Cooperative Banks, Structure, Functions, Regulation, Impact

Cooperative banks form a vital part of India’s financial system, combining the goals of banking and social welfare. They operate on the principle of mutual assistance and democratic control, providing credit and banking services primarily to farmers, small businesses, and rural communities.

These banks are crucial for financial inclusion, especially where commercial banks have limited penetration. They not only promote savings and credit but also play a key role in agriculture, rural industries, and small-scale enterprises, thereby strengthening the rural economy.

Cooperative Banks

Cooperative banks are member-owned financial institutions registered under the Cooperative Societies Act and governed by banking regulations of the Reserve Bank of India (RBI). Their operations are guided by the principles of cooperation, self-help, and mutual benefit.

They accept deposits, provide loans, and extend banking services to members and the public. Unlike commercial banks, cooperative banks are non-profit entities, and their primary objective is to serve members rather than maximize profit.

Cooperative Banks Structure

The structure of Cooperative Banks in India is a well-defined multi-tiered network designed to serve both urban and rural populations. As of 2025, there are around 96,000 PACS, 370 DCCBs, and 33 SCBs operating under NABARD’s supervision. (Source: NABARD Annual Report 2024).

It is broadly divided into two main categories: Urban Cooperative Banks (UCBs) and Rural Cooperative Banks (RCBs).

1. Urban Cooperative Banks (UCBs)

• Operates mainly in urban and semi-urban areas.
• Provide services like housing finance, personal loans, MSME credit, and deposits to small borrowers, traders, and small-scale industries.
• As of 2025, India has over 1,500 Urban Cooperative Banks, of which more than 90% operate under Core Banking Solutions (CBS). (Source: RBI & NABARD Reports, 2024-25)
• Categorized as:
  • Scheduled UCBs- Listed under the Second Schedule of the RBI Act, 1934.
  • Non-Scheduled UCBs- Not included in the Schedule but regulated by the RBI.

2. Rural Cooperative Banks (RCBs)

These serve the agricultural and rural sectors and are further divided into:

(a) Short-Term Cooperative Credit Structure (3-Tier System)

• State Cooperative Banks (SCBs)- Apex body at the state level; acts as a link between RBI/NABARD and DCCBs/PACS.
• District Cooperative Central Banks (DCCBs)- Operate at the district level; finance PACS.
• Primary Agricultural Credit Societies (PACS)- Base-level institutions at village/gram panchayat level providing short-term loans (1-3 years).

(b) Long-Term Cooperative Credit Structure (2-Tier System)

• State Cooperative Agriculture and Rural Development Banks (SCARDBs)- Provide long-term credit (up to 25 years) for agricultural and rural development.
• Primary Cooperative Agriculture and Rural Development Banks (PCARDBs)- Offer medium and long-term finance to small farmers and rural artisans.

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Cooperative Banks Functions

Cooperative banks perform multiple economic and social functions in the Indian banking landscape. These functions make cooperative banks a pillar of the rural credit system, contributing directly to inclusive economic growth.

• Credit Provision: Provide short-term and medium-term loans to farmers, artisans, traders, and small entrepreneurs.
• Deposit Mobilization: Collect savings through current, savings, and fixed deposit schemes.
• Rural Development: Promote agricultural and allied activities, self-employment, and cottage industries.
• Implementation of Government Schemes: Channel credit for programs like PM-Kisan, KCC (Kisan Credit Card), and PMFME.
• Financial Literacy & Inclusion: Spread awareness and provide financial services in remote and unbanked villages.

Cooperative Banks Regulation

Cooperative banks are regulated by multiple authorities, depending on their type and jurisdiction.

• RBI: Oversees banking operations under the Banking Regulation Act, 1949.
• NABARD: Supervises rural cooperative banks and provides refinance support.
• Registrar of Cooperative Societies (RCS): Handles registration and administrative control at the state level.
• Ministry of Cooperation (Government of India): Formed in 2021 to strengthen cooperative institutions across India.

• Amendment to the Banking Regulation Act, 2020: Empowered RBI to exercise control over both urban and multi-state cooperative banks.
• Digitization Drive (NABARD, 2024): All cooperative banks to be fully digitized by March 2025, including PACS under Core Banking Solution (CBS). (Source: Business Standard, Nov 2024)
• Cooperative Policy Framework (2023): Proposed to streamline governance and accountability in cooperatives under a single code.

Cooperative Banks Challenges

Despite their outreach, cooperative banks face numerous systemic and operational challenges.

Challenges:

• Governance and Political Interference: Frequent political influence in management and lending decisions reduces professionalism.
• Dual Control Confusion: Shared oversight between RBI and state governments often delays corrective action.
• Financial Weakness: Many banks suffer from low Capital Adequacy Ratio (CAR) and high Non-Performing Assets (NPAs).
• Technological Backwardness: Lack of digital banking infrastructure and cybersecurity frameworks.
• Frauds and Mismanagement: Scandals such as PMC Bank (2019) and New India Cooperative Bank (2025) damaged depositor trust.
• Limited Profitability: Focus on social objectives and concessional lending reduces revenue margins.

Way Forward:

• Strengthen governance and accountability with professional management.
• Complete digitization under NABARD’s Core Banking Solutions initiative.
• Promote mergers and consolidation to improve financial strength.
• Enforce uniform audit and transparency standards.
• Encourage capacity building and training for staff and directors.
• Introduce a Cooperative Banks Credit Guarantee Scheme for depositor safety.

Cooperative Banks Impacts

Cooperative banks have a deep impact on rural development, credit availability, and economic equality, especially in rural India. Below are key impact areas:

1. Expansion of Agricultural & Rural Credit

• In FY 2024, NABARD’s short-term refinance to cooperative banks increased by 15 % over FY 2023, with 73.3 % of that amount directed to State Cooperative Banks (StCBs).
• SCARDBs (long-term cooperative banks) remain heavily reliant on borrowings: as of 31 March 2023, borrowings made up 45.2 % of their liabilities; 83.6 % of those borrowings came from NABARD.

2. Improved Profitability & Financial Health

• According to NABARD key statistics, the consolidated operating profits of StCBs rose by 50.5 %, and for DCCBs by 24.8 % (year not specified, but recent reporting period).
• In Uttar Pradesh, the UP Cooperative Bank (UPCB) saw its net profit tripling since 2017, with business at DCCBs crossing ₹41,234 crores credited to digital initiatives like “Sahkar Sarthi”.

3. Strengthening Financial Inclusion Metrics

• The RBI Financial Inclusion Index climbed from 64.2 in March 2024 to 67 in March 2025, registering a 4.3 % growth across segments. This reflects deeper reach of banking and cooperative services in underserved regions.
• Cooperative banks now number 1,457 Urban Cooperative Banks, along with 34 State Cooperative Banks and 351 DCCBs, according to PIB (2025).

4. Governance & Regulatory Oversight Impact

• In FY 2024-25, RBI imposed 264 penalties on cooperative banks across India, higher in number than for any other banking category, with total fines amounting to ₹15.63 crore. This underscores the regulatory tightening and demand for better governance. 
• RBI also recently imposed individual penalties on UCBs in Maharashtra and Karnataka (total ~ ₹9.20 lakh) for non-compliance, indicating granular supervisory action.

Cooperative Banks Significances

The significance of cooperative banks lies in their inclusive character, grass-root penetration, and socio-economic contribution.

• Bridging the Rural-Urban Divide: They ensure flow of funds from surplus urban sectors to rural needs.
• Supporting Agricultural Growth: By offering timely and affordable credit.
• Empowering Local Economies: Encourage local savings and investment.
• Reducing Income Inequality: By promoting equitable access to financial services.
• Complementing Government Schemes: Facilitate the success of schemes like PM-KISAN and Atmanirbhar Bharat.
• Strengthening Self-Reliance (Atmanirbharta): Promotes community-driven development and local entrepreneurship.

Cooperative Banks Legal Framework

Cooperative banks are governed by a mix of constitutional, legal, and policy provisions, reflecting their unique socio-economic role.

Constitutional Provisions

• 97th Constitutional Amendment Act (2011):
  • Added Part IX-B (Articles 243-ZH to 243-ZT), granting constitutional status to cooperatives.
  • Ensured autonomous functioning, democratic management, and regular elections.
• Entry 32, State List (Seventh Schedule): “Incorporation, regulation and winding up of cooperative societies” is a state subject.
• Entry 43, Union List: Covers “Incorporation, regulation of cooperative societies operating in more than one state.”

Legal Provisions

• Banking Regulation Act, 1949: Applicable to cooperative banks post-2020 amendments.
• Multi-State Cooperative Societies Act, 2002: Governs cooperatives operating across states.
• Cooperative Societies Acts (State-specific): Define structure, registration, and governance.
• Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961: Provides deposit insurance up to ₹5 lakh per depositor.

Government Policies and Initiatives

1. Ministry of Cooperation (2021): Created to strengthen cooperative institutions, improve oversight, and modernize governance.
2. Computerization of PACS (NABARD, 2024): Project to digitize 63,000 PACS with ₹2,516 crore outlay.
3. National Cooperative Policy (Proposed 2024): Aims to unify cooperative laws and promote efficiency.
4. Formation of National Cooperative Export Society (NCES) and National Cooperative Organic Society (NCOS): To expand cooperatives’ market access.
5. Financial Assistance through NABARD: Refinance and liquidity support to cooperative credit institutions.

Cooperative Banks UPSC

The cooperative banking sector is witnessing rapid modernization and regulatory tightening.

1. Digitization Deadline: NABARD directed all cooperative banks to achieve 100% digital operations by March 2025.
2. Merger of New India Cooperative Bank with Saraswat Bank (2025): Approved by RBI after governance failures to protect depositor interests.
3. Deposit Growth: Cooperative banks’ deposits increased by 10.34%, reaching ₹4.47 lakh crore by Sept 2025. 
4. New Cooperative Code: Several states (like Rajasthan and Maharashtra) initiated frameworks to improve transparency and governance in cooperatives. 
5. Ministry of Cooperation Initiatives: Under the leadership of Amit Shah, projects like Computerization of 63,000 PACS and formation of multi-state cooperative societies for dairy and seeds were launched in 2024.
6. Cooperative banks account for nearly 11% of India’s rural credit.
7. There are over 1 lakh cooperative credit institutions operating under NABARD’s supervision.
8. Deposits with cooperative banks grew by 10.3% in FY2024-25, surpassing commercial bank growth.