Mahatma Gandhi once said: ‘Suppose I have come by a fair amount of wealth – either by way of legacy, or by means of trade and industry – I must know that all that wealth does not belong to me; what belongs to me is the right to an honorable livelihood, no better than that enjoyed by millions of others. The rest of my wealth belongs to the community and must be used for the welfare of the community.’
The statement captures the philosophy of co-operative movement in perhaps the best possible manner. What it tries to convey is that the wealth should be available for social welfare. This is also the basic motto of the co-operative movement in India which started to use money available at the bottom of the pyramid, for the maximum upliftment of the people at the bottom of the pyramid. This was also the basic expectation from co-operative banks which were brought into existence to serve the sections of the population which were not covered by the traditional banks. Providing finance to the artisans, carpet weavers, handloom operators, cattle raisers etc. is never on the radar of traditional banks which instead feel comfortable to lend to industries and big businessmen. Co-operative banks were to fill this gap.
To a large extent, these banks did their job well. They not only offered loans to lowest ring of entrepreneurs but also brought the savings of many millions of smallest savers in the productive use by bringing those under banking umbrella who had never thought of entering a bank building. In many states like Maharashta, Gujarat, Andhra Pradesh and Karnataka, co-operative banks became a big hit and an important part of the economic system.
However, a large majority of co-operative banks in the country also show a disturbing picture, a picture of inefficiency, shady operations, politically linked loans, and worst of all, of hopeless corporate governance. Boards of directors are mere proxies of owners, accountability of management is non-identifiable or definable, and landing decisions are suspect. It is in this environment that RBI had to intervene by freezing issuance of new co-operative bank licenses. As the experience of Madhavpura Mercantile Co-operative Bank showed, a collapse of a big co-operative bank can lead to systemic problems. It is a no-brainer, therefore, that the ways and means of co-operative banks as a group needs an overhaul. Malegam Committee made some very sound suggestions, including making the CEO accountable to RBI.
The future looks exciting for the co-operative banking sector, though. Not only competition is going to increase, thanks to the emergence of new entities like Small Finance Banks, but also because the business avenues of co-operative banks have been made diverse. RBI has allowed them to undertake lots of fee-based activities which will allow them to diversify their revenue base. The challenge for the sector is to become internally strong.
Co-operative banks are perhaps the central pillar to achieve financial inclusion and they must be made strong to fulfill that mandate. Failure is not an option, either for these banks or for the country.