AN ANALYSIS OF THE LEGAL FRAMEWORK OF THE CO-OPERATIVE BANKS IN INDIA

Section: A

Category: Research Paper

Paper Code: RP-BG-12

Page Number: 192 - 215

Date of Publication: February 10, 2021

Citation: Bidikha Gogoi, An Analysis of the Legal Framework of the Co-operative Banks in India, 1, AIJACLA, 192, 192-215, (2021), https://www.aequivic.in/post/aijacla-an-analysis-of-the-legal-framework-of-the-co-operative-banks-in-india.

Details Of Author(s):

Bidikha Gogoi, Advocate, Gauhati High Court

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ABSTRACT Co-operative banks are said to perform a broad and excellent role in the process of financial management which includes inculcating financial incorporation in India. Co-operative banks are considered as the monetary organization which provides financial support to the customers especially the people of low-class society who cannot take the opportunity of the high-class business banks for financial purposes. Co-operative banks provide loans especially to the poor people for the fulfillment of their means of livelihood. The co-operative banks in India are considered as the second-largest component among all the banking institutions in India. The co-operative banks provide loans of very low cost as it is their principle to work for cooperation rather than commercial parameters. Despite being categorized as one of the useful institutions of monetary nature it lays certain drawbacks that do not allow the institution to function smoothly. The cooperative banks have been working under the guidance of the Reserve Bank of India and its framework has been regulated by the Banking Regulation Act 1949. The co-operative banks are also under the dominance of the state government concerning the issues about the procedure for registration, membership, election, financial assistance, business operations, loans, recovery, and audit. All these important entities of cooperative banks are being regulated and supervised by the state government. In this research paper, the researcher will primarily focus on the working sector of the cooperative banks along with the history of its evolutions. The paper will also highlight the guidelines issued by the Reserve Bank of India and the Banking Regulations Act 1949. Also, some of the issues and challenges, and jurisdictional aspects faced by the bank are discussed in the paper. KEYWORDS Banking Regulation Act 1949, Cooperative Bank, Indian Legal Framework, Reserve Bank of India

INTRODUCTION A co-operative bank can be called a financial institution which generally in association with the members of the cooperative bank who are also at the same time can be said to be the possessor of the bank as well as the consumer of the cooperative bank. Co-operative banks are said to perform a broad and excellent role in the process which includes inculcating financial incorporation in India. The process of construction of co-operative banks is made by the individuals who are persons related to each other through local or professional community or persons who have a similar intention. Although going through the evolutionary history of co-operative banks it has been examined that the cooperative movement has a European past and the same movement also took place in India as the ringing bells gave enough support to focus on giving the common man access to credit. The movement in India had a huge impact on the masses. The movement was considered very much necessary as the poor people of the society along with the small business holdings were not been given the right to access the credit process by the commercial banks and also they were not within the outline of the banking process. There were many hurdles faced by the people below the poverty line. The uneducated masses had to pay an excessive rate of interest to the money lenders due to the absence of regularized credit procedure and they become the common prey of the money lenders. The poor people had no other than to avail by it. There were many difficulties faced during that period. The abstract idea for the evolution and establishment of co-operative bank India can be said to be acknowledged from the suggestion of the famous philosopher of Britain “Herman Schulze” and “Freidrich Raiffeisen”. They had developed the idea of the co-operative bank in England which also was considered important in India. As said by the great personality “Shirish Beke” that during the first phase of the 20th-century co-operative banks were accepted and approved in India to design and adopt a new system of organization which is to be founded on the concept of cooperative management and organization. The co-operative banks are to be regarded as an official for the effective functioning and they must also be appropriate for the settlement of disputes unusual to the organizations in India. Co-operative banks have been defined by various organizations. It can be said that there is no such fixed definition of co-operative banks. As per the definition of the Institution of Companies Secretaries of India, it has been explained that according to any Central or State Act co-operative society shall be registered or assumed to have been registered. It has been mentioned that every co-operative society is required to get itself cataloged as per the provisions of the Act of Co-operative Societies by the Administrator of Cooperative Societies. The registration of these kinds of banks is very important to represent it as a government entity and enable the proper functioning. If there arises the problem for the registration of co-operative banks if the co-operative banks are functioning in more than one state, then for registration of the co-operation banks the co-operative banks must be registered under the “The Central Co-operative Societies Act, 1912”. Co-operative banking is generally structured systematically based on the essence of cooperation. Co-operative banks can be called as a retail banking as well as commercial banking. The co-operative banks are very much helpful to the people of the society. The basic essential duty of a co-operative bank is to provide money as a loan for those borrowers as well as deposits of money across the world. Co-operative banks are very well known for the reason of providing the members of the bank with a broad and extensive scope of financial and banking facilities in times of their need. The phenomena of co-operative banking comprises within its ambit retail banking, as brought further by the various institutions like the mutual savings and loan associations, credit unions, commercial banking services as well as building societies and cooperatives. All these organizations are being imparted by manual organizations for example from cooperative business to cooperative organization. Co-operative banks are very much helpful in promoting and encouraging the growth of the economic potential of crores and crores of people. As regards the classification of the cooperative institutions, it can be explained that the Co-operative Institutionalized Credit system can be widely classified into the Urban Co-operative banks and Rural Co-operative banks. Again a classification concerning Rural Co-operative arises as the Rural Co-operatives are further divisible according to short duration cooperative association and long duration cooperative association. The long duration cooperative associations are further categorized into the basic types which are the Primary Co-operative Agriculture and Rural Development Bank and State Co-operative Agriculture and Rural Development Bank. The short cooperative institutions are divided into Primary Agriculture Credit Society, State Co-operative, and Central (District) Co-operative. The regulation and supervision of the different functions of the Cooperative banks of the Urban level, State level, and District level banks is done by the Reserve Bank of India. Also, provisions for such requirements are provided included in the Banking Regulation and Miscellaneous Provision Act 2004, Reserve Bank of India Act, 1934, and Banking Regulation Act, 1949 (as applicable to cooperative societies). The Reserve Bank plays a dominant role for such a purpose. Again the delegations of powers concerning regulation of State and Central Co-operative Banks are overall conferred to the National Bank for Agriculture and Rural Development (NABARD) under section 35(6). Although the cooperative banks have been provided with a strong framework and are guided by the Reserve Bank of India but still many issues and challenges arise in the working structure of the co-operative banks. The main problem is the interference in the working of cooperative banks by the banks of commercial business like the Indian Reserve Bank, State Government along with NABARD. Also, demarcation in the powers between the regulators is ambiguous. The primary aim of the paper therefore is to grab upon the idea and to acknowledge a better understanding of the concept which is to make a critical study on the existing legal framework of co-operative banks in India. Further to grab the idea and analysis of the role of Reserve Bank in regulating and supervising all the co-operative banks and suggest necessary steps for its improvement in the lacking of its working mechanism.

EMERGENCE AND DEVELOPMENT OF CO-OPERATIVE BANKS – AN OVERVIEW The emergence of cooperating banks in India is said to be in existence for almost a century. Co-operative banks have resulted in the development of its functioning with the changing of the time and scenario of Indian legislations. Since a long time after the passing of the “Co-operative Credit Society Act, 1904” there has been evolution of co-operative banks in India which resulted in the outcome of the co-operative movement in India. During that period government enabled the co-operatives to receive a policy boost. The policy was very essential for the development of the cooperatives. Co-operative society was considered as a federal subject by the Indian government. In 1919 with the passing of the government of India Act, 1919 there were constitutional reforms in the country which led to the outcome of transferring the cooperative societies from federal list to provincial list. The whole scenario of the co-operatives society was slightly modified. “The first-ever State Co-operative Societies was passed in 1925. It was the government of Bombay that was responsible for the passing of the Act. The act gave not only gave the movement its size and shape but was a pacesetter of cooperative activities and stressed upon the basic concept of the notions of thrift, self-help and mutual aid”[1].

Need for Co-operative Banks It can be said that the word co-operatives generally means any systematic category of people who are managed together as a joint association and can be said to be those enterprises that are democratically controlled. The co-operative banks play a very dominant role in the financial management of the country. Since 1904 the concept of cooperative banks emerged in India. A cooperative movement took place in India and the movement got motivation and support by the Co-operative Credit Society Act, which was enacted in the year 1904. But the Act tried its best for the development of co-operative banks in India. It can be said that the phrase from 1904 to 1951 was the most disappointing one concerning the progress of co-operative banks in India. Co-operative banks were emerged in India with the aim and purpose in view to serve as a mechanism for boosting “mutual and thrift” among its members. It generally focused on the people who belong to the lower strata of the society such as the farmers, artisans, and other people who receive very low income and are considered as the weaker sections of the society. They suffered various difficulties in society and could not cope up with the other persons of the society. It was seen that during the pre-independence period there was too much corruption among the high-class money lenders of the society. Their interest rate increased day by day. They exploited the artisans and the agriculturalist and threw them into the vicious cycle of poverty. The poor people were being drowned in that cycle due to their status of being poor. As a result, the co-operative movement emerged to save the poor people from such oppression and victimization. The movement was the outcome of the establishment of co-operative banks in India. The cooperative banks were able to fulfill the short term necessities of the people for their development. The co-operative banks play a very dominant role in enabling to give very affordable and low price credit facilities to the poverty-stricken farmers and artisans who were not being able to approach and get access to the big Joint Stock Banks.

Work profile of Co-operative Banks “A co-operative bank carries on normal banking business i.e the business as defined in section 5 (b) of the Banking Regulation Act, 1949 and engages in one or more forms of business specified in section 6 (1) of that Act”[2]. Section 5 deals with the interpretation clause and section 6 deals with the forms of business in which banking companies may engage. As it is commonly being acknowledged that the main goal of the co-operative banks is to provide benefits to their members. The co-operative banks provide loans of very low cost as it is their principle to work for cooperation rather than commercial parameters. The loan is quite proving to be useful for the members. “But at the same time it is found out that where the processing fee for loans can be as high as 3% in commercial banks, it can be nil for the cooperative banks. Further, it is comparatively easier to get loans and even though credit report is being enquired into, the procedure remains much less stringent”[3]. There are very much fewer chances of facing any kind of difficulties concerning loan application. Also to apply for a loan from the co-operative banks is quite easier as the bank had ensured to opt for an additional step for the loan request and also for the documents which are necessary for the sanction of the bank loan. They must be properly kept secured for future necessary processing of loans. A commercial bank contains one more important provision for loan application which explains that to become a member of the bank the individual is required to buy the necessary required shares. It is a requirement to become a member of the co-operative. The number of shares maybe 2.5% of the loans which can amount to a maximum of 25.000 and as such in the case of smaller loans which include personal loans it may the number of shares worth just Rs.100. These specific conditions are to be fulfilled by the individual to avail himself of bank loans. The process for the attainment of such kinds of shares is not a difficult procedure. The person at the same time is entitled to the enjoyment of dividends on such shares also. This kind of bank share in one way or the other offer both the fixed and floating rates of interest and charged around 100 basis points (bps) less in fixed interest and 25 – 50 bps less in floating charge, when it is compared to the commercial banks. The shares of the banks and their interest in such shares are quite affordable to the members of the banks. Another feature of co-operative banks is that the home loan does not contain any “prepayment policy”. The working mechanism of the co-operative banks had received much importance and also success. Its working mechanism is quite appreciated by its members.

Suggestions of various committees for the development of Co-operative Banks With the change in time, the Indian government has realized that the necessity that a growing importance was felt for making progress in the economic situation of the country for which the cooperative banks have to play a significant role. Also for understanding the different aspects of co-operative banks establishment of various committees was suggested. All these were done to lead to better progress and development of the co-operative banks in India who may in one way or the other are very much helpful to the society at large. The “Central Banking Enquiry Committee” in the year 1931 submitted a precise report which contains the requirement that the urban co-operatives banks must ensure that they fulfill their duty to help the middle-class people and small businesses. They must try their best to fulfill the needs of such societal needs.” After a passage of a few years again another committee was formed in the year 1939 which was the “Mehta- Bhansali Committee”. This committee proposes the viewpoint that generally the societies which are proving help to individuals in the same manner as the banks normally do and in one way or the other fulfill all the essential criteria of banks such societies must be given a permit and allowed to run themselves as banking institutions”[4]. The report of the committee was being accepted. A few years later, in the year 1946, the Co-operative planning focused and highlighted the facts of the urban banks and said that these urban banks were considered as desirable institutions for the backward people of the society. Generally, the high profile banks do not put any interest in providing loans to them. The joint-stock bank does not want to meet the needs of the small people and wants to provide various loans to them. Still then also the report of the various committees were not successful and acceptable for the development of co-operative banks. Again in the year 1950, a new committee was set up which was the “Rural Banking Committee Enquiry Committee”. The committee became unsuccessful as the cooperative bank's establishment procedure was very cheap and the operation cost of the bank was too low. This creates huge problems in the better development of the institutions. There was no appropriate procedure for which can lead to good development policies of the banks. After India got independence there were tremendous changes which took place for the better development of co-operatives banks.” The “All India Rural Credit Survey Committee” (AIRCSC) made various suggestions policies for the effective and faster growth and progress of co-operatives banks in India. They bolstered in the post-independence period and implemented various governmental schemes for the benefit of the co-operatives banks”[5]. In 1958-1959 the Reserve Bank of India had decided to make a cardinal study on the concept of the Urban Cooperatives banks in India for the better implementation of policies that may help in the progress of the co-operative banks. The Reserve Bank of India had examined various flaws of the working of the co-operative banks and submitted its report which was finally published in the year 1961. The report recognized the flung and financial soundness of the urban Cooperative banks. All this was done to lead the co-operative banks towards its development. The report was submitted with the recommendations which included the organizations of co-operative banks that the cooperative banks should be organized at all urban centers. The state government also must play a proactive role in the development and better functioning of the co-operative banks. Again in the year 1963, another committee was set up. The committee was the Varde Committee who proposed the idea that the co-operative banks need to be structured systematically at all places where the urban centers are located and which consisted of about one lakh population or more. The committee also suggested that the co-operative banks must not be homogenous i.e by a single community or center. The committee also tried to emphasize the idea of “Minimum Capital Requirement” for the banking sector and also the standard of population to be required to determine the urban centers were also merged into the concept. Later in the year 1969, a commission was appointed under the chairmanship of Mr. R.G.Saraiya. The commission made a brief report containing the wide terms of reference and also incorporated the examination of the structure and the operations not only of the commercial banks but also of the cooperative and financial institutions. The commission successfully carried out its mission concerning co-operative banks. The report of the commission was fruitful and productive in making comparisons between the composition and role and responsibilities of the co-operative banks and commercial banks.

TYPES OF CO-OPERATIVE BANKS IN INDIA Since the development of co-operative banks in India, it has been acknowledged that the cooperative banks have been guaranteed a proactive role that must be performed in both the rural and urban functioning. The co-operative banks aim to lend money to the borrowers. As usual, the co-operative banks have the power and authority to lend loans to the borrowers of agriculture, trade, and industrial sectors also besides the salary and professional classes. The co-operative banks provide finance to such small borrowers as much as possible to help them. Co-operative banks are those kinds of banks that are usually established in smaller units. The co-operative banks can be called as retail and commercial banking. These kinds of banks are constructed based on the cooperative sector. The co-operative banks have their working entity in both rural and urban areas where their centers are located. The co-operative banks are regulated by the Reserve Bank of India, 1934. The co-operatives banks are also ruled by the Banking Regulations Act, 1949 and Banking Laws (co-operative societies) Act 1965. Co-operative banks tried their best to borrow money from their members to facilitate their progress in their source of income and the means of livelihood. The cooperative banks are one of the important sources of dependent to the members of the bank. As regards the provisions of the Banking Regulation Act 1949 “only the Urban Co-operative banks, Central Co-operative Banks and State Co-operative Banks are appropriate to be called as banks”. As per the question of classification of co-operative banks these banks are broadly categorized into five basic types which are as follows:-

Urban Co-operative Banks “The expression Urban Co-operative banks (UCBs) can be generally made reference to the primary co-operative banks which are situated in the urban areas and also in the semi-urban areas”[6]. There is no proper definition of the concept of urban co-operative banks. The banks were located in the workplaces, localities, and communities. Till the year 1996, generally for nonagricultural purposes, only the co-operative banks were required to lend money. But with the change of time and development, the co-operative banks were ordered to lend money to businesses and small borrowers also. “Urban co-operative banks are governed by the Banking Regulation Act 1949 and Banking Laws (Co-operative Societies) Act. 1965. Scheduled Urban Co-operative Banks are included in the second schedule of the Reserve Bank of India Act 1934 and include banks that have a paid-up capital and reserves of not less than Rs. 5 lakhs and carry out their businesses in the interest of the depositors to the satisfaction of the Reserve Bank of India”[7].

Primary Co-operative Credit Society The primary co-operative society generally consists of borrowers and non-borrowers of a particular association. These borrowers and non-borrowers must be the residents of a particular locality. The primary co-operative society had fixed the borrowing powers of both the members and also it included the society at large. The society funds are acquired basically from the loans of the central co-operative banks and also from the deposits of members as well as share capital. The co-operative banks are allowed to provide loans to purchase fodder, pesticides, cattle, fertilizers etc.

Central Co-operative Banks Central cooperative banks are authorized to provide finance to the primary cooperative banks. In a particular district, these banks can be called as federations of primary credit societies. “The central co-operative banks are categorized into two types – as those who have a membership of primary societies and those who have a membership of individuals as well as societies”[8]. The central co-operative banks provide finance to member societies within the limits of borrowing capital of societies. The central co-operative banks consist of the funds of the deposits, share capital, and overdrafts from joint stocks and state cooperative banks. The central co-operative banks are also responsible for the aim of the purpose of conducting the business of a joint-stock bank. The central co-operative banks perform the role of a mediator between the Primary Co-operative Banks and State Co-operative Banks.

State Co-operative Banks “The state co-operative bank is considered as federating units of the central co-operative banks and who in the co-operative banking structure are advised to perform the role of watchdog in the state. The state co-operative banks obtained funds from the share capital, deposits, loans, and overdrafts from the Reserve Bank of India. The state co-operative banks do not directly provide money to the farmers they provide money to the primary societies central co-operative banks.”[9]

Land Development Banks “The land development is established and organized for developmental purposes to fulfill the long term credit requirements of the farmers. The land development banks are broadly classified into the three-tier system such as the central level, state level, and primary level. The state land development bank is entitled to the responsibility to oversee the primary land development banks which are located in the state tehsil areas and also some of which are established in the districts. It is important to note it is the primary duty of the state land development banks to keep an eye on the functioning of the primary land development banks. The primary development banks are particularly ruled by the Reserve Bank of India and also by the state government. The National Bank for Agriculture and Rural Development (NAMBARD) had performed an important task of providing supervision to the land development banks. The land development banks have been assumed with important powers and functions which are to be performed. The banks are not allowed to entitle any kind of deposits from the masses. The land development banks generate funds provided by the central government and state government from the sources like debentures”[10]. It has been specially mentioned in the Banking Regulation Act, 1949 that the Urban Co-operative Banks (UCBs), the State Co-operative Banks (SCBs), and the Central Co-operative Banks (CCBs) are in a position to function as a perfect banking entity and is qualified enough to call them as banks.

Functions of Co-operative Banks Co-operative banks are allowed to carry out its basic functions. The cooperative banks have to perform the basic banking functions. But the co-operative banks generally differ from the commercial banks. The main points of difference between the co-operative banks and commercial banks are as follows:- 1. “Commercial banks are joint-stock companies under the Companies Act of 1956 or public sector bank under a separate act of Parliament whereas co-operative banks were established under the Co-operative Society’s Act of different states. 2. Commercial banks structure is branch banking structure whereas co-operative banks have a three-tier setup, with state co-operative bank at apex level, central/ district co-operative bank at district level and primary co-operative societies at rural level to perform the functions 3. Co-operative banks perform functions on the principle of cooperation and not entirely on commercial parameters. 4. Only some of the sections of Banking Regulation Act of 1949 (fully applicable to commercial banks), apply to co-operative banks, resulting only in partial control by Reserve Bank of India of co-operative banks.”[11]

REGULATORY FRAMEWORK OF CO-OPERATIVE BANKS BY RESERVE BANK OF INDIA The co-operative banks have been governing the feature provided by its Constitution. The Constitution of the cooperative bank is particular as regard to the working of the banks because the co-operative bank is ministered and administered by the Cooperative Act of a respective state. The co-operative bank is also monitored and supervised by the Banking Regulation Act, 1949 (as applicable to the cooperative societies). Concerning instructions of the working of cooperative banks, it is provided by the Reserve Bank of India. The cooperative banks are almost managed by the banking authorities concerning their aims, governance etc. The Reserve Bank of India provides various other important acts which include the Banking Regulation Act, 1949, the Banking Regulation Rules, 1966, the Reserve Bank of India Act, 1934, which monitor and inspect the work of the co-operatives banks for better performance of their functions. These acts facilitate the better and fast development of co-operative banks in India. Although it is assumed from the fact that the co-operative banks play a dominant role in providing financial support to the borrowers and are considered as a financial entity. But it is also mentioned that the co-operative banks are also under the dominance of the state government concerning the issues about the procedure for registration, membership, election, financial assistance, business operations, loans, recovery, and audit. All these important entities of cooperative banks are being regulated and supervised by the state government. As regards the functions of the co-operative banks, it is also mentioned as per sources that they are being authorized, directed, and guided by the Reserve Bank of India. The Reserve Bank of India took the important decision of directing and guiding most of the functions of the cooperative banks only after the “The Banking Laws (Application to Co-operative Societies) Act, 1955 made certain changes in the provisions of the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934. Both these two acts were amended by the “The Banking Laws” with the purpose because of bringing the various banking features and principles of the cooperative banks within the purview and ambit of the administrative and executive powers of the Reserve Bank of India. The Reserve Bank of India was successful in controlling the actions of the cooperative banks. “Later when in the year 1982, National Bank for Agriculture and Rural Development was established by merging the “Agricultural Credit Department”, “Rural Planning and Credit Cell” of the Reserve Bank of India and the whole undertaking of the “Agricultural Refinance and Development Cooperation”, the Banking Regulation Act was again amended with the purpose and objective of giving the regulatory powers regarding rural cooperatives to the co-operative banks”[12]. In the year 1965, an amendment was made to the Banking Regulation Act. The amendment was considered to be very significant and valuable as it had introduced tremendous changes into the Banking Regulation Act which in one way or the other regulated and supervised the co-operative bank. The co-operative banks generally worked for the development and welfare of the people. The amendment act also made modifications in the Reserve Bank of India, 1934 as it had encompassed being brought in force for the reason that the Reserve Bank of India needs certain principles to be implemented together with the Banking Regulation Act. The purpose for such an amendment was made to encompass the banking sector which comes under the cooperative society. The purpose of the amendment with the object is because of regulating the functions and working of co-operative banks concerning their banking business. As a general viewpoint, it can be assumed and make appropriately clear that the objective of such amendment was not to define a co-operative bank which comes within the meaning of a banking company as defined in section 5(c) of the Banking Regulation Act. Co-operative banks can be explained and elaborated in a wide scope and definition. The co-operative banks cannot mean to have a single meaning. The fact that the amendment of section 5(c) of the Banking Regulation Act was designed to be worthless as it is assumed that rather than amending section 5(c) separate clauses were to be added up i.e, clause ci and CCV which can cover up the Co-operative banks and he primary Co-operative bank respectively. As regards the other amendments, it is to mention that section 56(a) of the Banking Regulation Act deals with the expansion of the regulatory mechanism to bring the co-operative banks are kept within the purview of the Reserve Bank of India and other such banking authorities. This has been done to circumscribe the co-operative banks to remain in the domain of the banking authorities. Section 56 of the Act mainly deals with the provision of constructing the co-operating banks as a banking company. The Reserve Bank of India Act, 1934 was amended as per chapter II of the enactment. Certain new changes were brought in the Reserve Bank of India Act, 1934. Certain new concepts were introduced and many definitional phrases were being modified some of which were agriculture where the animal husbandry as well as other ancillary functions which was together taken as agricultural operation. It has been particularly described in the Act that “the Central Co-operative Bank which is known as the chief cooperative society of a state which is particularly situated in a district of that state must ensure that the central co-operative bank financial motive must be to provide necessary financial help and support to the individuals of different societies”. The provision was being amended and has been included in part V of the Act where section 56 was implemented. Also, it has been found that the new chapter which has been included in the Act was given the title as “Application of the Act to Co-operative Banks”. Further the title of section 56 was named as “Act to apply to Cooperative Societies.....”. It has been found out that both the headings led to doubt because of the use of “Banks” and “Societies”. It is also to be noted here that only societies may be termed as Cooperative Banks. “The term “Co-operative Societies” has been defined under section 2(f) which particularly means and includes: i) A society registered under the Co-operative Society Act 1912, and ii) A society registered in any state under any law relating to co-operative societies for the time being in force in any state”[13]. “In Apex Co-operative Bank v M.S. Co-operative Bank Ltd, the Supreme Court of India held that the phrase “any other law” should be constructed as any Cooperative Act”[14]. “Chapter V of the Banking Regulation Act, 1949 also deals with the concept of Co-operative Banking. Section 56 of the Act provides that “the provisions of this Act as enforced for the time being shall apply to, or concerning. Banking companies subject to the following modifications i.e. throughout the Act reference to a ‘banking company’ or the ‘company’ or ‘such company’ shall be constructed as a reference to a Co-operative Bank”[15].

APPLICABILITY OF LAWS FOR REGULATION OF COOPERATIVE BANKS BY RESERVE BANK OF INDIA Banking Regulation Act 1949 (as applicable to Co-operative Societies) “The Banking Regulation Act, 1949 (as applicable to co-operative societies) had issued various guidelines for the development of co-operative banks. The Act has authorized the Reserve Bank of India with certain defined powers for control and guidance to the Cooperative banks. The Banking Regulation Act was being enacted in the year 1949. The powers regarding incorporation, management etc of these banks however continue to rest with the Registrar of Co-operative Societies of the state in which the society is being registered. Further, it can also be said that the provisions of the Banking Regulation Act, 1949 (as applies to Co-operative Societies) have been seen in addition to and not in derogation of any other law for the time being in force except where it is expressly provided in the bank. The co-operative banks require to follow certain provisions for their better working modes. It can also be said that the co-operative banks are required to comply with the principles of all the laws applicable to them including the Banking Regulation act, 1949”[16]. Under the amended Act, primary (urban) co-operative banks are also required to maintain a certain amount of cash reserve and liquid assets. “The scheduled primary (urban) co-operative banks must continue an average daily balance; the required quantity shall not be below five percent of the net demand and time liabilities following section 42 of the Reserve Bank of India Act, 1934”[17]. Such must be done in India together with the Reserve Bank of India. “The Non – scheduled (urban) co-operative banks are required to maintain a sum similar to at least three percent of their total demand and time liabilities on day to day basis as per the provision of section 18 of the Banking Regulation Act (as applicable to cooperative societies) 1949 in India”[18]. Again it is mandatory for the scheduled co-operative banks that CRR must maintain accounts with the Reserve Bank of India. But in the case of the non-scheduled co-operative banks, it can be continued by way of either cash within themselves or in the form of balances in a current account with the Reserve Bank of India or the state co-operative bank of the state concerned or the central co-operative bank of the district concerned or by way of net balance in current accounts with public sector banks Further for a cash reserve,” it must be made sure that for every primary (urban) co-operative banks (scheduled/ non-scheduled) it is compulsory to maintain liquid assets in the structure of cash, gold or unencumbered approved securities which need not be below twenty – five of the total of its time liabilities and demand. Such cash reserve must be done according to the principle mentioned in section 24 of the Banking Regulation Act, 1949 (as applicable to cooperative societies). As per section 27 it necessities that each and all co-operative banks must submit a return concerning the assets and liabilities to the Reserve Bank of India every month after the end of the business”[19]. But for the NABARD take the submission of such returns in the case of rural cooperative banks. Section 23 mandates every co-operative bank to make an application to seek permission to open new branches. The application has to be get forwarded by NABARD before seeking permission from the Reserve Bank of India for the central and state co-operative banks. Whereas the primary (urban) co-operative banks have the authority to get the application approved directly by the Reserve Bank of India. Under section 31 every year before the end of 31st march all the banks are under the duty to prepare the profit and loss account and balance sheet. Section 35 provides that the Reserve Bank of India is required to direct its officers to inspect the co-operative banks but for the time being the inspection of co-operative banks is to be done by NABARD. The Reserve Bank of India has the authority to issue directions to co-operative banks in general or any specific cooperative banks according to section 35(a). The Reserve Bank of India has also the power and authority as per section 47 (a) to impose penalties on a co-operative bank concerning the contravention of the provisions mentioned in section 46 (3) and section 46 (4) without taking recourse to a court of law. The Reserve Bank of India must conduct an inquiry for imposing a penalty and the co-operative banks will be allowed to defy themselves and prove their innocence. The penalty for default as stated in section 46 (4) is Rs. 5 lakhs and the penalty will be double in case the default is quantifiable.

Banking Regulation (Co-operative Societies) Rules, 1966 The Banking Regulation (Co-operative Societies) Rules has defined some of the basic features which are in one way or the other is very much helpful in the functioning of the Co-operative Banks. Some of the features of the Banking Regulation (Co-operative Societies) Rules are as follows:- 1. As for ‘Submission of Returns’ as required under the Banking Regulation Act, 1949 Rule II(i) essentially mentions that,” it is necessary that a return as specified under the Act or that these particular mentioned rules shall be necessary to be submitted as per the form prescribed for the purpose or as thereto or as circumstances admit”. It is further mentioned in Rule II (ii) that, “the submission of the returns shall be necessary to be submitted by the principal office of a Co-operative Bank to the principal office of the Reserve Bank of India. The submission shall be made in that principal office of the Reserve Bank which is located in the state in which the co-operative banks have their principal office. It may also be any other office of the Reserve Bank if the Reserve Bank has mentioned on an application made to the co-operative banks for the submission of returns”. 2. “According to Rule III, it has been specified about the ‘Particulars of Returns’. The co-operative banks must ensure the rules relating to the particular of returns. It has also been mentioned that Rule III further includes Form I which has specified about the Statement of Demand and Time Liabilities which has been included under section 18(1) and section 24(3)”[20]. 3. As per Form III A, B and C are regarded as the “Forms of Applications”. These forms of license are needed for commercial banking business as provided under section 22, Rule 6. These forms of license are also applicable to the cooperative banks like the Primary Co-operative Banks, State Co-operative Banks, and Central Co-operative Banks respectively. 4. Form IV of the Banking Regulation Rules mentions about the “Forms of Application for a License”. The form of the license application is required for the reason of carrying on banking business by the co-operative societies which were carrying on business as a co-operative bank at the commencement of the Banking Laws Act 1965 or by a Co-operative Bank which has come into existence as a result of the division of any other co-operative society carrying on business as a cooperative bank or the amalgamation of two or more co-operative societies carrying on banking business or by a primary credit society which becomes a primary co-operative bank after such commencement as clearly stated in section 22, Rule 6. 5. Rule 10 specifically mentions the ‘Manner of Publication of Accounts and Balance Sheets. The rule explains that the manner of publication of accounts and balance sheets must be done together with the Auditor’s report. The elaboration of rule 10 has been stated in section 29 of the Banking Regulation Act, 1949 for co-operative banks. 6. Lastly, Rule 11 gives the specific details of the manner of holding inquires under section 47A of the Banking Regulation Act, 1949.

The Reserve Bank of India Act, 1934 The Reserve Bank of India Act, 1934 has also applied to the Cooperative Banks for their proper functioning. The Reserve Bank of India Act, 1934 contains some of the important provisions concerning Co-operative Banks. These sections are proved to be necessary in giving guidance to the work of cooperative banks. The important sections of the Act as necessary for the working of the Co-operative Banks are as follows:- 1. “In terms of Section 17 (2)(bb) of the Reserve Bank of India Act, 1934, the section had mentioned that “scheduled Urban Co-operative Banks can avail refinance for industrial finance directly from the Reserve Bank of India, Industrial Development Bank of India and Small Industrial Development Bank of India and instead of through State Co-operative Banks”[21]. 2. Under Section 17(4)(a) of the Reserve Bank of India Act, 1934, the section has stated that “the Reserve Bank of India can change a line of credit to Schedule Urban Co-operative Banks which maintain their account with the Reserve bank (DAD) against the security of government and other trust securities”. 3. Under Section 42(1) of the Reserve Bank of India Act, 1934, the section explains that “Scheduled Primary Co-operative Banks are required to maintain with the Reserve Bank of India, Cash Reserve Ratio (CRR) on a daily average basis during a reporting fortnight”.

CO-OPERATIVE BANKS – ITS ISSUES, CHALLENGES AND JURISDICTIONAL MATTERS IN INDIAN SCENARIO The co-operative banks in India are considered as the second-largest component among all the banking institutions in India. The co-operative banks emerged as a solution to provide loans to the backward class of people of the society. It has always remained as one of the successful mechanisms. But still there exists certain problems in the working of the co-operative banks in India.

Issues and Challenges faced by co-operative banks 1. The problem of dual control – Co-operative banks are considered as the monetary organization which provides financial support to the customers especially the people of low-class society who cannot take the opportunity of the high-class business banks for financial purposes. But despite such advantages posed by the co-operative banks, there are drawbacks in the functioning of the co-operative banks. The procedure and management of the co-operative banks cause various challenges due to the authority and dictatorship of all the banks on which the co-operative banks rely upon for the better working of the framework of co-operative banks. The co-operative banks are being under the supremacy and domain of the supervisor banks which particularly includes the Reserve Bank of India, the State Government, and National Bank for Agricultural and Rural Development (NABARD). It is an accepted phenomenon that the co-operative banks are the urgent necessity of the poor people to receive loans and as such any kind of issues arising in the functioning of the co-operative banks must be sorted out as quickly as possible. It is commonly known to the citizens that under the Constitution of India, the word cooperation is regarded as a state subject therefore it is assumed that the co-operative banks are ruled by the State’s Act of Co-operative Societies. The Act consists of important provisions concerning the governance of the co-operative banks. The other important methods of cooperative banks such as the concept of incorporation, amalgamation, registration, management etc are administered in the particular state by the Administrator of Co-operative Societies. Co-operative Banks are important financial institutions that are also under the domain of other acts. Again at the same time, it can be said that in case of the acceptance of the installments from the individuals by the co-operative banks it is to be noted that the co-operative banks are also regulated by the provisions of the Banking Regulation Act, 1949. The Banking Regulation Act, 1949 provides various important provisions for the co-operative banks. It can be analyzed thoroughly that the principles of the Banking Regulation Act, 1949 apply basically in the rural framework to the District Central Co-operative Banks and State Co-operative Banks. Also in the urban framework, it applies to the PCBs. These principles are altogether used as guidelines by the co-operative banks. The co-operative banks in urban areas are under the rule of supervision of the Reserve Bank of India. This bank has supervisory jurisdiction over the Urban Co-operative Banks. Lastly National Bank for Agricultural and Rural Development regulates the co-operative banks in the rural areas. As coming across the issues and challenges of co-operative banks it can be said that the problem of ‘duality of control and regulation’ is said to have given rise to serious problems in the government structure. This issue is one of the important concerns which need to be solved as quickly as possible. “The term ‘duality of control and regulation has led to the complicated situation of the interference by the State Government due to the combined role played by the State Government concerning the co-operative banks such as the role of a dominant shareholder, manager, role of regulator including the role of supervisor and the role of auditor within the structure of co-operative banks”[22]. Also, it can be said that in the co-operative banks there is no proper division of the regulatory powers. This trouble at certain times leads to the outcome of cross directives which are particularly under the dominance of the agencies controlling it and therefore as such it may take the path in undermining the working of the co-operative banks. 2. Borrower Driven Structure – the concept of ‘borrower driven structure’ is also one of the very major difficulties to be looked into by co-operative banks. As per the situation in Rural Co-operative Banks, it is found that the structure of the bank is based on the method of refinancing. The term refinancing means that the upper tiers generally refinance the lower tiers. Thus it can be said that both the upper tiers and the lower tiers run on the borrowers at all levels. The whole structure leads to the creation of various problems. The structure is based on the system of credit. The system is not proved to be fruitful in the working mechanism of co-operative banks. Again concerning the voting rights, it can be found out that, in cooperative banks, the investor has no voting rights although he is regarded as a nominal person in the cooperative banks. Only the borrowers have the right to vote which is considered as one of the serious problems of the governance framework. This issue is regarded in anticipation of the notion of mutuality where the system of credit must be moving alongside the system of thrift. This action is however ably in preventing the inducement of the good governance system in the co-operative banks. It is so because the investors have no say about how their money must be used. 3. Human Resource Issue – the ‘human resource issue’ is considered as one of the major challenges concerning the co-operative banks. It is so because the cooperative banks generally lack sufficient manpower resources to carry out effective functions of the co-operative banks. Also, it can be said that the staff appointed in the co-operative banks comprises of such individuals who do have adequate training skill and are under-qualified. 4. Issues relating to finance – as the main aim of cooperative banks is to provide financial support to the people but there still arise certain financial problems like the low recovery rate of outstanding credit leading to high Non- Performing Assets. Further, it can also be assumed that there has been a shortage in the notion of diversification of loan portfolios due to the lending of priority sector to agriculture.

Jurisdictional Matters of Co-operative Banks Every institution in India is established for the benefit of the Indian people and also for their development. Even the banking institutions are established to prove financial help to the people in times of need by providing loans to them and in return takes a certain interest. Among the banking institutions, Cooperative banks also provide loans especially to the poor people for the fulfillment of their means of livelihood. It seems that such banks are proved to be very much helpful to the people. It cannot be doubted at all there no person can be left out without providing financial help to them by the Co-operative banks. But despite such friendly nature of the Co-operative banks, it is not free from the ongoing path of court matters. Even there arise certain disputes between the borrowers and the Cooperative banks concerning non-payment of loans and such other matters. The Code of Civil Procedure has no Jurisdiction to try the cases of Cooperative Banks. A separate Cooperative Court is established for this purpose. Even the Registrar of the Co-operative Societies had the authority to try the cases. The Co-operative courts were established to try the cases of cooperative banks. The Co-operative courts are the same as the civil courts. The jurisdiction of co-operative banks is very wide. But the infrastructure provided to co-operative courts is not sufficient to cater to its increasing jurisdiction. “The Maharashtra Co-operative Societies Act, 1960 governs the settlement of dispute concerning cooperative banks. As regards the constitution of Co-operative Courts, the State Government is empowered to constitute one or more Co-operative courts for adjudication of dispute under the Act. A Co-operative court shall consist of at least one member appointed by the State Government possessing the qualification of the position of a Judicial Officer or an Advocate or Pleader or Vakil practicing for three years. A Cooperative Court will have jurisdiction over the whole State. Even the High Court and Supreme Court has the authority to try cases of Cooperative banks”[23]. Chapter IX, Settlement of Disputes, comprising of section 91, 91A, 92, 93, 94, 95, 96 of the Maharashtra Co-operative Societies Act, 1960 deals with co-operative courts. Sections 91 says that about the settlement of any kind of disputes to be tried and brought up before the Cooperative Court. Section 91A deals with the process of the constitution of the Cooperative Courts Section 92 speaks about the period of limitation of the cases to be tried by the cooperative courts. Section 93 deals with the procedure for the transfer of cases from one cooperative court to another cooperative courts for speedy settlement of disputes Section 94 speaks about the procedure to be followed by the cooperative banks for the settlement of disputes and the power conferred upon the cooperative banks for settlement of such disputes. Section 95 speaks about the interlocutory order and attachment of an order before the cooperative courts. All these sections are in one way or the other are very much helpful in the quick and speedy settlement of the disputes and deliver effective judgments.

Cases dealt by Indian Law Courts The Indian courts have dealt with various cases having jurisdiction for the efficient and smooth functioning of cooperative banks in India and for the development of better facilities for providing loans to the borrowers. “In Apex Urban Co-operative Bank of Maharashtra and Goa Ltd v. ITO, the assessee license was challenged by the Maharashtra State Co-operative Bank Ltd by a writ petition. The Mumbai Tribunal delivered the judgment that after the cancellation of license, the banking business was inefficient to be continued and there was no such consideration about the matter of income of the society.”[24] “In Goa Urban Co-operative Bank Ltd v NMS Mussa, the defendant did offer an alternative place for the performance of the business by the plaintiff but the plaintiff was not willing to vacate the place. The defendant appealed on the ground that the plaintiff was not using the place to conduct the business for which it was let. The plaintiff did some other trade business instead of the banking business. The Supreme Court held that as the shop was meant to be used to sell goods so the concept of changing the trade cannot result in the changing notion of the use of premises. The change of trade many not amount to change of use of premises as the shop continued to be used as a shop. The shifting of the activities from office purpose to godown purpose is a change of use of premises. It is not shifting of the business from one trade to another trade.”[25]. “In Umanath Gopalkrishna Puthli v The Shamrao Vithal Co-operative Bank Ltd, as the plaintiff was a member of the Co-operative Appellate Tribunal so the Bombay High Court held that a judge cannot hear a matter to which a company is a party, if he is a shareholder of that company”.[26]

CONCLUSION AND SUGGESTIONS The co-operative banks are considered as one of the important institutions to perform a much-necessitated task for involving financial inclusion in India. These banks are in one way or the other provides loans to the low-class people of the society for their progress. After a brief analysis of the concept of co-operative banks, it can be the figure that there has been the existence of various problems and benefits in the working of the cooperative banks in India. It can be said that co-operative banks are one of the business models in India along with other Indian banks and it is not by definition a key to success. Even it is found out that in the co-operative banks there are various irritants in the regulatory and supervisory framework of the co-operative banks in India. The term cooperative has always been remained as a state subject and is under the domain of the administrative authority which power lies in the hands of the Registrar of Cooperatives of the State where the Co-operative bank is established. Besides the administrative authority, the Reserve Bank of India has the power of financial authority of the cooperative banks. Due to this sort of arrangement of the demarcation of the working framework of the co-operative banks there arises different sorts of problems due to the uncertainty in the power arrangement. There has been a huge number of domination and involvement in the working of the co-operative banks by the State which resulted in the loss of the personality of the organization. The co-operative banks are facing a considerable huge number of difficulties due to the reduction in the growth of profit, decrease in the efficiency and productivity of the bank. Also, it has been seen that the co-operative banks are facing a lack of loan facilities to be provided to the people of the society who wants to avail themselves to the loan due to financial problems. Certain other problems are emerging concerning the co-operative banks such as the poor quality of staff, lack of well-developed infrastructure and weak managing system etc. All these kinds of issues may affect the financial organization in the society due to the lack of priority sector. The co-operative banks were mainly established to provide loans to the weaker sections of the people of the society. The cooperative banks are established in all particular areas as such the areas of rural people and areas of urban people to fulfill certain needs required by maximum poor people but due to the lack of sufficient finance in the sector of banking institutions, the co-operative banks were not in an adequate position to fulfill the demands of the customers. The co-operative bank lacks sufficient working methods and procedures for its good governance in the society. Like other banking institutes, the co-operative banks are not well developed. There has not been any modern technology system established in the infrastructure of the co-operative banks. In certain cases, a necessity is required concerning cooperative banks established in both the urban sector and the rural sector to establish the new methods of banking systems which include the ATM, online banking facilities, etc. The scope of the co-operative banks is very much limited. The co-operative banks are not been extended to a wide area. The branches of the co-operative banks are also limited to a particular area. So it becomes an urgent necessity for the co-operative banks especially the urban cooperative banks to establish their branches in other parts of the state for the direct avail of the people to those branches. The most essential obligation upon all co-operative banks which urgently requires for giving loans generally which included low-class people of the society. All the required information for sanction of the loan must be provided by the person to the bank. So the co-operative banks must ensure that proper information concerning the individual background must be obtained along with the information concerning his family. The co-operative must keep a check over the payment of the loan by the borrowers. In case of failure of the payment of the loan money in due date and time, the bank must provide a notice of demand for the repayment of the loan to the individual concerned. Also in case of failure for payment of the bank loan necessary and strong action must be taken against the person for non-payment of loan in time. Also it is that with the change in the time and technology development it becomes utmost important for the co-operative banks to develop and make available to all the customers about the banking facilities and services. As it is known to all the people that the cooperative banks provide loans generally for the poor sections of the society so it is required by the cooperative banks especially the urban co-operative banks for arranging for giving proper training and conduct programs for the borrowers for making them aware about the loans to how it is to be repaid to the banks as well as how these funds must be used.

[1] Prinkur Priya Financial Statement Analysis of Kangra Central Co-operative Bank Ltd, SHODHGANGA, (Sep. 2020, 23, 08:27 PM), http://shodh.inflibnet.ac.in/handle/123456789/4373. [2] Preety&Dr.D.K.Maheshwari&Dr. Prabhat Kumar Dr Pushpendra Kumar Verma, Benefits and Challenges faced by the Cooperative Banks, 4IJETER (2016) 61, 63, (Sep. 2020, 26, 03:43 PM), http://www.ijeter.everscience.org/Manuscripts/Volume-4/Issue-4/Vol-4-issue-4-M-16.pdf.. [3]Bindisha Sarang, Cooperative Banks may give a better deal, LIVEMINT, 2011, (Sep. 2020, 26, 05:53 PM), https://www.livemint.com/Money/qyqdDq5IS7NfonzRJX3UbJ/Cooperative-banks-may-give-a-better-deal.html. [4] Ibid. [5] M L Tannan, Tannan’s Banking Law 17 (1st edn., Lexis Nexis 2015). [6] Types/functions of co-operative banks in India, CO_OPERATIVE.ORG, (Sep. 2020, 30, 04:30 PM), http://co-operative.ozg.in/2012/07/types-function-of-cooperative-banks-in.htm.l. [7] Ibid. [8] Ibid. [9] Ibid. [10] Ibid. [11] Ibid. [12] Anjani Kant, Lectures on Banking Law 38 (3rd edn. Central Law Publication 2010). [13] Rn Chaudhary, Banking Laws 34( 1st edn, Central Law Publication 2009). [14] Apex Co-operative Bank v. M.S. Co-operative Bank Ltd. AIR 2004 SC 141. [15] The Banking Regulation Act, 1949, (No 10, Acts of Parliament, 1949 India). [16]ChapterI to VI, Review of Legislations and RBI guidelines,SHODHGANGA, (Oct. 2020, 02, 05:56 PM), http://shodhganga.inflibnet.ac.in/bitstream/10603/94123/14/14_chapter6.pdf. [17]The Reserve Bank of India Act , 1934, (Oct. 2020, 02, 06:30 PM), https://rbidocs.rbi.org.in/rdocs/Pubications/PDFs/RBIA1934170510.PDF. [18] The Banking Regulation Act, 1949, (No 10, Acts of Parliament, 1949 India). [19] Ibid. [20] Legal Provisions For Urban Co-operative Banks, SHODHGANGA, (Oct. 2020, 03, 03:44 PM), http://shodhganga.inflibnet.ac.in/bitstream/10603/145778/12/10_chapter%203.pdf.. [21] Id. [22]Mandira Sarma, Current Developments InCooperative Banking in India, Indian Council For Research On International Economic Relations , (Oct. 2020, 03 08:47 PM), http://icrier.org/pdf/Mandira%20Sarma.pdf. [23] The Maharashtra Co-operative Societies Act, 1960, Maharashtra Act (No 24, Acts of Parliament, 1961 India), (Oct. 2020, 04, 10:15 PM), http://www.bareactslive.com/MAH/mh037.htm. [24] Apex Urban Co-operative Bank of Maharashtra and Goa Ltd v. ITO (2012) 134 ITD 188 Mumbai Tribunal. [25] Goa Urban Co-operative Bank Ltd v. NMS Mussa AIR 2004 SCC 3886. [26] Umanath Gopalkrishna Puthli v The Shamrao Vithal Co-operative Bank Ltd (1962) 64 BOM LR 700.