IBPS Test 22

Cooperative banks occupy a unique and important position in India's financial system, providing credit and other financial services to agricultural and rural communities, weaker sections, and small borrowers through a structure that combines ownership by members with a developmental mandate. The cooperative banking system operates at three tiers at the national, state, and district and primary levels, with NABARD serving as the apex refinancing and supervisory institution for the cooperative credit structure. State Cooperative Banks operate at the apex level in each state, borrowing from NABARD and the money market and channelling funds to District Central Cooperative Banks. DCCBs in turn provide credit to Primary Agricultural Credit Societies at the village level, which directly serve farmer members with crop loans and other agricultural credit. Urban Cooperative Banks, which operate in urban and semi-urban areas, provide financial services to small traders, self-employed persons, and salaried individuals. UCBs number in the thousands across India, ranging from tiny institutions with a handful of branches to large multi-state cooperative banks with deposits running into tens of thousands of crores of rupees. The dual regulatory structure that governed cooperative banks — with the Registrar of Cooperative Societies of state governments overseeing the management aspects and the Reserve Bank of India supervising the banking functions — created supervisory gaps that facilitated governance failures and frauds in several UCBs over the years. The Punjab and Maharashtra Cooperative Bank fraud, which came to light in 2019, involved fraudulent loans to a real estate developer that were concealed through fictitious accounts, and resulted in restrictions on withdrawals that caused significant distress to depositors. This and other UCB failures highlighted the need for unified, stronger regulation. The Banking Regulation (Amendment) Act of 2020 significantly enhanced the Reserve Bank of India's powers over cooperative banks, giving the regulator greater authority over audit, management, capital raising, and resolution of cooperative banks. The amendment placed cooperative banks more firmly under the RBI's prudential regulatory framework, bringing them closer to the standards applicable to scheduled commercial banks. The challenge of governance in cooperative banks stems from their ownership structure where elected boards representing member interests may not always prioritise prudent banking practices, creating tensions between the cooperative ethos and sound banking governance.