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Chronolog History of Urban Cooperative Banks in India
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Brief History of Urban Cooperative Banks in
India

The term Urban Co-operative Banks (UCBs), though not

formally defined, refers to primary cooperative banks
located in urban and semi-urban areas. These banks, till
1996, were allowed to lend money only for non-
agricultural purposes. This distinction does not hold
today. These banks were traditionally centred around
communities, localities work place groups. They
essentially lent to small borrowers and businesses.
Today, their scope of operations has widened
considerably.

The origins of the urban cooperative banking movement

in India can be traced to the close of nineteenth century
when, inspired by the success of the experiments
related to the cooperative movement in Britain and the
cooperative credit movement in Germany such societies
were set up in India. Cooperative societies are based on
the principles of cooperation, - mutual help, democratic
decision making and open membership. Cooperatives
represented a new and alternative approach to
organisaton as against proprietary firms, partnership
firms and joint stock companies which represent the
dominant form of commercial organisation.

The Beginnings

The first known mutual aid society in India was probably

the ‘Anyonya Sahakari Mandali’ organised in the
erstwhile princely State of Baroda in 1889 under the
guidance of Vithal Laxman also known as Bhausaheb
Kavthekar. Urban co-operative credit societies, in their
formative phase came to be organised on a community
basis to meet the consumption oriented credit needs of
their members. Salary earners’ societies inculcating
habits of thrift and self help played a significant role in
popularising the movement, especially amongst the
middle class as well as organized labour. From its
origins then to today, the thrust of UCBs, historically,
has been to mobilise savings from the middle and low
income urban groups and purvey credit to their
members - many of which belonged to weaker sections.

The enactment of Cooperative Credit Societies Act,

1904, however, gave the real impetus to the
movement. The first urban cooperative credit society
was registered in Canjeevaram (Kanjivaram) in the
erstwhile Madras province in October, 1904. Amongst
the prominent credit societies were the Pioneer Urban in
Bombay (November 11, 1905), the No.1 Military
Accounts Mutual Help Co-operative Credit Society in
Poona (January 9, 1906). Cosmos in Poona (January 18,
1906), Gokak Urban (February 15, 1906) and Belgaum
Pioneer (February 23, 1906) in the Belgaum district, the
Kanakavli-Math Co-operative Credit Society and the
Varavade Weavers’ Urban Credit Society (March 13,
1906) in the South Ratnagiri (now Sindhudurg) district.
The most prominent amongst the early credit societies
was the Bombay Urban Co-operative Credit Society,
sponsored by Vithaldas Thackersey and Lallubhai
Samaldas established on January 23, 1906..

The Cooperative Credit Societies Act, 1904 was

amended in 1912, with a view to broad basing it to
enable organisation of non-credit societies. The
Maclagan Committee of 1915 was appointed to review
their performance and suggest measures for
strengthening them. The committee observed that such
institutions were eminently suited to cater to the needs
of the lower and middle income strata of society and
would inculcate the principles of banking amongst the
middle classes. The committee also felt that the urban
cooperative credit movement was more viable than
agricultural credit societies. The recommendations of
the Committee went a long way in establishing the
urban cooperative credit movement in its own right.

In the present day context, it is of interest to recall that

during the banking crisis of 1913-14, when no fewer
than 57 joint stock banks collapsed, there was a there
was a flight of deposits from joint stock banks to
cooperative urban banks. Maclagan Committee
chronicled this event thus:
“As a matter of fact, the crisis had a contrary effect, and
in most provinces, there was a movement to withdraw
deposits from non-cooperatives and place them in
cooperative institutions, the distinction between two
classes of security being well appreciated and a
preference being given to the latter owing partly to the
local character and publicity of cooperative institutions
but mainly, we think, to the connection of Government
with Cooperative movement”.

Under State Purview

The constitutional reforms which led to the passing of

the Government of India Act in 1919 transferred the
subject of “Cooperation” from Government of India to
the Provincial Governments. The Government of
Bombay passed the first State Cooperative Societies Act
in 1925 “which not only gave the movement its size and
shape but was a pace setter of cooperative activities
and stressed the basic concept of thrift, self help and
mutual aid.” Other States followed. This marked the
beginning of the second phase in the history of
Cooperative Credit Institutions.

There was the general realization that urban banks have

an important role to play in economic construction. This
was asserted by a host of committees. The Indian
Central Banking Enquiry Committee (1931) felt that
urban banks have a duty to help the small business and
middle class people. The Mehta-Bhansali Committee
(1939), recommended that those societies which had
fulfilled the criteria of banking should be allowed to
work as banks and recommended an Association for
these banks. The Co-operative Planning Committee
(1946) went on record to say that urban banks have
been the best agencies for small people in whom Joint
stock banks are not generally interested. The Rural
Banking Enquiry Committee (1950), impressed by the
low cost of establishment and operations recommended
the establishment of such banks even in places smaller
than taluka towns.

The first study of Urban Co-operative Banks was taken

up by RBI in the year 1958-59. The Report published in
1961 acknowledged the widespread and financially
sound framework of urban co-operative banks;
emphasized the need to establish primary urban
cooperative banks in new centers and suggested that
State Governments lend active support to their
development. In 1963, Varde Committee recommended
that such banks should be organised at all Urban
Centres with a population of 1 lakh or more and not by
any single community or caste. The committee
introduced the concept of minimum capital requirement
and the criteria of population for defining the urban
centre where UCBs were incorporated.

Duality of Control

However, concerns regarding the professionalism of

urban cooperative banks gave rise to the view that they
should be better regulated. Large cooperative banks
with paid-up share capital and reserves of Rs.1 lakh
were brought under the perview of the Banking
Regulation Act 1949 with effect from 1st March, 1966
and within the ambit of the Reserve Bank’s supervision.
This marked the beginning of an era of duality of control
over these banks. Banking related functions (viz.
licensing, area of operations, interest rates etc.) were to
be governed by RBI and registration, management,
audit and liquidation, etc. governed by State
Governments as per the provisions of respective State
Acts. In 1968, UCBS were extended the benefits of
Deposit Insurance.

Towards the late 1960s there was much debate

regarding the promotion of the small scale industries.
UCBs came to be seen as important players in this
context. The Working Group on Industrial Financing
through Co-operative Banks, (1968 known as Damry
Group) attempted to broaden the scope of activities of
urban co-operative banks by recommending that these
banks should finance the small and cottage industries.
This was reiterated by the Banking Commisssion
(1969).

The Madhavdas Committee (1979) evaluated the role

played by urban co-operative banks in greater details
and drew a roadmap for their future role recommending
support from RBI and Government in the establishment
of such banks in backward areas and prescribing
viability standards.

The Hate Working Group (1981) desired better

utilisation of banks' surplus funds and that the
percentage of the Cash Reserve Ratio (CRR) & the
Statutory Liquidity Ratio (SLR) of these banks should be
brought at par with commercial banks, in a phased
 manner. While the Marathe Committee (1992) redefined
the viability norms and ushered in the era of
liberalization, the Madhava Rao Committee (1999)
focused on consolidation, control of sickness, better
professional standards in urban co-operative banks and
sought to align the urban banking movement with
commercial banks.

A feature of the urban banking movement has been its

heterogeneous character and its uneven geographical
spread with most banks concentrated in the states of
Gujarat, Karnataka, Maharashtra, and Tamil Nadu.
While most banks are unit banks without any branch
network, some of the large banks have established their
presence in many states when at their behest multi-
state banking was allowed in 1985. Some of these
banks are also Authorised Dealers in Foreign Exchange

Recent Developments

Over the years, primary (urban) cooperative banks have

registered a significant growth in number, size and
volume of business handled. As on 31st March, 2003
there were 2,104 UCBs of which 56 were scheduled
banks. About 79 percent of these are located in five
states, - Andhra Pradesh, Gujarat, Karnataka,
Maharashtra and Tamil Nadu. Recently the problems
faced by a few large UCBs have highlighted some of the
difficulties these banks face and policy endeavours are
geared to consolidating and strengthening this sector
and improving governance.

Source: Adapted from a paper by O.P. Sharma,

formerly of the History Cell.
 
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