Why Cooperative Credit Societies are a Mess?

Swetha Dhinesh

14 Mar, 2023

A Cooperative Credit Society is a financial organisation owned and run by its members. Credit cooperative societies are established with the primary objective of developing the economy and society by giving their members access to adequate credit at reasonable interest rates. The registration of cooperative credit societies includes creating a society according to the law with a group of persons with similar objectives.

For the construction of such credit cooperative societies, society registration is necessary. Credit cooperative society registration involves less paperwork than other types of registration. Additionally, these societies provide loans to their members to promote social and economic development. 

What is a cooperative society?

A cooperative society is an association of people united voluntarily to address common social, cultural or economic needs. These organisations are democratically controlled and collectively owned. Cooperative societies’ primary goals are decided by their members. Every society’s purpose is to fill its members’ requirements by engaging in the market. It is operated to encourage thrift, set up credit at a reasonable cost, and offer other financial services to its members. It displays the society’s desire to assist one another in achieving a balance between social responsibility and mutual assistance for its members.

What is the Purpose of Cooperative Credit Societies?

The credit cooperative societies offer the following services to members of the community.

• It only accepts deposits from its members.
• They are created to assist its members financially.
• They frequently reduce intermediary’s extra profits in trade and business.
• They provide low-interest loans to members. (loans for a house, personal assets, an automobile, etc.)
• Primarily responsible for protecting rural consumers’ and producers’ rights.

Types of Cooperative Credit Societies

Cooperative credit societies are classified into two types.

1. Agriculture Credit Societies – Agriculture credit societies are common in villages. These associations would lend money to local farmers and artisans.
2. Non-Agriculture Credit Societies – They are found in urban and metropolitan areas, and loans are provided to those in these areas.

Three-Tier Structure of Cooperative Credit Societies

Regarding categories, there are mainly three tiers for credit cooperative societies, which are as follows.

Primary Credit Cooperative Society – A group of individuals in a particular area who are both borrowers and non-borrowers make up the primary credit cooperative society. Everyone who lives in that area is welcome to join. Additionally, they show interest in one another’s business affairs.

Central Credit Cooperative Society – Membership in this kind of society is restricted to a few individuals, and usually, they are referred to as banking unions. Nearly all central cooperative banks now allow people to join as members.

State Credit Cooperative Society – This kind of organisation frequently accepts deposits from a specific group of individuals. State credit cooperative society was established to attract wealthy urban classes to deposit money. They are the intermediary between the joint stock banks and the cooperative movement.

Problems in the operation of Cooperative Credit Societies

Their monitoring needs to be tightened because the majority of cooperative credit societies ignore regulatory control and engage in unsafe lending.

• Despite taking deposits from and disbursing loans to its members, these societies are not directly inspected by the RBI.
• The majority of cooperative credit societies operate with smaller capital to escape from RBI regulatory monitoring, but those with reserves and paid-up capital of over 1 lakh must apply for a license from the RBI.
• Many Cooperative credit societies offer deposits at exorbitantly high-interest rates (e.g. 12%). They ought to be lending at least 18-20 per cent in that situation. In such a case, who may the borrowers be? The entire cooperative credit structure is put at risk because the borrowers of this high-cost borrowing must be investing in extremely risky and fragile assets.
• Accepting deposits from non-members, that is, some cooperative societies are breaking the Banking Regulation Act’s rules by accepting deposits from non-members, nominal members, and associate members.
• Cooperative credit societies are governed by opaque and anachronistic legislation, and if these societies fail, their members will suffer.
• According to reports, during the past ten years, a number of the organisations incorporated under the multi-state cooperative societies Act, 2002 have collected deposits worth thousands of crores.
• It mandates that societies provide money to hazardous borrowers, which will negatively impact the financial industry overall.
• Domino effect- Because the capital and reserves in these societies are low, any failure could start a domino effect.
• Because these societies are exempt from know your customer (KYC) regulations and Anti-Money Laundering Laws, money launderers could be eligible depositors.
• Unfair Advantage – There is also a warning that some societies are unfairly exploiting the poor in economically excluded areas and exploiting them, which leads to financial exclusion.
• Other problems affecting the cooperative banking industry include bad governance, lack of regulations, local political interference, and a change in the structure of the banking sector that creates intense competition.

Measures to Improve the Cooperative Credit Societies

• Many cooperative societies work around Section 7 of the Banking Regulation Act’s restrictions. To prevent a domino effect on all banking transactions, it is crucial that proper legal action is taken against the offenders.
• Cooperative society registrars should be sufficiently modernised. Ill-functional societies need to be isolated, and controllers and supervisors authorised by the RBI must conduct specific preventive investigations.
• Strengthening financial inclusion is necessary. Strong evidence suggests that societies may be exploiting and unfairly benefiting the poor in economically marginalised areas.
• Internal surveillance mechanisms need to be significantly improved; for instance, these credit societies should be added to the RBI SWIFT platform.
• Members who have made deposits should be more concerned with the safety of their principal than with the return on it.

RBI Guidelines

The practice of primary credit organisations starting banking operations without first getting an RBI license needs to stop. According to the Act’s revision, those societies should adhere to RBI’s standards within a year of notification. A cooperative credit society is defined as a cooperative society, “the primary goal of which is to provide financial accommodation to its members and includes a cooperative land mortgage bank” under the terms of section 5(ccii) of the Banking Regulations Act, 1949^[1] (AACS). These organisations are called thrift societies. A primary credit society and a cooperative credit society can be distinguished based on how they conduct business.

A primary credit society’s main goal or line of business is conducting banking transactions. These societies transform into cooperative banks if their paid-up capital and reserves reach 1 lakh. However, a primary credit society should apply to the RBI for a license to conduct banking activity even after it transforms into a cooperative bank. However, it is still permitted to conduct banking operations up until a licence is issued to it or until it is informed that one cannot be.

Conclusion

To protect the interest of depositors and to safeguard the institutional framework governing the conduct of the activities, proper legal action must be taken on the cooperative credit society’s mess. If the State government monitors and oversees these organisations along with the RBI, the majority of the problems will be fixed. Both the ordinary person and the financial industry as a whole will benefit from this.

Also Read:
Multi State Credit Cooperative Society Registration
Requirements For Forming a State Co-Operative Society