The Indian government recently set up a separate Union ministry of
cooperation to ‘strengthen the cooperative movement in the country’. Until
then, the subject was dealt with under the ministry of agriculture. Home
Minister Amit Shah has been given charge of the new ministry.

One of the biggest
players in the cooperative space are the cooperative banks. But these have been
struggling for a while. The Punjab and Maharashtra Cooperative (PMC) bank
fiasco exposed the weakness of cooperative banks and left depositors running
pillar to post to withdraw their hard-earned money.

Here, we delve into
the five reasons why India’s cooperative banks are struggling.

Dwindling
deposits

According to
Reserve Bank of India’s Trends and Progress of Banking in India report, urban
cooperative banks (UCBs) have seen a decline in deposits from 6.1% in 2018–19
to 3.5% in 2019–20. Loans and advances too have seen a sharp decline

Diminished
share in agricultural lending

Cooperative banks
have been a strong support system for the agricultural sector. Despite its
crucial role, agricultural lending by cooperative banks has diminished
considerably — from 64% in 1992–93 to 11.3% in 2019–20.

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Dual control

Cooperative banks
have been under dual control as they are regulated by both the Reserve Bank of
India and the state registrar of societies. However, RBI’s regulatory powers in
case of cooperative banks is limited in many ways. As a result, such banks have
escaped scrutiny despite failures and frauds.

Declining
number of urban cooperative banks

A short while after
RBI liberalised the licensing policy for UCBs in 1993, a third of the
newly-licensed banks became unviable. In 2005, RBI reversed its liberal
licensing policy to shore up the viability of these banks. This resulted in
merger of weak banks bringing down the total number of UCBs.

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Decline in
asset quality

UCBs have always
struggled with burgeoning non-performing assets (NPAs) more than SCBs. However,
the asset quality of both kinds of cooperative banks declined in 2019–20. The
rise in NPAs can be attributed to stagnant growth in loans, advances and a weak
balance sheet.