Cooperative Banking denotes the financial institutes that bring easy banking services, savings, and investments, mainly in rural areas of India. Take a look at the further details of the cooperative banking system of India in the following sections:

What Is Cooperative Banking?

As the name suggests, cooperation with the people of rural belts of India is the principle of these banks. Cooperative banks encourage rural people to understand essential banking services in the easiest possible words and be a part of it.

At the same time, it offers loans with lower interest rates and investment schemes to help people have a better lifestyle. These institutes help in employment by funding these. Cooperative Bank aims to bring the rural belt into the mainstream by introducing easy financial services they were deprived of and these are quite successful in rural inclusion.

Why Did Cooperative Banking Start In India?

Objectives Of Cooperative Banks

• Banish The Monopoly Of Money Lenders
• Introduce Cooperative Credit System
• Offer Loan In Lower Interest Rates
• Provide Banking And Financial Assistance
• Help in Employment
• Bring Agricultural Development

The objective behind setting up cooperative banks was mainly to drive away the rural credit system. More specifically, it started to banish the greedy money-lenders who literally debt-trapped innocent villagers.

Rural people generally need money for agricultural purposes, livestock needs, home-based small businesses, etc., since they do not have huge savings to fund these. And the villagers had no other option than to take loans with high-interest rates from money lenders. Failing to return it by the stipulated time, they go bankrupt.

Self-employment by doing anything (farming, business, or higher studies) was a struggle for rural people for quite a long time. Along with ending the monopoly of these money lenders, introducing cooperative credit system was the primary aim of these institutes.

Also, it aimed to offer low-interest loans and create awareness for investments. In short, these institutions tried to be the one-stop financial assistance to the people and cooperative banks have successfully met all these objectives. And the best part is rural people rely on these institutions because these provides them loans and other banking assistance in easier terms. People are well aware of digital payments and payment gateways, too, thanks to the cooperative banks.

Brief History of Cooperative Banking in India

Check the brief history of Cooperative Banking in the flow-chart below:

How Do Cooperating Banks Work?

How cooperative banks function in an exciting way:

Firstly, the members (individuals or groups) deposit money and purchase shares in the bank. The members’ deposits work as the bank’s capital, which is later used to lend money to the account holders. Then, the shareholders elect a board of directors to take care of the operations.

Also, read Small-Scale Industries in India

Flow-chart of Indian Cooperative Banks

Cooperative banks were set up to support the people whose source of income is mainly agriculture. Based on the different needs of the villagers, there are a number of segregations in cooperative banking institutions:

Let’s have some more details of different types of short-term cooperative credit institutions:

State Cooperative Banks	Central Cooperative Banks	Primary Agricultural Credit Societies
Organised at state and district level	Runs pan-India level	Runs on the initiatives of individual farmers, agricultural professionals, etc.
Under RBI Regulation	Under the supervision of the State Cooperative Department and RBI regulation	Under RBI Regulation and registered under Cooperative Societies Act
Serves low to medium-income rural people	Serves rural to urban people	Serves rural areas where conventional banking services don’t reach
Shares, Government resources, RBI borrowing, etc., are the source of capital	Individual funds, RBI borrowing, deposits, etc., are the source of capital	Contributions from individuals are the source of capital
Offers credits for agricultural development, small industrial growth, and businesses	Offers loans, other banking services, and insurance	Offers loans at low interest, insurance, storage services, etc.

Features of Cooperative Banking

The cooperative banks of India hold some unique features, such as:

Individual Voting system

Members of cooperative banks democratically elect their board of directors using the "One person, One vote" system.

Customer-owned Entities

Members, as well as the end users/customers/account holders, are the owners of the cooperative bank because they have the right to get some share by paying certain amounts.

Profit Distribution

Whatever profit these institutes generate gets distributed among the shareholders based on their investments.

Rural Inclusion

Cooperative Bank aims to bring the rural belt into the mainstream by introducing the financial services they were deprived of. Right now, rural India is well aware of digital payments and payment gateways, too.

Pros and Cons of Cooperative Banking

Now, let’s move on to the advantages and disadvantages of the cooperative banking system:

Advantages of Cooperative Banking

The advantages of cooperative banking include:

1. Provides Easy credits at low interest rates
2. Provides high-interest rates for deposits
3. Brings more people under savings and investment settings
4. Aims at improving the lifestyle of rural Indians
5. Boosts agricultural development

Altogether, cooperative banks work for the overall growth of rural India by introducing easy financial services to them.

Also, read banking as a service or BaaS

Limitations of Cooperative Banking

Even though cooperative banking is beneficial, it has a few shortcomings to improve. These include:

Incapabilities to meet the credit requirements for production or technology improvements

High level of overdue

Poor structure and incomplete coverage

Hence, cooperative banks should have wider coverage so that farmers and small business owners from all corners of India can access these. Also, these banks need some more capital to meet rural India’s production and technology requirements.

Cooperative banks are undoubtedly doing a great job, and people are relying on them for all their financial needs – it is indeed a good sign; however, it has to excel in its achievements in the coming days by cutting the shortcomings.