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What do you mean by co-operative bank

By the Paise Sherpa

What do you mean by co-operative bank? Is co-operative bank private or government? Is co-operative bank under RBI regulation? Many such doubts might have popped up in your minds recently due to the news of RBI restrictions on the Mumbai based New India Co-operative Bank and the Rs. 122 Crore financial fraud by one of its employees.  

How safe are Co-operative banks? Is it poor financial decision making to keep deposits in Co-operative banks? We want to answer all your doubts, so read on.


Co-operative Banks 

Co-operative banks started in the India with the noble purpose of offering financial solutions to rural and semi-urban areas. The co-operative banks have members who are also its customers that own the bank. The decision making is done in co-operational manner. The co-operative banks are regulated both by the RBI and the Registrar of co-operative societies of respective state governments. The RBI regulates the banking aspects like risk control, lending, etc. and the state government handles the management, administration, internal audits. 


Comparison with other banks 

Co-operative banks work slightly differently than other banks - PSU banks, private banks, etc. They are required to keep lower reserves in form of cash, bonds, securities, gold. Simply put, their emergency corpus is lower. Co-operative banks offer lesser financial and banking services - generally limited to offering loans and accepting deposits. Operations are limited to a small location. The rate of interest offered by Co-operative banks is slightly higher. 


Issues with Co-operative banks in India

Political interference 

Local political entities are involved in the management of many of the Co-operative banks and have vested interests. 

Regulation issues

The dual regulation of RBI and the Registrar of co-operative societies of respective state government causes inefficacies. Also the regulation is not at par with PSU or private banks. 

Lagging technology adoption

Generally Co-operative banks lag behind in the use of latest technology; their size, infrastructure at the location play into this non-adoption of technology. 

Weak Oversight

Generally Co-operative banks have weaker oversight and lax internal controls due to governance practices lacking in corporate standards, weak risk management frameworks and political interference.

All these issues are an invitation for financial malpractices. In fact, according to RBI, Co-operative banks account for a majority of the penalties levied on financial institutions in India. You might have heard of the PMC Co-operative bank fraud in 2019, the CKP Cooperative Bank case, and many others; the New India Co-operative bank is just the latest case of financial malpractice. 

Why people opt for Co-operative banks

At this point, one might wonder why even open an account in such a bank? Why would anyone keep their hard earned money here? Limited knowledge, familiarity specially in rural context are some of the reasons why people opt for Co-operative banks. Another important reason is they offer slightly higher interest rates than PSU or private banks. 

Having said this there are a few large Co-operative banks that have been operational for decades, where operations are in line with any other PSU or private bank. Some examples are - Cosmos Co-operative Bank, Saraswat Co-operative Bank, TJSB Sahakari Bank, Janata Sahakari Bank, etc. These banks total assets might be comparable with small private sector banks. 

Conclusion

Co-operative banks are structurally, operationally different than other RBI regulated banks. Their risk controls, required compliances, governance methods are generally less stringent than PSU and private banks. This gives rise to financial malpractices and strict interventions by RBI like what we have seen with the New India Co-operative bank case. However, finally it is the depositor who is at a loss in such and event. Hence just like banks do KYC (Know Your Customer), it is crucial that depositors do KYB (Know Your Bank). 

Hope this was gives a brief idea about Co-operative banks. 

Where do you keep your deposits? 


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