Union Cooperation Minister Amit Shah launched the National Urban Cooperative Finance and Development Corporation (NUCFDC) and asked the umbrella body to set up one Urban Co-operative Bank in each town.

There are more than 1,500 Urban Co-operative Banks with 11,000 branches. The banks have a deposit size of over Rs 5.33 lakh crore, and total lending of more than Rs 3.33 lakh crore.

What is the purpose of NUCFDC?

• The main objective of NUCFDC is to help Urban Co-operative Banks (UCBs) adhere to the Banking Regulations Act and bring professionalism in their work.

• The NUCFDC has received Certificate of Registration (CoR) from the Reserve Bank of India to operate as a Non-Banking Finance Company (NBFC) and serve as the umbrella organisation for the Urban Co-operative Banking sector. 

• In addition to this, it will be allowed to operate as a self-regulatory organisation (SRO) for the sector.

• The NUCFDC aims to raise capital, with plans to reach a capital base of Rs 300 crore. It intends to utilise this capital to support UCBs and develop a shared technology platform to improve service offerings and reduce costs. 

• It would set up a technology platform that can be shared by all UCBs, enabling them to widen their range of services at a relatively lower cost. It can also offer fund management and other consultancy services.

Urban Co-operative Banks (UCBs)

• Co-operatives are people-centred enterprises owned, controlled, and run by and for their members to realise their common economic, social, and cultural needs and aspirations. 

• UCBs refers to primary cooperative banks located in urban and semi-urban areas. 

• The UCBs play an important role in furthering financial inclusion by generally providing traditional, if not the more modern, banking services to persons in the less included segments of the economic strata.

• Until 1966, these banks were allowed to lend money only for non-agricultural purposes. 

• These banks were traditionally centred around communities, localities and workplace groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

• UCBs cater to the financial needs of customers in urban and semi-urban areas.

• UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the state concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries of one state. 

• The sector is heterogeneous in character with uneven geographic spread of the banks. While many of them are unit banks without any branch network, some of them are large in size and operate in more than one state.

• Though the Banking Regulation Act came into force in 1949, the banking laws were made applicable to cooperative societies only in 1966 through an amendment to the Banking Regulation Act, 1949. 

• Since then there is duality of control over these banks with banking related functions being regulated by the Reserve Bank and management related functions regulated by respective state governments/central government.

Dual Control of Co-operative Banks

• Under the Indian Constitution, co-operation is a State Subject covered under the Seventh Schedule. 

• During the mid-1960s, as demands for extension of the deposit insurance scheme to co-operative banks became more vocal and pressing, banking laws were made applicable to these banks so that the Reserve Bank may be able to exercise some control over them. 

• This led to the dual control of the sector in which the Registrar of Co-operative Societies (RCS) or the Central Registrar of Co-operative Societies (CRCS) were empowered to look after their incorporation, registration, management, recovery, audit, supersession of board of directors and liquidation. 

• The RBI was vested with regulatory oversight on banking activities of UCBs, State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs). 

• The RBI was also entrusted with the supervision of UCBs.

• The RBI’s regulatory and supervisory powers were, however, limited in many ways, which affected its ability to take prompt corrective actions in case of irregularities. 

• The amendment to the BR Act in 2020 seeks to protect the interests of depositors and strengthen co-operative banks by improving governance and oversight by the Reserve Bank, while enabling better access to capital. 

Legal status of co-operative banks

• The legal status of co-operative banks is akin to banking companies in many ways. Both are body corporates by the name in which they are registered, with limited liabilities, which can sue and be sued in their own name, with independent legal personalities distinct from their shareholders/members, with power to acquire, hold and dispose of property and enter into contract. 

• However, there are certain vital distinctions between the two types of banks, primarily arising out of their structure, which need to be considered while formulating a regulatory regime for UCBs. 

• The most fundamental difference between the banking companies and co-operative banks is in the rights of the shareholders to vote in resolutions. In the case of a banking company, each share has a vote (subject to the limitations imposed by Section 12 of the BR Act). However,  in the case of a co-operative bank, each shareholder has only one vote irrespective of the number of shares held.

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