To Cooperate or Not to Cooperate? That is the Question


The image above shows vision and objectives of four banks. While two of them have an explicit focus on the needs of the community, the other two are clear in their focus on a revenue model which ensures profitability. Two of them are co-operative banks and other two are commercial banks. This difference might be more pronounced in written words than in action. The origin of these two streams of banking however was indeed based on the principles these vision statements imbibe.

Modern commercial banking, was introduced to India by the British, to advance their commercial and economic interests in India and integrate them with their financial system in Europe. The first three Presidency banks were on the port cities of Calcutta, Bombay and Madras which were key trading ports and economic centres for the British. In 1921, these three Presidency banks were merged to form the Imperial Bank of India, which became State Bank of India (SBI) after Independence.

Even though SBI has evolved to become the largest lending bank in India it does not feature in the top 50 banks globally. Financial returns, profits and the held capital size are some of the criteria for these rankings. To create such stronger, bigger and profitable banks, Government of India recently announced its plans to merge 10 public sector banks into four, after almost a century of the amalgamation of the three Presidency banks. The acknowledged intent for the mega-merger of Indian banks is to create efficiency, economies of scale and generate higher returns and profits.

Cooperative Banking: An alternative approach

Parallel to the evolution of modern banking, another movement was picking up pace in a different part of England in the middle of 19th century. Many weavers in Manchester were losing jobs due to increased mechanisation of the industry. To guard themselves against the high market prices of consumer goods, 28 weavers organised themselves as Rochdale Society of Equitable Pioneers. They started a consumer products store. The store was amongst first such attempt towards a ‘cooperative business’. It gave them access to affordable products as well as an income generating business.

Around the same time, Friedrich Raiffeisen and Hermann Schulze-Delitzsch were laying the foundations of ‘cooperative banks’ in Germany. Their efforts were also a direct outcome of the hardships faced by farmers and craftsmen during the 19th century industrial revolution era. Raiffeisen founded a society to provide affordable credit to farmers and Schulze founded a similar society for artisans. Today, almost 1 out of 4 people in Germany, is a member of a cooperative.

Origin and Principles of Urban Co-operative Banking in India

Cooperative movement spread to India shortly after Britain and Germany. Anyonya Sahakari Mandali in Vadodara was the first ‘mutual aid’ society that was formed on co-operative principles in 1889. It later became a co-operative bank (and was recently shut down in 2008). The Cooperative Credit Societies Act was passed in 1904.

India has close to 98,163 cooperative banks, out of which only 1551 (or 1.5%) are urban cooperative banks (UCBs). Rest of the 96,612 banks are rural cooperative banks. 1.5% of the cooperative banks (the UCBs) accounts for 34% of the total asset size of all the cooperative banks.

While commercial banks started with the commercial motives for financing governments and businesses and make profits, the cooperative banks were started to cater to the needs of those who could not afford banking services and needed support.

 Commercial banks enabled the integration of global finances between 17th and 19th century through colonialism. They bind the whole world through complex financial linkages even today. While commercial banks expanded the flow of capital beyond transcontinental boundaries, cooperative banks emerged as the vehicles to generate and multiply the capital within the communities.

Cooperative banking, like most cooperative initiatives is based on the principles of self-help, self-administration and cooperation between the members of the cooperative. Today there are a number of initiatives that help those that would formerly be unbanked to be included in the financial institutions. These co-operative banks were the first institutions providing this credit line and services to those who would not have gotten access to finances at the commercial banks.

Commercialising of Co-operative banks

Today, Cooperative Banking, especially the urban cooperative banks, stand at crossroads between the balance of the cooperative spirit and the competitive commercial interests. While some of the larger UCBs are aspiring to operate on the lines of commercial banks and expand their credit and geographic footprint, the RBI is cautious to allow their expansion.

The RBI Committee on UCBs under the chairmanship of Madhava Rao in 1999 had noted that “the essence of co-operative character is that a cooperative is an institution where there is an identity between the share-holders and borrowers and that the members elect the board of directors of UCBs on the quintessential dictum of ‘one member - one vote’ irrespective of a member's share-holding”. The committee considered that its first objective was to ‘preserve the co-operative character of the UCBs”.

Over the last two decades, the focus has been to ensure that their expanded operations are not detrimental to the financial and monetary system, not so much focus on preserving the principles on which the cooperatives have been formed. The latest high-powered committee’s recommendations in 2015 focused on finding ways through which UCBs could become commercial banks and identifying new areas of business.

The RBI committee in 2015 also recommended the thresholds for the business sizes of cooperative banks beyond which UCBs could convert to commercial banks or small finance banks. It also recommended creation of a Board of Management over and above the existing Board of Directors, as a mandatory requirement if UCBs wish to expand their area of operation or open new branches.

The UCBs themselves have been aspirational and made great strides especially after the liberalisation in early 1990s. RBI’s policy of ‘one district-one bank’ for UCBs was done away with in 1993 and over 500 new UCBs were granted license in a period of 6 years between 1993 and 1999. The fact that only 293 new banks were licensed between 1967 and 1993 i.e. over 26 years, can put this growth in perspective. This growth was later marked with a consolidation phase where well performing UCBs took over underperforming banks. Almost 128 mergers had happened between 2004 and 2017 and their number reduced from 1926 to 1562 in this period.

What does this trend to commercialize mean?  

The recent trends in cooperative banking in India point to a tilt in favour of economic interests over the objectives of meeting community needs. Aspiring for growth is a natural instinct and it is true for co-operative banks as well. However, if this growth leads to the dilution of the spirit with which the institutions were formed, there is a merit to assess this aspiration for the sector as a whole.

In 2016, UNESCO added “The Idea and Practice of Organizing Shared Interests in Cooperatives,” to its Representative List of the Intangible Cultural Heritage of Humanity. It describes cooperative as ‘an association of volunteers that provides services of a social, cultural or economic nature to members of the community to help improve living standards, overcome shared challenges and promote positive change’. UNESCO identifies cooperatives as a heritage worth preserving.

Cooperatives including co-operative banks have always straddled between meeting economic and social interests. The genesis of cooperatives though was a reaction to the free market economic structures which pursued profits. Cooperatives intended to make the economic outcomes secondary to the social welfare outcomes and serve the members of its communities.

Growth in cooperative banks reflects the trust communities and shareholders have shown in them. Is transforming into a commercial bank part of natural evolution for cooperative banks? Are they merely copying the business models and aspirations of commercial banks? In the face of lack of options, this is the only way for them to grow? Banking sector should introspect and search for these answers such that the growth in cooperative banks is not at the cost of the communities and those who need them.



Nagar Trends: Power of a Nagar


Cities in Indian Constitution
Originally, the Indian constitution did not have an explicit focus on cities or city governance. When the constitution was adopted, the priority was to integrate states and territories in the newly formed country based on the pre-independence governance structures. Later, the states were reorganised linguistically. Local level institutions such as panchayats and Urban Local Bodies (ULBs) gained attention in the early 1990’s when the 73rd and 74th amendment of the Indian Constitution recognised them as the third tier of the government. The 12th Schedule was added through the 74th Amendment with 18 functions meant to be devolved to the ULBs listed in this schedule. These 18 functions were to be the remit of the urban local bodies. Some of the already existing schedules include list of states, union territories; their respective functions (union list, state list and concurrent list); and administration & governance of scheduled areas, tribal areas and panchayats.

Pan-India Study
Nagrika has been conducting a pan-India mapping of the implementation status of 74th Amendment and municipal functions enshrined in the 12th Schedule. This is being done as part of a knowledge partnership project. The project is an urban governance study led by Praja Foundation, a non-partisan organisation working towards enabling accountable governance. Praja's initiative aims to advocate policy changes that will change the way Indian cities are governed. It is multi-year project in nature, with ground research as the foundation being used to form a pan-India network and influence change across the country. The Nagrika team have already visited 16 out of the 29 states, which are part of the study.

The primary objective of the Nagrika component of the larger study is to build an evidence base on the status of decentralisation of municipal functions at the city level by collecting it directly from the cities. The study is analysing that how empowered are the municipal corporations to undertake those functions in terms of staff and capacity, financial resources, legal mandate as well as autonomy in decision making. For each of the states, we have analysed the municipal acts to understand the functions provided to the city governments as per these acts. We have also verified from the city governments directly, as to how many of those functions are performed by them and various other state or national level agencies. In addition, we are identifying the prevalent institutional structures across different states and municipalities, the roles and responsibilities of various departments and officials (elected as well as administrative) within the municipalities and local / regional civil society organisations working on governance issues. 

Preliminary Reflections from the Study
Nagrika presented some of its reflections on its study in a regional level roundtable organised by Praja Foundation in Feb 2019 in New Delhi. The consolidated findings of the study will be presented in due course of time. Our initial findings from first 6 states as well as regional and state level consultations held to validate the findings are available here.

a. Composition of the functions
Though the 12th Schedule lists 18 functions, these 18 functions themselves are actually composed of many more functions. All the Municipal Acts list anywhere between 40-50 functions to be undertaken by the ULBs. Kerala's Act has approximately 150 different functions. 

Within the 18 functions, there are a few functions which contain more than one function. For example, the 'Promotion of Cultural, Educational and Aesthetic aspects' is one function but a municipality requires different resources and skills for promoting cultural activities, running educational institutions and enhancing aesthetics in a city. 'Public amenities including street lighting, parking, bus stops, public conveniences' is also considered as one function but  each of these is a distinct function. Then there are others which might sound as one function but have multiple parts like urban planning. This function includes creation of a spatial plan as well as its execution. The agencies as well as the skills required for the designing a plan versus enforcing a plan are also different. Given the multi-dimensional composition of the functions, there are various gaps and overlaps between the agencies who perform these functions. The study has identified these multi-dimensional functions as well as details regarding their funding and functionaries who perform them.

b. Administrative decentralisation versus Deliberative Decentralisation
The study also analysed the level of decentralisation at city level for both the deliberative as well as administrative wings.  The study highlighted the differences that exist in the relative level of decentralisation between these two wings at the city level. For instance, the difference that exists between the two wings with regards to the implementation of 18 functions in terms of the administrative department or staff assigned to the function versus elected councillors or deliberative bodies (such as standing committees) assigned for them. 

c. De facto vs De Jure: 
There is a wide variation in what is included in the Municipal Act and what is practiced on the ground. The study found the variances between the law and the practice for issues such as ward committees, integration of municipal plans with District Planning Committees' plans, delegation of functions listed in the 12th Schedule  among others. It also highlights the detailed analysis of these 18 functions in terms of what is provided in the Act, what does performing the function entail, who performs them, what are the challenges in performing them and so on.

d. Devolution versus control:  Analysing the Acts against the prevalent practices across the cities we identified the various ways and means through which effective devolution is subservient to control of national/state departments or para-statal agencies. Most Acts give control to state government including the power to dissolve corporations. This control is manifested in various others forms as well, such as appointment of posts in the municipalities, inspection of municipal works, overseeing implementation of municipal activities, granting approvals for works that municipalities undertake etc.  Most of the municipal acts define the municipal functions either as obligatory and discretionary, the former being the essential functions to be performed by the municipality and latter are not essential but at the corporation's discretion.  The study highlights how the control of the municipal functions is spread between the essential and discretionary functions and who holds the discretion to the performance of the function. 

The study is a positive step towards documenting the vast amount of existing but diffused knowledge on the functioning of the third tier of the government i.e. city government AKA municipalities. It is putting together a credible evidence base from across the country, on the opportunities and challenges that exist in empowering this tier of the government, that is closest to citizens.