Elements of Banking & Insurance

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Meaning of Co-operative Banks
 A co-operative bank is a 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 a common
interest.
 Co-operative banks generally provide their members with a
wide range of banking and financial services (loans, deposits,
banking accounts).
 They are registered under the Cooperative Societies Act, 1912,
and governed by the Banking Regulations Act 1949 and
Banking Laws (co-operative societies) Act, 1965.
 They are organized and managed on the principal of
cooperation, self-help, and mutual help. They function with the
rule of one member, one vote.
 Function on "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.
Structure of Co-operative Banks in India
 Co-operative banking in India is federal in
its structure.
 At the lower rung, there are primary credit
State
societies in villages and urban banks (UB)
Co-operative
and other non-agricultural credit societies
Bank (SCB)
(NACS) in cities, then there are the
central co-operative banks at the
district level and at the top there are Central
Provincial or State Co-operative Co-operative Bank (CCB)
banks in each state are known
as “Apex” Banks.

Primary Credit Societies (PCS)

PCS (in villages) UB and NACS

(in cities)
 Co-operative banks form another component of the Indian
banking organisation, originated in India with the enactment
of co-operative Credit Societies Act of 1904. Under this act a
number of co-operative credit societies were started.
 Owing to the demand of co-operative credit, a new act was
resolved in 1912, which provided for the establishment of co-
operative central banks by a union of primary credit societies
and individuals.
 In 1914, the Maclagan Committee was appointed to examine
co-operative movement and to make recommendations
regarding improvement of the movement.
 It recommended the establishment of State Co-operative Apex
Bank.
Primary Credit Societies (PCS)
 Primary credit society is at the bottom of the three-tier structure
of co-operative banks.
 The society normally comes in contact with the farmers and
makes only a few members living within the area of the society.
 Here individuals of a particular area meet together inspired by
sentiment of co-operation.
 Every member has to pay his share in the share capital. The
price of a share is nominal.
 The main aim of forming this organisation is to make the
farmers free from the fatal grip of local lenders and releasing
them from their exploitation and providing the credit at cheaper
rates of interest.
The society is managed by elected persons: Honorary secretary
and members of working committee.

Financial sources: Admission fees to become a member, share

capital, deposits from the people. Finance from Central co-
operative banks or State co-operative banks if needed.

Field of Action: As per the act of co-operative credit society 1904,

10 or more individuals who are not from the same family and they
are belonging to the same village or town can establish the primary
credit society .
As per the co-operative society Act, 1912 as per the regulation of
the state, each such society is required to be registered. The field of
jurisdiction is limited only upto the field of area of a particular
village or a town where it has been established.
Membership: Any person above the age of 18 years can become
a member of the society. For this membership he has to pay the
membership subscription as well as he has to purchase shares as
per the rule.
A person who is immature or having unsteady mind or declared
insolvent or having loose character or has not paid government
loans is not liable to be a member of the society.

Management: The society is managed by the managing

committee. It is the elected body, usually the secretary and the
other members run the routine process of the society. Only the
Secretary-cum treasurer is full time paid member and other are
honorary members.
Functions:
1) Provide short and medium term loans and advances to needy
members mainly out of the deposits.
2) Supply all necessities required for agriculture, such as
agricultural tools, seeds, fertilizers and insecticides.
3) Market the agricultural products and crops.
4) Supply certain consumable goods like food-grains, sugar,
kerosene and other essential commodities.
5) Encourage the habits of saving among its members.
6) Arrange the programmes regarding the economic welfare of
its members.
Limitations:
1) Co-operative credit still forms a small portion of the total
borrowings of the farmers which means that the farmers are
still in the clutches of money-lenders.
2) Tenants and small farmers find it difficult to satisfy their
needs fully.
3) Most primary credit societies are unable to meet fully the
production-oriented credit needs of farmers.
4) Overdues at all levels are increasing alarmingly indicating
the failure of co-operative credit institutions.
5) They have not been able to ensure adequate and timely credit
for the borrowing farmers.
6) Society is found to have lack of business skills.
Central (District) Co-operative Banks
The central co-operative bank is a link joining state co-operative
bank with the primary credit society. For making the provision of
the monetary aid to primary credit societies and through them to
the needy farmers the district co-operative banks were established
at the district level. The central co-operative banks are of two
types:
1) Pure type district banks
2) Mixed type district banks

Pure type district banks: If the membership of the banks is of co-

operative organizations only are called pure district types.
Mixed type district banks: If the membership of the banks open
To co-operative organisations as well as to individuals is called
mixed type district banks.
Financial sources: Share capital, deposits from the people and
PCS, loan from state co-operative banks and where the state banks
do not exist, from the RBI and other commercial banks.

Management: The bank constitutes a managing committee for

managing the running of the bank. A general meeting of
shareholders is held annually.
In the managing committee there are usually 9 to 11 members
which are elected in the general meeting. The managing committee
meets usually once in a month.
For regular day-to-day management a full time manager is
appointed. The operations are carried out as per the guidelines of
the committee.
Functions:
1) Supplies money to primary credit society.
2) Collects deposits from rural areas and farmers and provides it
to the PCS in the form of safe investment. Also accept deposits
from the private credit societies at attracted rates.
3) Gives money to other co-operative institutes at a reasonable
rate of interest.
4) Supervises the functioning of PCS and gives training, guidance
and advices to the employees of credit society only.
5) Advances loan to the people against their first class guilt edged
securities.
6) Accepts cheques, drafts and hundies etc. on behalf of the
customers.
7) Purchase and sells the securities on behalf of customers.
8) Acts as an agent of the customers.
Limitations:
1) Recovery of loan is tedious and serious and the process is also
complex.
2) Development of DCCBs region wise is not equal.
3) Management is not efficient and effective.
4) Lack of farmer’s interest in co-operative activities.
5) Lack of business skills.
6) Ignorance and uneductance of the members.
7) Castism.
8) Interference of political parties.
9) Uneconomical units.
10) Lack of financial soundness.
State Co-operative Banks
State co-operative bank means the principal society in a state which
is registered under the Government Societies Act, 1912 or any
other law in force in India related to co-operative societies in the
state. This bank especially co-ordinates the activities of district co-
operative banks and controls them and give them required
guidance. The state co-operative banks are of two types:
1) Pure state banks
2) Mixed state banks

Pure State Banks: It is a federation of central co-operative banks

only.
Mixed State Banks: It is a federation of both central co-operative
banks as well as individual members.
Management: The ultimate authority of state co-operative bank
lies with the general body and managing committee of the state
co-operative bank. The general body elects the board of director
as per the banking regulation act, rules and by laws.
The state government is also party to the bank management and
share capital and hence the state government nominates its own
representatives. The number of such representatives should not
exceed one-third of the total general body strength.
The selected board of directors appoints a general manager
known as managing director.

Financial sources: Share capital, deposit collection from co-

operative institutions, public and business, loan from RBI.
Functions:
1) Assist the central banks and to balance excess and deficiencies in the
resources of central banks.
2) Keep watch on all the district co-operative banks within the state.
3) Act as a chain between co-operative activities and country’s money
market.
4) Directs the guidelines for the development of co-operative activities
to the district banks situated in the state.
5) Helps district co-operative banks in the form of subsidies.
6) Create proper environment for the rapid growth of co-operative
activity.
7) Plays the role of friend, philosopher and guide to all the co-operative
institutions in the state.
8) Manage for imparting education and training of co-operative
activities in the state.
9) Provides credit to the primary credit societies through the central co-
operative banks.
10) Provides the facility of re-discounting of bills and clearing house.
Limitations:
1) Policy of advancing the loan is not proper. The
administrative authorities and political leaders interfere in
this matter.
2) Banks are unable to attract the public for saving and hence
the collection of deposits through the public is poor. On this
regard they have to depend upon RBI.
3) Watch over the working of DCBs and PCS is not
satisfactory.
4) Lending medium term advances is difficult.
5) Performance of their duty as supreme authority is not well.
 CO-OPERATIVE BANK COMMERCIAL BANK

Only some sections of Banking Commercial banks are governed by the

Regulation Act, 1949 are applicable to Banking Regulation Act,1949.
co-operative banks.
Co-operative banks have a three-tier On the other hand, Commercial banks
structure having State co-operative have organization of a unity base.
banks at the top, DCBs at the district
level and PCS at the village level.
They are generally concentrating on They are mainly concentrating on the
rural credit and provide credit facilities requirements of trade and industry.
to agricultural and rural activities.
In Co-operative Banks the borrowers Borrowers can be any including
are usually their members. individuals institutions.
Co-operatives banks are co-operative On the other hand, Commercial banks
organizations. are joint-stock banks.
 CO-OPERATIVE BANK COMMERCIAL BANK
Co-operative banks have been Commercial banks have been
established under Co-operative Societies established under the Companies Act,
Act of different states. 2013 as joint stock companies or under
separate acts passed in the Parliament.
Co-operative banks are subject to the Commercial banks are subject to the
rules laid down by the Registrar of Co- control of the Reserve Bank of India
operative Societies. directly.
Co-operative banks have lesser scope in Commercial banks have wider scope in
offering a variety of banking services. offering a variety of banking services.

Co-operative banks are functioning on Commercial banks proceed on the

the basis of co-operation. strong business principles.
Co-operative banks are private sector Commercial banks in India are of two
banks. types: (i) public sector banks and (ii)
private sector banks.
CO-OPERATIVE BANK COMMERCIAL BANK
In co-operative banks, borrowers are Borrowers of commercial banks are only
member shareholders, so they have some account- holders and have no voting power
influence on the lending policy of the as such, so they cannot have any influence
banks, on account of their voting power. on the lending policy of these banks.
Co-operative banks are relatively on a Commercial banks in India are on a larger
much smaller scale. Many co-operative scale. They have adopted the system of
banks follow only unit-bank system, though branch banking, so they have countrywide
there are cooperative banks with a number operations.
of branches but their coverage is not
countrywide.
Only state co-operative banks can obtain Commercial banks can avail refinance from
refinance from RBI. RBI.
The Co-operative Banks provide a little The Commercial Banks provide a
higher rate of interest on deposits as lesser rate of interest as compared to
compared to commercial banks. co-operative banks.
Audit and inspection of co-operative Whereas the audit of commercial banks
banks are done by the SCBs. is done by external auditors.
Nagarik/ People’s/ Urban Co-operative
Bank
Nagarik Co-operative Bank means a co-operative society which has
been registered in a city area. Its paid-up share capital is at least Rs.
50,000.
The Maclegan Committee, 1955 and Central Banking Inspection
Committee, 1931 had recommended strongly on the importance of
development of Nagarik Co-operative Banks. The first Nagarik Co-
operative Bank was started in 1989 at Baroda by the leading citizens
of Baroda. These banks function on the same track similar to the
tracks of commercial banks.
Functions:
1) Performs financial transaction.
2) Paid up capital reserve should not be less that one lakh.
3) Function starts only after getting the license from the RBI.
4) Progress reports, P&L Account and Annual Account must be
send to RBI in prescribed manner.
5) RBI shall have essential power to inspect the working of a
bank.
6) Develop the habit of thrift in the middle class people of the
society staying in the urban or semi urban region.
7) Facilitate middle class with the investment and credit
services for the merchants, workers, craftsmen, journalist etc.
8) Gives medium and short term credit to its members.
9) Nagarik co-operative banks also performs usual commercial
banking activities.
10) Nagarik Co-operative bank has to keep 25% of the total
properties and 3% of the cash assets as reserved fund.
Limitations:
1) Limited working area.
2) Uneven development in different states.
3) Scarcity of skilled and trained staff.
4) Insufficient use of deposits.
5) Inefficiency in management.
6) Difficulty in returning the loans.
7) Banks are not fully developed because of strict rules of RBI.
Land Development Bank
 All the co-operative banks at different levels and Nagarik Co
operative Banks generally provide only short-term and medium
term loans to the farmers.
 The agriculturists sometimes require long-term finances for
affecting permanent improvement in land, for liquidating old
debts, for purchasing costly machineries, etc.
 Hence, to fulfill such long term financial requirements Land
Development Banks as the special financial institution.
 The first co-operative land mortgage bank was established in
Punjab in 1920 at Jhang.
 After independence, the importance of such banks was
emphasized by All India Credit Survey Commission to increase
agricultural production.
 After 1951, these Land Mortgage banks are known as Land
Development Banks.
Structure of Land Development is of two tier:
One at a state level, there are Central Land Development Banks and
at district level, there are Primary Land Development Banks.
1) Federal Land Development Bank
2) Unitary Land Development Bank

Federal Land Development Bank: In this pattern, the central

institution has not direct contact with the borrowers. It is only
through the medium of primary banks central institution finances
the agriculturists. Central institution issues debentures and the
funds are passed to primary banks and via them to borrowers.
Unitary Land Development Bank: Under this unitary structure,
there are Apex Land Development Banks which operate directly
through branches at district level.

The farmers who own land have been granted the loans of 50 to 60%
of total value of their land.
Monetary sources: The Central land development banks raise
their resources by floating debentures in the market. These
debentures carry of the state government and are subscribed by the
central and state governments, commercial banks, LIC and others
LDBs as a measure of mutual support.

Limitations:
1) Banks render financial help to the farmer who own the land.
2) Farm laborers or the tenants of land do not get advantage from
these banks.
3) Where the land is divided into small pieces or if it is dry or
unproductive these banks cannot serve here so successfully.
4) Poor farmers do not use advances for productive purpose but
they utilize it in paying their debts. So financial help to such
farmers is not useful.