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, till
1996, were allowed to lend money only for non-agricultural purposes. This distinction
does not hold today. These banks were traditionally centred around communities,
localities work place groups. They essentially lent to small borrowers and businesses.
Today, their scope of operations has widened considerably.
The origins of the urban cooperative banking movement in India can be traced to
the close of nineteenth century when, inspired by the success of the experiments
related to the cooperative movement in Britain and the cooperative credit movement
in Germany such societies were set up in India. Cooperative societies are based
on the principles of cooperation, - mutual help, democratic decision making and
open membership. Cooperatives represented a new and alternative approach to organisaton
as against proprietary firms, partnership firms and joint stock companies which
represent the dominant form of commercial organisation.
The first known mutual aid society in India was probably the "Anyonya Sahakari Mandali"
organised in the erstwhile princely State of Baroda in 1889 under the guidance of
Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit societies,
in their formative phase came to be organised on a community basis to meet the consumption
oriented credit needs of their members. Salary earners" societies inculcating habits
of thrift and self help played a significant role in popularising the movement,
especially amongst the middle class as well as organized labour. From its origins
then to today, the thrust of UCBs, historically, has been to mobilise savings from
the middle and low income urban groups and purvey credit to their members - many
of which belonged to weaker sections.
The enactment of Cooperative Credit Societies Act, 1904, however, gave the real
impetus to the movement. The first urban cooperative credit society was registered
in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst
the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905),
the No.1 Military Accounts Mutual Help Co-operative Credit Society in Poona (January
9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and
Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math
Co-operative Credit Society and the Varavade Weavers" Urban Credit Society (March
13, 1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst
the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored
by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906..
The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad
basing it to enable organisation of non-credit societies. The Maclagan Committee
of 1915 was appointed to review their performance and suggest measures for strengthening
them. The committee observed that such institutions were eminently suited to cater
to the needs of the lower and middle income strata of society and would inculcate
the principles of banking amongst the middle classes. The committee also felt that
the urban cooperative credit movement was more viable than agricultural credit societies.
The recommendations of the Committee went a long way in establishing the urban cooperative
credit movement in its own right.
In the present day context, it is of interest to recall that during the banking
crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was
a there was a flight of deposits from joint stock banks to cooperative urban banks.
Maclagan Committee chronicled this event thus:
"As a matter of fact, the crisis had a contrary effect, and in most provinces, there
was a movement to withdraw deposits from non-cooperatives and place them in cooperative
institutions, the distinction between two classes of security being well appreciated
and a preference being given to the latter owing partly to the local character and
publicity of cooperative institutions but mainly, we think, to the connection of
Government with Cooperative movement".
Under State Purview
The constitutional reforms which led to the passing of the Government of India Act
in 1919 transferred the subject of "Cooperation" from Government of India to the
Provincial Governments. The Government of Bombay passed the first State Cooperative
Societies Act in 1925 "which not only gave the movement its size and shape but was
a pace setter of cooperative activities and stressed the basic concept of thrift,
self help and mutual aid." Other States followed. This marked the beginning of the
second phase in the history of Cooperative Credit Institutions.
There was the general realization that urban banks have an important role to play
in economic construction. This was asserted by a host of committees. The Indian
Central Banking Enquiry Committee (1931) felt that urban banks have a duty to help
the small business and middle class people. The Mehta-Bhansali Committee (1939),
recommended that those societies which had fulfilled the criteria of banking should
be allowed to work as banks and recommended an Association for these banks. The
Co-operative Planning Committee (1946) went on record to say that urban banks have
been the best agencies for small people in whom Joint stock banks are not generally
interested. The Rural Banking Enquiry Committee (1950), impressed by the low cost
of establishment and operations recommended the establishment of such banks even
in places smaller than taluka towns.
The first study of Urban Co-operative Banks was taken up by RBI in the year 1958-59.
The Report published in 1961 acknowledged the widespread and financially sound framework
of urban co-operative banks; emphasized the need to establish primary urban cooperative
banks in new centers and suggested that State Governments lend active support to
their development. In 1963, Varde Committee recommended that such banks should be
organised at all Urban Centres with a population of 1 lakh or more and not by any
single community or caste. The committee introduced the concept of minimum capital
requirement and the criteria of population for defining the urban centre where UCBs
Duality of Control
However, concerns regarding the professionalism of urban cooperative banks gave
rise to the view that they should be better regulated. Large cooperative banks with
paid-up share capital and reserves of Rs.1 lakh were brought under the perview of
the Banking Regulation Act 1949 with effect from 1st March, 1966 and within the
ambit of the Reserve Bank"s supervision. This marked the beginning of an era of
duality of control over these banks. Banking related functions (viz. licensing,
area of operations, interest rates etc.) were to be governed by RBI and registration,
management, audit and liquidation, etc. governed by State Governments as per the
provisions of respective State Acts. In 1968, UCBS were extended the benefits of
Towards the late 1960s there was much debate regarding the promotion of the small
scale industries. UCBs came to be seen as important players in this context. The
Working Group on Industrial Financing through Co-operative Banks, (1968 known as
Damry Group) attempted to broaden the scope of activities of urban co-operative
banks by recommending that these banks should finance the small and cottage industries.
This was reiterated by the Banking Commisssion (1969).
The Madhavdas Committee (1979) evaluated the role played by urban co-operative banks
in greater details and drew a roadmap for their future role recommending support
from RBI and Government in the establishment of such banks in backward areas and
prescribing viability standards.
The Hate Working Group (1981) desired better utilisation of banks' surplus funds
and that the percentage of the Cash Reserve Ratio (CRR) & the Statutory Liquidity
Ratio (SLR) of these banks should be brought at par with commercial banks, in a
phased manner. While the Marathe Committee (1992) redefined the viability norms
and ushered in the era of liberalization, the Madhava Rao Committee (1999) focused
on consolidation, control of sickness, better professional standards in urban co-operative
banks and sought to align the urban banking movement with commercial banks.
A feature of the urban banking movement has been its heterogeneous character and
its uneven geographical spread with most banks concentrated in the states of Gujarat,
Karnataka, Maharashtra, and Tamil Nadu. While most banks are unit banks without
any branch network, some of the large banks have established their presence in many
states when at their behest multi-state banking was allowed in 1985. Some of these
banks are also Authorised Dealers in Foreign Exchange
Over the years, primary (urban) cooperative banks have registered a significant
growth in number, size and volume of business handled. As on 31st March, 2003 there
were 2,104 UCBs of which 56 were scheduled banks. About 79 percent of these are
located in five states, - Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil
Nadu. Recently the problems faced by a few large UCBs have highlighted some of the
difficulties these banks face and policy endeavours are geared to consolidating
and strengthening this sector and improving governance.
Source: Adapted from a paper by O.P. Sharma, formerly
of the History Cell.