OVERVIEW: UNDERSTANDING THE CO-OPERATIVE BANKING SYSTEM

Introduction

The Financial Sector occupies a dominant position in India’s endeavour to achieve rapid growth and development in its economy. Its dominant position is a result of strong financial inclusion which is a necessary condition for sustaining equitable growth. The primary indication of a good economy is seen in its objective to ensure availability of banking and payment services to the entire population without discrimination which can only be achieved through Co-operative Banks. Thus the financial sector largely depends on these Co-operative Banks for adequate availability and mobilisation of financial assets among the weaker sections.

History of Co-operative Banks

In order to solve the issue of “Rural Credit” in India, the Co-operative Societies Act was passed in 1904, and was further amended in 1912 which focussed on the need for regulation of such societies and the establishment of appropriate bodies to oversee their functioning.

What are Co-operative Banks?

A Co-operative bank is a financial body which belongs to its members, who are both the owners and the customers of their bank. In India, these banks are registered under the States Cooperative Societies Act,1912 and are also regulated by the Reserve Bank of India (RBI) and governed by the

These banks also fall within the ambit of SARFAESI Act, 2002. They operate in Rural, Semi-Urban and Urban areas. They are formed to promote the upliftment of financially weaker sections of the society.

Characteristics of Cooperative Banks

• Customer Owned Entities: The members of Co-operative Banks are both the customers as well as the owners of the bank.
• Profit Allocation: A major proportion of the yearly profits or benefits are allocated towards constituting reserves and some part of this profit is also distributed to the members of the cooperative banks within legal limits.
• Financial Inclusion: They ensure the financial inclusion of unbanked rural areas in the economy.
• Democratic Member Control: They are owned and controlled by the members, who democratically elect a board of directors. All Members have equal voting rights i.e. “one person, one vote”.

Functions of Co-operative Banks

• It provides financial assistance to people with small means and protects them from the clutches of money lenders who provide loans at high interest rate.
• It supervises and guides affiliated societies.
• Rural financing- It provides financing to rural sectors like cattle farming, crop farming, hatching, etc. at comparatively lower rates.
• Urban financing- it provides financing for small scale industries, personal finance, home finance, start-ups, etc.
• It mobilises funds from its members and provides interest on the capital invested.

Structure of Co-operative Banks in India

In India the co-operative banks are organised as a three tier structure:

1. Primary Agricultural Credit Societies (PACS) operate at the bottom level and deal directly with the farmers, catering to their short and medium term credit needs. They encourage savings among agriculturalists and offers loans to the needy farmers.
   Their funds are raised by way of share capital, membership fees, deposits from members and non members and loans from Central Co-operative Banks and also from the Government.
2. Central Co-operative Banks (CCBs) operate at the centre of the three tier structure. They operate at the district level and function as a link between the bottom level PACs and the money market. Their primary function is to provide loans to the PACS. They also provide loans to others also and supply remittance facilities. They shift surplus funds from surplus primary societies to the deficit ones.
   They raise assets mainly from deposits and borrowings. Deposits are mainly from individuals and co-operative societies.

3. State Co-operative Banks (SCBs) are the apex banks and operate at the State level. They provide loans to CCBs so as to enable them to lend to the PACS. They supply a link through which the RBI provides credit to co-operatives. As they finance the CCBs, they supervise and control CCBs and through them the PACs function as the leader of the co- operative movement within the State.
Their funds are raised through share capital, accepting deposits from the general public, loans from bank and commercial banks. 50-90 percent of their assets are mostly contributed by the Federal Reserve Bank of India.

In a recent judgement of Pandurang Ganpati Chaugule V. Vishwasrao Patil Murgud Sahakari Bank Ltd (SCC 2009), a five-judge Constitution bench of the Supreme Court held that co-operative banks are 'banks' for the purposes of section 2(1)(c) of the SARFAESI Act, and that the recovery procedure under section 3 of the Act is also applicable to such banks,". The court also held that cooperative banks across the country comes under the securitisation and reconstruction of financial assets and enforcement of security act (SARFAESI Act) and thus can initiate recovery proceedings against defaulters.

What is SARFAESI Act?

SARFAESI stands for “The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”. It is an act which regulates scrutinisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.

Purpose of the Act

The Act was created primarily to address the issue of Non-Performing Assets or bad assets via a variety of mechanisms.

The Act provides 3 methods for recovery of Non- performing assets and they are:-

(i)Securitization
In context with the management of non-performing assets, securitization is the process of conversion of loans into marketable securities.

(ii)Asset Reconstruction
Asset reconstruction is the process of transforming a bad or non-performing asset into a performing asset. The process of asset reconstruction involves several steps which includes purchasing of bad asset by a dedicated asset reconstruction company (ARC), financing of the bad asset conversion into good asset using bonds, debentures, securities and cash etc among other steps.

(iii)Enforcement of Security without the intervention of Court
The Act vests power with the financial institutions to take possession or auction the securities without any intervention of the Court.

Objectives of SARFAESI Act

1. Smooth and efficient recovery of Non-Performing Assets of financial institutions
   2. Setting the foundation and structure of the legal framework required for securitization activities
   3. Granting financial institutions and banks the ability to secure interests without any intervention from the Courts
   4. Allow banks and financial institutions to auction the properties in cases where the borrower is unable to pay the loan.

Conclusion

Thus in today’s rapidly changing economy, Co-operative banks are playing a pivotal role in carving a niche for smooth and continuous growth and development of the economy. And in order to aid and ensure their success, SARFAESI Act, 2002 has been enacted to aid financial bodies and banks to auction or sell all kinds of residential and commercial properties with the objective of recovering bad loans. Thus the mutual cooperation of Co-operative banks and SARFAESI Act, 2002 has proved to be a very beneficial aspect resulting in growth of the economy and is expected to give positive results in the near future.

Author is Priyana Gupta, Vivekananda Institute of Professional Studies, 2nd Year