Subject – BANKING LAW

TOPIC– COOPERATIVE BANKING IN INDIA-STUDY OF

EVOLUTION

Supervised By:

_________________

ASST. PROF OF LAW

NAME: CHANDRAKANT SHARMA

ROLL NO.:
(Admit card No.) –
(Class Roll. No.) –
COURSE: 5 YEARS LLB SEMESTER X
 ACKNOWLEDGEMENT

With profound gratitude and sense of indebtedness I place on record my sincerest thanks to

________________,Indian Institute of Legal Studies, for his/her invaluable guidance, sound

advice and affectionate attitude during the course of my studies.

I have no hesitation in saying that he/she molded raw clay into whatever I am through his/her

incessant efforts and keen interest shown throughout my academic pursuit. It is due to his/her

patient guidance that I have been able to complete the task.

I would also thank the Indian institute of Legal Studies Library for the wealth of information

therein. I also express my regards to the Library staff for cooperating and making available the

books for this project research paper.

Finally, I thank my beloved parents for supporting me morally and guiding me throughout the

project work.

Date: _____________________
CHANDRAKANT SHARMA

pg. II
 TABLE OF CONTENTS
__________________________________________________________

Acknowledgement

Research Methodology

Table of Cases

Chapter 1: INTRODUCTION 01

Chapter 2: CO-OPERATIVE MOVEMENT 03

2.1 DEFINITION OF CO-OPERATIVE 03

Chapter 3: HISTORY OF CO-OPERATIVE BANKS

05

Chapter 4 : MAIN FUNCTIONS OF CO-OPERATIVE BANKS

06

Chapter 5: RECENT DEVELOPMENT:

12

Chapter 6: ROLE OF CO-OPERATIVE BANKING IN INDIA

14

Chapter 7: CONCLUSION
15

Bibliography
16

pg. III
 RESEARCH METHODOLOGY

STATEMENT OF PROBLEM
The co-operative banks in urban areas are reluctant to finance various categories of people for
self-employment industries, small scale units, home finance, consumer finance, personal
finance, etc.
RESEARCH OBJECTIVES

The main objective of the research is to understand the co-operative banking system in India
and its evolution.

The aim is to extend the frontiers of knowledge and to bring about increase in the existing
knowledge.

RESEARCH QUESTIONS

The research problem addressed in this paper are:

1. What is co-operative bank?

2. How did the co-operative movement started in India?

3. How is the co-operative banking emerging in India?

4. What are the advantages of Co-operative banking ?

HYPOTHESIS

In the co-operative movement, agriculture credit sector has acquired a special importance in
order to avoid the exploitation o poor farmers.

RESEARCH METHOD

The researcher in this work has relied mainly on ‘Doctrinal and Analytical Research’. The
above method was considered apt for the given topic; because, it is a theory-based topic, for
which the doctrinal method of research is preferred as compared to non-doctrinal or empirical
method of research.

pg. IV
SOURCES OF DATA
The Primary Source:
 Statutes

The Secondary sources:

 Articles
 Books
 Website

pg. V
pg. VI
 CHAPTER-1

INTRODUCTION

The word bank originated the French word ‘benque’ or Italian ‘banco’ which means an office
for monitory transaction over the counter. In those days or desks were used as centers for
monitory transactions. During the barter system also, there existed traces of banking, i.e.
people used to deposit cattle and agricultural products in specified places get loans get loans
of some other form in exchange for these. There is solid evidence found in records excavated
form Mesopotamia, showing some bank existed around a standard for valuation.

ORIGIN OF BANKING INDUSTRY

Greece was the first country to introduce a satisfactory system of coinage. After the invention
of Coins started, a meaningful system of banking came into existence taking into account all
the avenue of banking a credit system.

Rome was the first country to start a bank at the department of state level in the 4th century
B.C. with transactions such as depositing and investments in other forms. In India ancient
records show that banking was popular and money lending was a common practice among the
common people. In the olden days’ Goldsmith, merchants and money lenders conducted the
business. They had transactions among themselves by which funds were transferred from one
business firm to another. They had no general or uniform principles of banking, lending, rate
of interest, etc.

Co-operative sector has a long history of more than a century. In the co-operative movement,
agriculture credit sector has acquired a special importance in order to avoid the exploitation
of poor farmers from the middlemen and money lenders and to provide suitable assistance to
the eligible farmers. As our nation is basically an agriculture country, agriculture credit
systems plays an important role in the development of this sector. Through this system, the
credit sector is extending helping hand to farmers in its own way to boost the agricultural
production in the state in particular and in the country at large.

KSC Apex bank over the ninety five years, since its inception has always come forward to
extend its assuring hand to the farmers of the state through district central co-operative banks,
primary agricultural co-operative credit system besides the bank is providing the needed
financial assistance, for development of human resources, training, computerization and all

pg. 1
other encouragement from time to time to the DCC banks and PACS. The Government of
Karnataka has accepted Prof. Vaidyanathan’s committee recommendations for revival of
cooperative credit institutions and apex bank is committed to its successful implementation in
the state.

CO-OPERATIVE BANKS:

The co-operative banks in India started functioning almost 100 years ago. The Co-operative
bank is an important constituent of the Indian Financial System, judging by the role assigned
to co-operative bank operate. Though the co-operative movement originated in the west, but
the importance of such banks have assumed in India rarely paralleled anywhere else in the
world. The co-operative bank I the urban areas also have increased phenomenally in recent
years due to the sharp increase in the number of primary co-operative.

While the co-operative banks in rural areas mainly finance agricultural based activities
including farming, cattle, milk, hatchery, personal finance etc. along with some small scale
industries and self-employment driven activities, the co-operative banks in urban areas
mainly finance various categories of people for self-employment industries, small scale units,
home finance, consumer finance, personal finance, etc.

Co-operative Banks in India are regulated under the Co-operative Societies Act1. The co-
operative bank is also regulated by RBI.

1
Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
pg. 2
 CHAPTER-2

CO-OPERATIVE MOVEMENT

Co-operative moment as an economic system and as best instrument to eradicate the poverty
of the people and to protect them for the economic exploitation from the ‘haves’ was
introduced for the first time in the world with the organization of consumers’ Co-operative
society in 1844 at London. Later on the Co-operative movement was introduced in Germany
with an organization of Agricultural Credit Co-operative Societies (Urban Co-operative
Banks) in towns and cities. Hence, if the England is the motherland for the whole Co-
operative movement, the Germany is the cradle for the Co-operative credit and Banks
organizations.
The co-operative movement in India was introduced with the organization on of primary
Agricultural Co-operative Credit Societies (PACS) in villages and Urban Co-operative banks
in town and cities offer passing the Co-operative Credit societies act 1904 with an objective
to emancipate the poor people in the rural and urban areas from the clutches of money lenders
and middlemen in the market and also to accelerate the pace of agriculture and industrial
developments in these areas. With the passing of second Act, viz, Co-operative Societies Act,
1912: the Co-operative movement in India entered into all sphere of economic activities
besides organizing DCC banks and State Co-operative Apex Banks. Profiteering (at more
prices) and usury (more interest) are the greatest evilsconst antly grinding the poor people
down and hang them till their death. To do way profiteering, consumers marketing,
processing industrial and other Co-operatives were organized and to minimize the usury the
Co-operative credit and banking organizations were organized to protect the poor people from
the exploitation by middle men in the market and to eschew them from the clutches of
unbridled money lenders.2

2.1 MEANING OF CO-OPERATIVE

A co-operative bank is financial entity which belongs to its members, who are at the same
time the owners and the customers of their bank. Co-operative banks are often created by
persons belonging to the same local or professional community or sharing common interest.

2
Dr. ParthoPpratim R, “ Management of urban Co-operative Bank”, 2005

pg. 3
DEFINITION OF CO-OPERATIVE BANKS

In the words of Henry Wolff “Co-operative banking is an agency which is in a position to

deal with the small means on his own terms”. Devine defines “a mutual society formed
composed and governed by working people themselves for encouraging regular saving and
generating miniature loans on easy terms of interest and repayments.

FEATURES OF CO-OPERATIVE BANKS

Some distinguishing features of the nature of co-operative banks are:

 They are organized and managed on the principles of co-operation, self-help and mutual
help.
 Some of the well-developed co-operative banks are scheduled banks.
 Co-operative banks are financial institution.
 Co-operative banks belong to the money market and capital market.
 Co-operative banks are also required to comply with requirements of SLR and CRR and
liquidity requirements as other scheduled and non-scheduled banks.
 Co-operative banks are perhaps the first government supported agency in India.
 Co-operative banks accept all types of deposits including current, saving and fixed or time
deposits from an individual both members and non-members.3

3
https://www.bankingschool.co.in/indian-financial-system/co-operative-banking-in-india/, last visited on
10/03/2019 at 19:40 p.m.

pg. 4
 CHAPTER-3

HISTORY OF CO-OPERATIVE BANKS

The bank was formed in 1872 as the loan and deposit department of Manchester’s co-
operative Wholesale society, becoming the CWS bank four year later. However, the bank did
not become a registered company until 1971. In 1975, the bank became the first new member
of the committee of London Clearing Banks for 40years, and thus able to issue its own
cheques. Since 1974 the co-operative banks has consistently offered free banking for personal
customers who remain in credit. It was also first clearing bank to offer an interest bearing
cheque account called cheque and save, in 1982. In 1991 the bank shook the credit

Card market when it introduced a guaranteed “free for life” gold visa card.

ESTABLISHMENT OF CO-OPERATIVE BANKS IN INDIA

Co-operative Banks in India were started during 1904 when official efforts were initiated to
create a new type of institution based on the principles of co-operative organization and
management which were considered to be suitable for solving the problems peculiar to Indian
conditions.

Co-operative banks were conceived and were expected to substitute such agencies to provide
adequate short term and long term institutional credit at reasonable rates of interest, and to
bring about integration of the unorganized and organized segments of India’s money market.

Farmers in India are scattered all over the country and need short term small borrowings for
agricultural purposed. This need is not fulfilled by commercial banks, which are unsuited for
financing agriculture. Land, which these farmers can offer to cover bank advances, is not
generally accepted as security by commercial banks. Therefore, special types of banks are
best suited for this purpose. The object of co-operative banks is to offer banking facilities to
persons of limited means requiring credit for productive purposes in the use of the land and
labor at their disposal. In 1914 the government of India appointed a committee under Sir
Edward Mac lagan to survey the progress of co-operation in the country. The committee
submitted its report in 1915, in which it made several recommendations, principal one being
the institution of provincial co-operative pyramid. The present organization in India is based
upon the findings of this report. In 1919, the Montague Chelmsford act made co-operation a

pg. 5
provincial subject. Since then, all the state governments have passed their own separate co-
operative societies acts.4

4
http://shodhganga.inflibnet.ac.in/bitstream/10603/2031/11/11_chapter%202.pdf, last visited on 10/03/2019
at 19:43 p.m.

pg. 6
 CHAPTER-4

MAIN FUNCTIONS OF CO-OPERATIVE BANKS

 Co-operative banks are organized and managed on the principal of co-operation, self-help
and mutual help. They function with the rule of “no profit, no loss” basis. Co-operative
banks, as a principle, do not pursue the goal of profit maximization. Co-operative bank
performs all the main banking functions of deposit mobilization, supply of credit and
provision of remittance facilities. Co-operative banks provide limited banking products
and are functionally specialists in agriculture related products. However, co-operative
banks now provide housing loans also. UCB’s provide working capital loans and term
loan as well.
 Co-operative banks do banking business mainly in the agriculture and rural sector.
However, UCBs, SCBs and CCBs operate in semi urban, urban and metropolitan areas
also. The urban and non-agricultural business of these banks has grown over the years.
The co-operative banks demonstrate a shift from rural to urban, while the commercial
banks, from urban to rural. Co-operative banks belong to the money markers as well as to
capital market. Primary agricultural credit societies provide short term and medium term
loans.
 Co-operative banks in India finance rural areas under:
i. Farming
ii. Cattle
iii. Milk
iv. Hatchery
v. Personal finance

 Co-operative banks in India finance urban areas under:

i. Self-employment
ii. Industries
iii. Small scale units
iv. Home finance
v. Consumer finance
vi. Personal finance

pg. 7
Future prospects of the industry:

The Indian banking system, with its extensive branch network spread across the length and
breadth of the country, has both depth and reach today. It is the spine of our entire financial
system and the institutional framework within which financial markets operate. An economy
that is growing at a steady clip of 9% needs a vibrant and dynamic banking system to keep
pace with it.5

5
P. Subba Rao, Human Resource Management, 3rd edition, Himalaya Publishers, Year-2003.

pg. 8
 CHAPTER-5

TYPES OF CO-OPERATIVE BANKS

CO-OPERATIVE BANKS

RURAL CO-OPERATIVE BANKS URBAN CO-OPERATIVE BANKS

SHORT-TERM RURAL CO-

LONG-TERM RURAL CO-
OPERATIVES
OPERATIVES

STATE CO-
CENTRAL CO- PRIMARY
OPERATIVE
OPERATIVE BANKS AGRICULTURE CREDIT
BANKS
SOCIETY

STATE CO-OPERATIVE
AGRUCULTURE & RURAL
PRIMARY CO-OPERATIVE
DEVELOPMENT BANKS
AGRICULTURE & RURAL
DEVELOPMENT

pg. 9
The co-operative banking structure in India may be divided into three component parts, they
are

 Primary credit societies at the base

 Central co-operative banks at the middle
 Provincial or state co-operative banks (also called apex banks)at the top
 Primary co-operative credit society
Primary co-operative credit society is an association of borrowers and non-borrowers and
deposits of members and loans from central co-operative banks. The borrowing power of
the members as well as of the society is fixed. The loans are given to members for the
purchase of cattle, fodder, fertilizers pesticides, implements etc.
 Central co-operative societies
Central co- operative societies are federation of primary credit societies as well as
individuals. The funds of the bank consist of share capital, deposits, loans and overdrafts
from state co-operative banks and joint stocks. These banks finance member societies
within the limits of the borrowing capacity of societies. They also conduct all the business
of a joint-stock bank.
 State co-operative bank
State co-operative bank is a federation of central co-operative banks and acts as a
watchdog of the co-operative banking structure in the state. Its funds are obtained from
share capital, deposits, loans and overdrafts from the reserve bank of India. The state co-
operative banks lend money of central co-operative banks and primary societies and not
directly to farmers.

SOURCES OF FUNDS FOR CO-OPERATIVE BANKS ARE:

 Central and state government

 RBI and NABARD
 Other co-operative institutions
 Owned funds
 Debentures issued

pg. 10
 Deposit from public

CLASSIFICATION OF CO-OPERTIVE BANKS

Some co-operative banks are scheduled banks, while others are non-scheduled banks. For
instance, SCBs and some UCBs are scheduled bank but other co-operative banks are non-
scheduled banks. At present, 28 SCBs and 11 UCBs with demand and time liabilities over
Rs.50crore each included in the second schedule of the RBI act.

Co-operative banks are subject to CCR and liquidity requirements as other scheduled banks
are however, their requirements are less than commercial banks.

TABLE – 1:

SL. No. Category bank Minimum SLR holding in govt.

and other approved securities as
percentage of Net Demand and Time
Liabilities (NDTL)

1. Scheduled banks 25%

2. Non-Scheduled banks 15%
a) With NDTL of Rs.25crore &
above 10%
b) With NDTL of less than
Rs.25crore

pg. 11
 CHAPTER -6

RECENT DEVELOPMENT:

Over the year, primary (urban) co-operative banks have registered a significant growth in
number, size and volume of business handled. As on 31st march, 2003 there were 2,104 UCBs
of which 56 were scheduled banks. About 79% of these are located in 5 states- Andhra
Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. Recently the problems faced by a
few large UCBs have highlighted some of the difficulties these banks face and policy
endeavors are geared to consolidating and strengthening this sector and improving
governance.
There are more than 297 co-operative banks in India:

States No. of Banks

Andhra Pradesh 24
Assam 1
Bihar 24
Chhattisgarh 1
Goa 11
Gujarat 221
Haryana 1
Himachal Pradesh 3
Jammu and Kashmir 2
Karnataka 8
Kerala 43
Madhya Pradesh 35
Maharashtra 67
Meghalaya 5
Orissa 2
Rajasthan 13
Tripura 1
Tamil Nadu 2

pg. 12
 Uttarakhand 1
Uttar Pradesh 8
West Bengal 14

INDIANSCENARIO

The Indian banking system of today can be compared with finest banking system in the whole
world. Today the Indian banking system is on very sound lines with a network of branch
spared all over the country and serving all sections of the society with innovative
banking programs.

Today’s Indian banking system comprises of 27 public sector banks,30 private sector non
schedule commercial banks, several private sector new commercial banks, 27 foreign
schedule banks, 196 regional rural banks, several thousand’s Co- Operative banks and several
land development banks. Institutions like Life Insurance Corporation of India and Unit Trust
Bank of India also plays an important role in Indian banking system.

Banking structure or banking system in India

 The constituents in the banking sector of India are

 The Reserve Bank of India
 The State Bank of India and its subsidiaries
 The Nationalized and the private Sector Indian Commercial Banks
 The Private Sector Foreign Exchange Banks in India
 The Co-operative banks and land development banks
 The regional rural banks
Indian commercial bank

Banks that carry on commercial banking operation such as acceptance of deposits from the
public, repayable on demand or alter a short period and the granting of short term credit
mainly to trade, commerce and industry with a wide network of branches throughout the
country.6

6
Co-operative Banks in India – Functioning and Reforms – by Amit Bhasak

pg. 13
 CHAPTER-7

ROLE OF CO-OPERATIVE BANKING IN INDIA:

Co-operative Banks are much more important in India than anywhere else in the world. The
distinctive character of this bank is service at a lower cost and service without exploitation. It
has gained its importance by the role assigned to them, the expectations they are supposed to
R fulfill, their number, and the number of offices they operate. Co-operative banks role in
rural financing continues to be important day by day, and their business in the urban areas
also has increased phenomenally in recent years mainly due to the sharp increase in the
number of primary Co-operative banks. In rural areas, as far as the agricultural and related
activities are concerned, the supply of credit was inadequate, and money lenders would
exploit the poor people in rural areas providing them loans at higher rates. So, Co-operative
banks mobilize deposits and purvey agricultural and rural credit with a wider outreach and
provide institutional credit to the farmers. Co-operative bank have also been an important
instrument for various development schemes, particularly subsidy-based programmes for
poor.

PROBLEMS OF CO-OPERATIVE BANK:

Co-operative banks are no exceptions when it comes to problems. As in the case of

commercial banks, these do have certain problem:

 The vital link in co-operative credit system namely, the primary co-operative associations
themselves are weak.
 They suffer from weak quality of loan assets and force unsatisfactory recovery of loans.
 They suffer from infrastructure weakness and structural flaws.
 They suffer to some extent officially and politically. 7

7
http://www.banknetindia.com/banking/cintro.htm, last visited on 10/03/2019 at 19:47 p.m.

pg. 14
 CHAPTER- 8

CONCLUSION

Co-operative banks take active part in local communities and local development with a
stronger commitment and social responsibilities. These banks are best vehicles for taking
banking to doorsteps of common men, unbanked people in urban and rural areas. Their
presence in the social, economic and democratic structure of the country is essential to bring
about harmonious development and that perhaps is the best justification for nurturing them
and strengthening their base. These banks are sure to win in the race because they are from
the people, by the people and of the people.

pg. 15
 BIBLIOGRAPHY

PRIMARY SOURCES

I. STATUTES

Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

SECONDARY SOURCES

I. BOOKS
 Management of urban Co-operative Bank by Dr. ParthoPpratim R
 P. Subba Rao, Human Resource Management, 3rd edition, Himalaya Publishers,
Year-2003.

II. WEBSITES

https://www.bankingschool.co.in/indian-financial-system/co-operative-banking-in-india/

http://shodhganga.inflibnet.ac.in/bitstream/10603/2031/11/11_chapter%202.pdf

http://www.banknetindia.com/banking/cintro.htm

III. ARTICLES

Co-operative Banks in India – Functioning and Reforms by Amit Bhasak.

pg. 16