In India, there is a plethora of banks providing almost all services that an individual requires. But most of the banks that people use are either private (which makes up a major chunk of the numbers) or nationalised banks. However, there is another sector of banks that is used by a large number of the middle class sections of the society --co-operative banks.
Co-operative banks are small-sized units organized in the co-operative sector which operate both in urban and non-urban centers. These banks are traditionally centered around communities, localities and work place groups and they essentially lend to small borrowers and businesses.
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, until 1996, could only lend for non-agricultural purposes.
However, today this limitation is no longer prevalent. While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance, et cetera, along with some small scale industries and self-employment driven activities, the co-operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units and home finance.
Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
These banks provide most services such as savings and current accounts, safe deposit lockers, loan or mortgages to private and business customers. For middle class users, for whom a bank is where they can save their money, facilities like Internet banking or phone banking is not very important.
The co-operative banking structure in India is divided into following main 5 categories:
- Primary Urban Co-op Banks
- Primary Agricultural Credit Societies
- District Central Co-op Banks
- State Co-operative Banks
- Land Development Banks
Co-operative banks function on the basis of 'no-profit no-loss'. Co-operative banks, as a principle, do not pursue the goal of profit maximisation. Therefore, these banks do not focus on offering more than the basic banking services. So, co-operative banks finance small borrowers in industrial and trade sectors, besides professional and salary classes.
- Some cooperative banks in India are more forward than many of the state and private sector banks.
- According to NAFCUB (National Federation of Urban Co-operative Banks and Credit Societies Ltd), the total deposits and lending of cooperative banks in India is much more than old private sector banks and also some new public sector banks.
- This exponential growth of co-operative banks in India is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele.
Although they are not better than private banks in terms of facilities provided, their interest rates are definitely competitive. For example, the interest rates on auto loans are anywhere less than 5%-7% than that offered by private banks.
However, unlike private banks, the documentation process is lengthy if not stringent and getting a loan approved quickly is rather difficult. The criteria for getting a loan from a UCB are less stringent than for a loan from a commercial bank. For instance, when taking an education loan, it does not matter whether the course you are going for is recognized or not.
So, it makes better sense to bank with UCBs today, what with the rates some offer being the best in the industry. And with the risk of a run minimized, they are almost on an equal footing with commercial banks when it comes to vying for your attention.
However, to get a loan, you have to be a member of the SCB: own its shares worth at least 2.5 per cent of the loan amount, or a maximum of Rs. 25,000. This amount earns a return of 12-20 per cent.
A word of caution: Only approach those co-operative banks which have a good history. Since, a lot of co-operative banks have political interests, providing social help is not one of their priorities sometimes.