao Vithal Co-operative Bank has acquired Kolhapur’s Mahavir Co-operative Bank, Bangalore’s Sauhadra Co-operative Bank and Nashik-based Saptashringi Co-operative Bank.  Saraswat Bank which had acquired the Maratha Mandir Cooperative Bank has more recently acquired the financially sick Rupee Cooperative Bank as well.  Around one out of every five UCBs is financially weak. Hence consolidation will become inevitable due to the virtual ban by the RBI on issue of fresh branch licenses for UCBs. These banks may be able to look at acquisitions in other states once they get registered under the Multi-state Cooperative Societies Act.

Conclusion

Cooperative banks have been loss making and remained dormant with only a few exemptions. Especially the ever growing bad debts and non performing assets in credit cooperatives has put their financial shape out of order. Increased number of willful defaulters, political interferences in loan recovery, waiver practices of governments, weak and delaying recovery tribunal processes, ineffective credit administration and supervision, artificial profit showing in the accounts, increased frauds and misappropriation of money etc. are a great worry for them. The main reasons for the failure of the cooperative banks are lower product strength, inability to attract customer due to poor quality or limited variety and a virtual absence of effective ground promotion. Further, red-tapism, vested interests of bureaucrats and increased corruption and frauds are the other challenges affecting the cooperative banks' business growth. 

However, the cooperative banks' managements’ have transformed remarkably over the past few years. This coupled with the RBI's stringent governance policies towards cooperative banking has seen a slow improvement in the overall health of the cooperative banking movement in the country. The UCBs' shift towards transparent and professional management can be clearly seen from dramatic reduction in its gross NPAs over the recent years. Their widespread network and personalized banking services are the competitive advantages they enjoy over the commercial banks. Further, the cooperative banks have also improved in terms of product offerings. These banks are today offering competitive rates to borrowers and shifting their focus to wholesale banking from traditional retail banking. 

As the banking sector is opening up, more and more new banks as well as hitherto existing banks will expand their reach across India intensifying the competition in the sector. The cooperative banks operate in niche area with a close relation with its clientele. As cooperative banks lack behind in technology, consolidation will help the fragmented segment to overcome its weakness in future. Further, the consolidation effort has to be more towards becoming financially strong with considerable business spread and size to integrate their businesses and pass on the advantages to their customers.