Urban Cooperative Banks

Syllabus: GS3/Economy

Context

• Recently, the Union Home and Cooperation Minister, at the ‘Co-op Kumbh 2025’, called on Urban Cooperative Banks (UCBs) to play a transformative role in empowering India’s youth and underprivileged communities.

Key Highlights of Co-op Kumbh 2025

• ‘Delhi Declaration 2025’: It was adopted by the National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB), focusing on enhancing financial stability, governance, and digitization within the cooperative banking network.
• Digital Push: Two new digital initiatives Sahkar Digi-Pay and Sahkar Digi-Loan  were launched to empower even the smallest cooperative banks.
  • These enable digital payments and loan disbursement services, integrating UCBs into India’s broader digital revolution.
• Commitment to Strengthening the Cooperative Credit Ecosystem: The government aims to establish an UCB in every Indian city with a population exceeding two lakh within the next five years.
  • It aims to expand the urban cooperative credit ecosystem and make financial inclusion more accessible across urban India.

About Urban Cooperative Banks (UCBs)

• These are financial institutions rooted in the cooperative movement, primarily serving urban and semi-urban populations.
  • Cooperative societies are based on the principles of cooperation like mutual help, democratic decision making and open membership, unlike commercial banks.
• They cater to small businesses, salaried individuals, and lower-income groups, offering banking services such as deposits, loans, and credit facilities.
  • They play a vital role in promoting inclusive economic growth, supporting small traders, entrepreneurs, and the weaker sections of society.
• As per RBI and NABARD, there are 1,457 Urban Cooperative Banks, 34 State Co- operative Banks (StCBs), 351 District Central Co-operative Banks (DCCBs) and one Industrial Cooperative Bank which are under the supervision of RBI and NABARD.

Previous Efforts of Recognising Cooperative Banks

• Government of India Act (1919):  It transferred the subject of ‘Cooperation’ from the Government of India to Provincial Governments.
  • The Government of Bombay passed the first State Cooperative Societies Act (1925), which:
    • Shaped and expanded the cooperative movement.
    • Emphasized thrift, self-help, and mutual aid.
  • It was followed by other states, marking the second phase in the history of Cooperative Credit Institutions.
• Indian Central Banking Enquiry Committee (1931): Emphasized urban banks’ duty to assist small businesses and the middle class.
• Mehta-Bhansali Committee (1939): Recommended that cooperative societies meeting certain banking criteria be allowed to function as banks.
  • It suggested forming an Association for Urban Cooperative Banks.
• Co-operative Planning Committee (1946): Acknowledged that urban banks were the best financial agencies for small people, often ignored by joint stock banks.
• Rural Banking Enquiry Committee (1950): Recommended setting up such banks even in smaller towns, given their low operational costs.

RBI Study and Report (1958–1961)

• The Reserve Bank of India (RBI) conducted the first study of Urban Cooperative Banks (UCBs) in 1958–59, and published in 1961:
  • Recognized the financial soundness of UCBs.
  • Suggested expansion to new centers.
  • Urged State Governments to actively support their growth.
• Varde Committee (1963): It recommended establishing UCBs in all urban centers with populations over 1 lakh.
  • Stressed that banks should not be community- or caste-based.
  • Introduced the concept of minimum capital requirement.
  • Defined population criteria for identifying urban centers suitable for UCB incorporation.
• Madhavdas Committee (1979): Conducted a detailed evaluation of UCBs’ role and performance. It recommended:
  • Support from RBI and Government for setting up UCBs in backward regions.
  • Viability standards for sustainable growth.
• Hate Working Group (1981): It suggested:
  • Better utilization of surplus funds.
  • Gradual alignment of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) of UCBs with commercial banks, through a phased approach.
• Marathe Committee (1992):
  • Redefined viability norms for UCBs.
  • Initiated an era of liberalization within the cooperative banking sector.
• Madhava Rao Committee (1999): It focused on:
  • Consolidation and control of sick banks.
  • Improved professionalism and management standards.
  • Integration of UCBs with the broader commercial banking system.

Current Challenges Faced by UCBs

• Declining Numbers: The total number of UCBs has dropped from 1,926 in 2004 to around 1,500 in 2024 due to regulatory and financial pressures.
• Regulatory Constraints: UCBs have faced restrictions on branch expansion and licensing. New licenses have not been issued since 2004.
• Governance and Compliance Issues: Many UCBs struggle with outdated governance structures, poor compliance with the Banking Regulation Act, and limited technological adoption.
• Financial Vulnerabilities: Limited capital base and exposure to risky lending practices have affected their stability.

Related Initiatives and Reforms

• NUCFDC Formation: NUCFDC was established to serve as an umbrella organization for UCBs, offering financial support, regulatory guidance, and capacity building.
• Empowerment Measures: RBI has allowed UCBs to open new branches and empowered their boards to formulate settlement policies similar to commercial banks, under the direction of the Ministry of Cooperation.
• Expert Committee Recommendations: A committee chaired by Shri NS Vishwanathan submitted a report in 2021 recommending the creation of a strong apex entity and improved regulatory mechanisms.
• Modernization and Reforms in Cooperative Sector: It emphasized that significant policy reforms have modernized cooperatives and resolved long-pending challenges since the creation of the Ministry of Cooperation.
  • Several state governments have adopted model bylaws for Primary Agricultural Credit Societies (PACS), ensuring uniformity and transparency.
• Financial Discipline and Reduction in NPAs: Highlighting financial improvements, Shah stated that Non-Performing Assets (NPAs) in the cooperative sector have declined from 2.8% to 0.6% in the past two years.
• The Union Ministry of Cooperation has outlined four key objectives, including:
  • Engaging youth through new educational initiatives such as Tribhuvan Sahkari University.
  • Promoting multi-sectoral collaboration.
  • Ensuring financial discipline and efficiency.
  • Expanding the reach of cooperatives across urban and rural India.
• The United Nations (UN) designated 2025 as the International Year of Cooperatives (IYC 2025) under the theme ‘Cooperatives Build a Better World’, which aims to serve as a platform to modernize and scale the cooperative banking system.

Source: DD News