Rethinking rural cooperatives

Source: The post “Rethinking rural cooperatives” has been created based on “Rethinking rural cooperatives” published in “Indian Express” on 5th October 2026.

UPSC Syllabus: GS-3- Indian Economy

Context: The cooperative sector has received renewed policy attention through initiatives such as Bharat Taxi, new Primary Agricultural Credit Societies (PACS) and primary milk cooperatives. However, changing rural financial needs and the consolidation of Regional Rural Banks (RRBs) make it necessary to rethink the structure of grassroots rural cooperatives.

Evolution of Rural Credit

1. The All-India Rural Credit Survey Committee (1956) advocated decentralised, village-level financial institutions to provide rural credit.
2. Primary cooperatives constituted the first major phase of formalisation of rural credit.
3. Subsequently, nationalised banks, supported by branch-licensing requirements and priority-sector lending, expanded into rural areas.
4. This was followed by Regional Rural Banks (RRBs), which were intended to combine professional banking with a local focus.

Present status of the cooperatives in India

1. At their peak, India had more than 1 lakh primary credit cooperatives, although only around 60% were estimated to be active.
2. Today, approximately 40,000–50,000 primary cooperatives may be active, although there is no clear current estimate after NABARD stopped regularly publishing comprehensive statistics on rural credit and non-credit cooperatives.
3. RRBs have undergone consolidation, while amendments to the RRB Act have enabled private-sector shareholding.
4. Increasing commercial imperatives of RRBs may gradually move them away from their original focused rural-development agenda.
5. Therefore, hyper-local primary cooperatives remain important for reaching people, particularly the last woman in the remotest village.

Major Problems with Rural Cooperatives

1. Rural cooperatives are vulnerable and can fail easily because they have traditionally been structured mainly as credit institutions.
2. They are highly leveraged, while their members can simultaneously be borrowers, creating governance and financial risks.
3. Their loan portfolios are often excessively concentrated in agriculture, creating portfolio concentration risk.
4. Their geographical concentration exposes them to covariance risk, where events such as natural disasters can simultaneously affect many borrowers.
5. Primary cooperatives depend heavily on refinancing from District Central Cooperative Banks (DCCBs).
6. Many DCCBs themselves depend on State Cooperative Banks, which ultimately rely on NABARD refinancing.
7. Thus, weaknesses at one level can transmit throughout the entire cooperative credit structure.

Lessons from Successful Models

1. Successful models in Maharashtra, Kerala, Coastal Karnataka, parts of West Bengal and Telangana show that rural cooperatives can become more resilient by diversifying their balance sheets.
2. Many successful primary cooperatives accept local deposits, thereby creating local financial participation and a stronger stake in the institution.
3. They also undertake non-credit trading activities, which diversify their income and provide a buffer during years of financial stress.

Proposed Reforms

1. Integrating the middle tier: District-level cooperative banks should be integrated with State Cooperative Banks because, in an interconnected financial system, the middle tier may add significant overhead without providing equivalent value.
2. Specialised Regional Banks (SRBs): The integrated institution should function as a professionally managed Specialised Regional Bank, rather than being managed purely according to traditional cooperative principles.
   1. SRBs should focus their asset book on cooperatives and provide financing to the entire cooperative structure, covering both credit and non-credit activities.
3. Ownership of SRBs: Shares should be held only by cooperatives and cooperative-like institutions, including Farmer Producer Organisations (FPOs) and other local institutions.
4. Professional governance: Governance should not strictly follow the cooperative principle of “one person/institution, one vote”. Instead, RBI norms, including independence and fit-and-proper requirements, should guide management.
5. Reduce excessive leverage: Refinancing provided by SRBs to primary cooperatives should gradually be reduced to around six times their member share capital and eligible non-withdrawable deposits, subject to appropriate tenor conditions.
6. Encourage local deposits: Primary cooperatives should increase their reliance on local deposits rather than excessive external refinancing.
7. Diversify activities: Primary cooperatives should undertake non-credit activities to diversify income and strengthen their balance sheets.
8. Modern banking facilities: Strong primary cooperatives meeting financial conditions could access services such as remittances, interoperability, UPI, debit cards and credit cards for their members under a common brand.
   1. Such modern banking facilities could be mapped to the balance sheet of the SRB, providing technological and financial support to grassroots institutions.
9. Government support: Union or State Governments may provide a one-time grant to viable active cooperatives for revival.
   1. Cooperatives that are beyond revival could instead be replaced or restructured through new grassroots cooperatives involving local communities and linking them with activities such as milk production and local payment systems.

Way Forward

1. India needs to move beyond excessive concentration on apex and elite financial institutions and strengthen grassroots institutions.
2. The consolidation and commercialisation of RRBs make it even more important to preserve hyper-local financial institutions.
3. Modern financial technology and infrastructure now provide the capacity to improve the housekeeping, payments and banking operations of grassroots cooperatives.

Conclusion: India needs vibrant, self-governed and financially responsible grassroots cooperatives that combine local participation with professional governance. Strengthening primary cooperatives through diversification, local deposits, reduced leverage, integrated banking support and modern digital services can ensure that rural finance continues to reach the most remote sections of society.

Question: Rural cooperatives can play a crucial role in ensuring inclusive and decentralised financial development in India. Discuss.

Source: Business Standard