Cooperative banks and rural credit: local institutions, persistent problems

Cooperative banks are member-owned institutions that provide credit and banking services, especially in rural areas. Their structure is three-tiered in many states: state cooperative banks at the top, district central cooperative banks in the middle, and primary agricultural credit societies at the village level. Urban cooperative banks serve towns and cities. The model aims to combine local knowledge and democratic member control with banking services, and it has historically been central to agricultural credit, input purchase and marketing support.

Rural credit also flows through regional rural banks, set up from 1975 to combine the local feel of cooperatives with the professionalism of commercial banks, and through commercial bank branches and self-help groups. The National Bank for Agriculture and Rural Development, or NABARD, established in 1982, refinances cooperative banks and regional rural banks, supervises them in part, and promotes rural development. The Kisan Credit Card, introduced in 1998, was designed to give farmers a single working-capital limit for crop and allied needs, reducing dependence on separate loans for each season.

Cooperative banks have faced persistent governance problems. Because they are regulated by both the Reserve Bank and state cooperative authorities, with state governments often involved in management and elections, dual control has weakened supervision and allowed political interference, weak appraisal and delayed recovery in some institutions. The Banking Regulation (Amendment) Act, 2020, brought urban cooperative banks more fully under Reserve Bank regulation, including on management and capital, while primary agricultural credit societies remained largely outside that framework. Deposit insurance through the Deposit Insurance and Credit Guarantee Corporation, which covers bank deposits up to five lakh rupees per depositor per bank, applies to many cooperative banks and became more salient after failures such as the Punjab and Maharashtra Cooperative Bank crisis.

Reform debates therefore focus on governance before expansion: professional boards, fit-and-proper management, transparent elections, timely audits and prompt corrective action. Computerisation and integration of primary societies with district banks aim to improve records and reduce fraud, but technology alone cannot fix weak local accountability. For civil studies, cooperative banks show how a democratic institutional form can serve inclusion or capture, depending on whether members can actually exercise control over their own bank.