By H H Mohrmen
The two major challenges that government departments and agencies face in improving the economic conditions of the people and the development of the state is in ensuring financial inclusion and to help the public access credit. Any government would know that the economic condition of the state depends on the economic activities of the people; hence, financial institutions have a vital role to play in the economic development of the state. The State Government may dream for a 5, a 10 or even 100 billion dollars economy, but without strong and sound financial institutions in place, it will remain a dream. Financial institutions like Cooperative Urban Banks (CUBs) are, in fact, in a better position to help propel the economic growth of the state.
About 50 years ago, Cooperative Urban Banks were started in the three district headquarters of the state, and since then, one of the three CUBs, the Shillong Urban Cooperative Bank, became very successful. The other two have room for improvement. If one conducts a quick SWOT analysis of these banks, one would find that the strength of the CUBs lie in the fact that the bank is manned by locals who can speak the local language and also has the confidence of the people because the staff are all local. The opportunity for the banks to grow is immense, as these are local banks governed under the Cooperative system, enabling them to reach the grassroots and farthest corners of the state. It also opens wide vistas of opportunity to create employment for the youths of the state. But the most important strength of the CUB is that they understand the psyche and the cultural nuances of the regions. Unfortunately, the banks also have weaknesses and face threat perceptions in the way they operate.
The Current Status of CUBs in the State
The state currently has three CUBs. They are part of over 1500 CUBs across the country. The 3 CUBs together have around deposits of around Rs. 630 crores amongst them and total advances of Rs. 187 crores, i.e., a Credit Deposit Ratio of 30% (approx.), with a branch network of 9 branches between them.
The CUBs operate in a very competitive environment and are vying for business with the public sector banks, the private banks, and state cooperative banks and lately with the small finance banks. Customers have a wide gamut of banks to choose from. The driving force for today’s competition amongst banks is the use of technology. Like in other fields of our lives, technology has become center stage in the delivery of banking services as well.
Hence the question that arises are: Are CUBs competitive enough to compete with other banks in this age of cutting-edge technology? The CUBs will need qualified and experienced manpower to transition to technology-driven organizations. And lastly, they have to have the willingness to transition from the traditional banking method to technology-driven banking.
Dual Control of CUBs
The CUBs run on a dual control model where both the RBI and the State Government, via the office of the Registrar of Cooperative Societies (RCS), control and manage the functions and operations of these banks. As the cooperatives which run the banks are registered with the Cooperation Department of the Government, the banks are run under the Cooperative Societies Act. After the amendment of the Banking Regulation Act, 1949, in 2020, all the functions of the banks, except for registration, are directly under the supervision of the RBI. The dual control of the banks at times poses a challenge for the smooth functioning of the CUBs.
Suggestions to Improve CUBs in the State
CUBs have been in operation for over four decades now, which is evidence of a sustainable business model. However, successful as they may be, these banks are facing challenges. The challenges can be in governance, as the members are all lay people, and therefore, even the directors elected from among the members are mostly people with no banking experience.
The management of the bank by the Cooperative model is both a strength and a drawback for the successful functioning of the bank. The Cooperative system not only supplies people who are members of the Cooperative Society, but members of the bank are also elected as the directors of the governing board of the bank. If one looks at the composition of the directors in the bank, more often than not, the directors are laypersons with no banking experience or knowledge. This poses a challenge to the functioning and progress of the bank. Even though it is mandatory to appoint at least two directors with banking experience to the board of directors, some kind of experience is needed for a person to be elected as a director.
Remedial Measures
One of the corrective measures that the Government can take to improve the function of the banks is that the officers in the Cooperation Department should be made aware of the Banking Regulation Act, 1949. Since the bank also manages public funds, it is important that they are aware of the Banking Regulation Act. It is mandatory that the officers, especially those working in close tandem with the CUBs, should be well-versed with the Banking Regulation Act, 1949. The other idea that the government can explore is to create a special cell at the office of the RCS for the management and monitoring of UCBs. These officers should be well-versed with the Banking Regulation Act, 1949, and should also keep themselves abreast of the developments and directives sent by the RBI so that they can provide professional advice to the management of these banks.
CUBs, because they are local and because the State Government has a stake in these banks, should tailor-make or customize their products to cater to the needs of the local people of the state. For instance, in the Khasi- Jaintia area, it is very difficult for a male member of the society to avail a loan because the bank would ask for collateral. This is a very challenging task for many men in the society because traditionally, men do not own land as per the culture. Other commercial banks would not understand these challenges, but a local bank like CUB managed by locals, is better positioned to understand the local problems of the area.
Linking IVCS with CUBs
Integrated Village Cooperative Societies (IVCS) are new financial entities instituted by the government to help rural folk access credit and ensure financial inclusion in the state. IVCS also encourages savings among the members of the cooperative. The projects implemented by the Meghalaya Basin Management Agency (MBMA) and sponsored by the World Bank are registered with the office of the Registrar of Cooperative Societies. The goal is that a village or cluster of villages will have its own village bank that will cater to the needs of the local people. Like any government project, there are successful and not so successful IVCS in the entire state. The question that begs an answer is what happens after the funding from the agency ends? How will these IVCS operate? The IVCS can be linked with the CUBs as these are also registered under the Cooperation Department.
CUB and Employment Creation for Local Youths
CUBs will not only help local people access credit because they understand the culture and the land tenure system of the area and the staff can speak the local language, but they can also help generate employment for local youths. The State Government is also a stakeholder in the CUBs not only because the banks are run by Cooperatives registered under the Cooperative Societies Act, but the fact that the State Government is also a shareholder in the bank. It, therefore, has a very important role to play in the function of the bank. Today, we have only three Cooperative Urban Banks in the entire state: they are in Shillong, Jowai, and Tura. The Shillong bank has 5 branches, the Jowai bank has two branches, and the Tura bank has two branches. If the State Government can start one bank in each district headquarters, then we would have another nine or so CUBs in the state to begin with.
More than Cooperatives
The CUBs are more than cooperative societies because they accept deposits from the public and utilize the money for their banking activities, thereby falling under the supervision and control of the RBI and under the Banking Regulation Act, 1949 (as amended in 2020). Another important point to note is that the money in these banks does not belong solely to the members of the cooperative society; a significant portion of the funds in these banks belongs to the general public and depositors. Therefore, the Government and the RBI play a vital role in protecting public interest in these banks.