To Cooperate or Not to Cooperate? That is the Question

The image above shows vision and objectives of four banks. While two of them have an explicit focus on the needs of the community, the other two are clear in their focus on a revenue model which ensures profitability. Two of them are co-operative banks and other two are commercial banks. This difference might be more pronounced in written words than in action. The origin of these two streams of banking however was indeed based on the principles these vision statements imbibe.

Modern commercial banking, was introduced to India by the British, to advance their commercial and economic interests in India and integrate them with their financial system in Europe. The first three Presidency banks were on the port cities of Calcutta, Bombay and Madras which were key trading ports and economic centres for the British. In 1921, these three Presidency banks were merged to form the Imperial Bank of India, which became State Bank of India (SBI) after Independence.

Even though SBI has evolved to become the largest lending bank in India it does not feature in the top 50 banks globally. Financial returns, profits and the held capital size are some of the criteria for these rankings. To create such stronger, bigger and profitable banks, Government of India recently announced its plans to merge 10 public sector banks into four, after almost a century of the amalgamation of the three Presidency banks. The acknowledged intent for the mega-merger of Indian banks is to create efficiency, economies of scale and generate higher returns and profits.

Cooperative Banking: An alternative approach

Parallel to the evolution of modern banking, another movement was picking up pace in a different part of England in the middle of 19th century. Many weavers in Manchester were losing jobs due to increased mechanisation of the industry. To guard themselves against the high market prices of consumer goods, 28 weavers organised themselves as Rochdale Society of Equitable Pioneers. They started a consumer products store. The store was amongst first such attempt towards a ‘cooperative business’. It gave them access to affordable products as well as an income generating business.

Around the same time, Friedrich Raiffeisen and Hermann Schulze-Delitzsch were laying the foundations of ‘cooperative banks’ in Germany. Their efforts were also a direct outcome of the hardships faced by farmers and craftsmen during the 19th century industrial revolution era. Raiffeisen founded a society to provide affordable credit to farmers and Schulze founded a similar society for artisans. Today, almost 1 out of 4 people in Germany, is a member of a cooperative.

Origin and Principles of Urban Co-operative Banking in India

Cooperative movement spread to India shortly after Britain and Germany. Anyonya Sahakari Mandali in Vadodara was the first ‘mutual aid’ society that was formed on co-operative principles in 1889. It later became a co-operative bank (and was recently shut down in 2008). The Cooperative Credit Societies Act was passed in 1904.

India has close to 98,163 cooperative banks, out of which only 1551 (or 1.5%) are urban cooperative banks (UCBs). Rest of the 96,612 banks are rural cooperative banks. 1.5% of the cooperative banks (the UCBs) accounts for 34% of the total asset size of all the cooperative banks.

While commercial banks started with the commercial motives for financing governments and businesses and make profits, the cooperative banks were started to cater to the needs of those who could not afford banking services and needed support.

 Commercial banks enabled the integration of global finances between 17th and 19th century through colonialism. They bind the whole world through complex financial linkages even today. While commercial banks expanded the flow of capital beyond transcontinental boundaries, cooperative banks emerged as the vehicles to generate and multiply the capital within the communities.

Cooperative banking, like most cooperative initiatives is based on the principles of self-help, self-administration and cooperation between the members of the cooperative. Today there are a number of initiatives that help those that would formerly be unbanked to be included in the financial institutions. These co-operative banks were the first institutions providing this credit line and services to those who would not have gotten access to finances at the commercial banks.

Commercialising of Co-operative banks

Today, Cooperative Banking, especially the urban cooperative banks, stand at crossroads between the balance of the cooperative spirit and the competitive commercial interests. While some of the larger UCBs are aspiring to operate on the lines of commercial banks and expand their credit and geographic footprint, the RBI is cautious to allow their expansion.

The RBI Committee on UCBs under the chairmanship of Madhava Rao in 1999 had noted that “the essence of co-operative character is that a cooperative is an institution where there is an identity between the share-holders and borrowers and that the members elect the board of directors of UCBs on the quintessential dictum of ‘one member - one vote’ irrespective of a member's share-holding”. The committee considered that its first objective was to ‘preserve the co-operative character of the UCBs”.

Over the last two decades, the focus has been to ensure that their expanded operations are not detrimental to the financial and monetary system, not so much focus on preserving the principles on which the cooperatives have been formed. The latest high-powered committee’s recommendations in 2015 focused on finding ways through which UCBs could become commercial banks and identifying new areas of business.

The RBI committee in 2015 also recommended the thresholds for the business sizes of cooperative banks beyond which UCBs could convert to commercial banks or small finance banks. It also recommended creation of a Board of Management over and above the existing Board of Directors, as a mandatory requirement if UCBs wish to expand their area of operation or open new branches.

The UCBs themselves have been aspirational and made great strides especially after the liberalisation in early 1990s. RBI’s policy of ‘one district-one bank’ for UCBs was done away with in 1993 and over 500 new UCBs were granted license in a period of 6 years between 1993 and 1999. The fact that only 293 new banks were licensed between 1967 and 1993 i.e. over 26 years, can put this growth in perspective. This growth was later marked with a consolidation phase where well performing UCBs took over underperforming banks. Almost 128 mergers had happened between 2004 and 2017 and their number reduced from 1926 to 1562 in this period.

What does this trend to commercialize mean?  

The recent trends in cooperative banking in India point to a tilt in favour of economic interests over the objectives of meeting community needs. Aspiring for growth is a natural instinct and it is true for co-operative banks as well. However, if this growth leads to the dilution of the spirit with which the institutions were formed, there is a merit to assess this aspiration for the sector as a whole.

In 2016, UNESCO added “The Idea and Practice of Organizing Shared Interests in Cooperatives,” to its Representative List of the Intangible Cultural Heritage of Humanity. It describes cooperative as ‘an association of volunteers that provides services of a social, cultural or economic nature to members of the community to help improve living standards, overcome shared challenges and promote positive change’. UNESCO identifies cooperatives as a heritage worth preserving.

Cooperatives including co-operative banks have always straddled between meeting economic and social interests. The genesis of cooperatives though was a reaction to the free market economic structures which pursued profits. Cooperatives intended to make the economic outcomes secondary to the social welfare outcomes and serve the members of its communities.

Growth in cooperative banks reflects the trust communities and shareholders have shown in them. Is transforming into a commercial bank part of natural evolution for cooperative banks? Are they merely copying the business models and aspirations of commercial banks? In the face of lack of options, this is the only way for them to grow? Banking sector should introspect and search for these answers such that the growth in cooperative banks is not at the cost of the communities and those who need them.