Cooperatives and the Reserve Bank of India's Dilemma

Cooperatives pose a unique dilemma for the Reserve Bank of India (RBI). While cooperatives are highly effective neighborhood institutions operating on principles of self-help and mutuality, they challenge the RBI's regulatory framework designed for capital-centric, widely-held listed entities.

Core Functions of the RBI

• Managing monetary policy and public debt.
• Regulating banks and financial institutions.
• Playing a developmental role, including financial inclusion.

Significance of Cooperatives

Cooperatives are vital for financial inclusion, providing essential services to individuals excluded from mainstream banking. The All-India Rural Credit Survey Committee in 1954 emphasized their importance, stating that the failure of cooperatives would signify a loss of hope for rural India.

Regulatory Challenges

• Form of Incorporation: Cooperatives' structure, allowing for open membership and capital withdrawal, contradicts typical banking regulations.
• Licence Issuance: Despite suggestions from committees like Malegam (2011) and Gandhi (2015) for new cooperative bank licences, the Vishwanathan Committee (2021) was cautious.
• In 2026, the RBI revisited the discussion on cooperative bank licenses, highlighting ongoing challenges.

Design and Function of Cooperatives

Cooperatives operate on principles such as open membership and democratic control, fitting small neighborhood models. However, when a cooperative becomes a bank, it loses its mutuality essence, posing a regulatory challenge.

The Cooperative Bank Paradox

• Patronage-Based Model: Cooperatives are designed for members who contribute and vote, while banks serve the public.
• Complex Regulation: By 2025, India had 838 cooperative banks with deposits under ₹100 crore, complicating RBI's regulation efforts compared to a giant like the State Bank of India.

RBI's Strategic Considerations

The RBI must rethink its approach to cooperative banks. Encouraging federal institutions and affiliating smaller cooperatives to larger Tier-IV cooperative banks could be a solution. This model, successful in western countries, would provide stable capital and effective regulation.

Conclusion

Instead of issuing more licenses to primary banks, the RBI could foster federal institutions, allowing smaller cooperatives to affiliate, thus easing regulatory burdens. This bold approach could maintain cooperative values while enhancing financial inclusion.