Cooperative Banks in India: Types and Function of Urban & Rural Banks

Cooperative banks, also known as co-op banks, are unique financial institutions that significantly impact the socio-economic development of communities. These banks operate on cooperation, self-help, and mutual assistance principles, focusing on providing accessible and affordable financial services to their members.

In this article, we will explore cooperative banks’ key features and benefits, highlighting their role in promoting financial inclusion, empowering individuals and communities, and fostering sustainable economic growth for UPSC Exam Preparation.

What are Cooperative Banks?

Cooperative banks are financial institutions that operate on the principle of cooperation among their members. They are owned and governed by their customers, who are also the shareholders of the bank. Moreover, they offer various banking and financial services such as loans, deposits, and banking accounts to their members. They have a specific focus, such as providing agricultural products or supporting small-scale industries.

In addition, Cooperative banks operate on the principle of “no profit, no loss” and prioritize the financial needs and welfare of their members. Unlike commercial banks that focus on profit-making, cooperative banks prioritize the financial needs and welfare of their members and the communities they serve.


The objectives of cooperative banks can be outlined as follows:

  • Promote financial inclusion.
  • Providing rural financing and micro-financing.
  • Eliminating the influence of money lenders and intermediaries.
  • Empower members and foster a sense of ownership.
  • Provide affordable and accessible financial services.
  • Support local economic development.
  • Adhere to cooperative principles of trust and transparency.
  • Promote savings and financial education.
  • Strengthen social and community bonds.

History of Cooperative Banks in India

The cooperative movement emerged during the Industrial Revolution in 18th and 19th century England. Hermann Schulze and Friedrich Wilhelm Raiffeisen introduced the concept of cooperative banks to provide accessible credit to small businesses and marginalized sections of society, leading to the establishment of cooperative banks worldwide. Here is a brief overview of the history of cooperative banks in India:

Co-operative Credit Societies Act, 1904: During British India, the cooperative banking model was adopted based on the recommendations of Sir Frederick Nicholson and Sir Edward Law. This led to the passing of the Co-operative Credit Societies Act, of 1904. The act aimed to address rural indebtedness and improve the conditions of farmers by promoting the establishment of credit cooperative societies.

First Urban Co-operative Credit Society: As a result of the Co-operative Credit Societies Act, the first urban co-operative credit society was registered in October 1904 in Kanjeepuram, now in Tamil Nadu State. This marked the beginning of the institutionalization of the Cooperative Banking system in India.

Defects in the Act and the Cooperative Societies Act, 1912: The Co-operative Credit Societies Act of 1904 had certain limitations. It only allowed for the registration of credit societies, leaving out non-credit societies or federal societies. To address these issues, the government introduced the Cooperative Societies Act of 1912. This act recognized the formation and organization of non-credit societies and central cooperative federations.

Montague Chelmsford Reforms (1919): In 1919, after World War I, the Montague Chelmsford Reforms were introduced in India, transferring the subject of cooperation to the states. To effectively implement and expand cooperative banks, the Bombay Provincial Government passed the Bombay Provincial Cooperative Societies Act in 1925. Other states like Madras, Bengal, Bihar, and Punjab followed suit with their own legislation.

Multi-Unit Cooperative Societies Act, 1942: In 1942, the British Government enacted the Multi-Unit Cooperative Societies Act, which regulated societies operating across multiple states. This ensured that such societies adhered to the cooperative societies act of the state where their primary business was located, promoting proper governance and functioning of cooperative banks with operations in multiple regions.

Cooperative Societies after Independence: After independence, cooperatives continued to play a crucial role in the country’s economic development.

Five Year PlanFourth Five-Year Plan
Fifth and Sixth Five-Year PlansRecognition of cooperative importance, particularly for farmers and marginalized sections.
Fourth Five-Year PlanExpansion of cooperative activities, emphasis on warehousing.
Third Five-Year PlanFocus on personnel training and expanding the cooperative movement’s reach.
Fourth Five Year PlanConsolidation of cooperative system for effective functioning.
Seventh Five-Year PlanIntroduction of programs for Farmers Service Societies and expanding cooperative scope.
Consolidation of a cooperative system for effective functioning.Focus on expanding cooperative societies for employment generation and poverty reduction.
History of Cooperative Banks in India

Also Read: Small Finance Banks

Features of Cooperative Banks

Here are the key features of cooperative banks:

  • Voluntary Association: Cooperative banks are formed by a voluntary association of individuals or small businesses who come together to meet their common financial needs.
  • Customer Ownership: Members of cooperative banks are both customers and owners of the bank. Each member has an equal say in the decision-making process regardless of the size of their deposits.
  • Democratic Governance: Cooperative banks operate on the principles of democratic governance. Members elect a board of directors who are responsible for managing the bank’s affairs and making decisions on behalf of the members.
  • Limited Profit Motive: Cooperative banks aim to serve their members rather than maximize profits. Their primary focus is on meeting the financial needs of their members at reasonable rates.
  • Social Objectives: Cooperative banks often have social objectives, such as promoting financial inclusion, supporting agriculture, providing credit to small businesses, and uplifting the economically weaker sections of society.
  • Mutual Cooperation: Members of cooperative banks actively cooperate with each other and share resources to meet their financial requirements. This mutual cooperation strengthens the collective bargaining power of members.
  • Local Focus: Cooperative banks primarily serve a specific local community or region. They have a better understanding of local needs and can tailor their products and services accordingly.
  • Credit and Savings Services: Cooperative banks provide a range of banking services, including accepting deposits, granting loans, and offering various savings and investment products to their members.
  • Profit Distribution: Any surplus generated by the cooperative bank is distributed among the members in proportion to their participation or usage of the bank’s services. This ensures equitable sharing of profits.
  • Regulatory Oversight: Cooperative banks are regulated by the respective cooperative departments and banking regulators of the country to ensure compliance with regulatory requirements and safeguard the interests of members.

These features distinguish cooperative banks from other types of financial institutions and highlight their member-centric and community-oriented nature.

Types of Cooperative Banks

There are different types of cooperative banks, including:

  1. Primary Cooperative Banks
  2. Urban Cooperative Banks
  3. State Cooperative Banks
  4. Central Cooperative Banks
  5. Land Development Banks
  6. Agricultural Cooperative Banks
  7. Cooperative Rural Banks
  8. Multi-State Cooperative Banks
Urban Cooperative BanksRural Cooperative Banks
Geographical AreaPrimarily located in urban and semi-urban areasMainly situated in rural areas and villages
MembershipOpen to individuals, businesses, and organizations in urban areasOpen to individuals and communities in rural areas
Target CustomersServe urban population, businesses, and organizationsServe rural population, farmers, and agricultural communities
Loan PortfolioFocus on commercial and retail lending for urban businesses and individualsFocus on agricultural loans and financing for rural activities
Product OfferingOffer a wide range of banking and financial services catering to urban needsProvide basic banking services along with specialized products for rural communities
Credit FocusEmphasis on trade finance, working capital loans, and retail lendingEmphasis on agricultural credit, livestock loans, and rural development financing
Regulatory BodyRegulated by the central bank or financial authority of the countryRegulated by the cooperative department or state-level authorities
InfrastructureTypically have modern banking infrastructure and digital banking capabilitiesMay have limited infrastructure with a focus on local branch networks
Financial InclusionPromote financial inclusion in urban areas by offering accessible banking servicesPromote financial inclusion in rural areas by reaching underserved communities
Economic ImpactContribute to urban economic development and business growthContribute to rural development, agricultural productivity, and livelihood improvement

Advantages & Disadvantages

The advantages of Cooperative Banks are:

  • Local focus and understanding of community needs.
  • Member ownership and shared decision-making.
  • Customer-centric approach and personalized services.
  • Lower interest rates for loans and credit facilities.
  • Promote financial inclusion and serve underserved populations.

Disadvantages of Cooperative Banks are:

  • Limited access to capital and resources compared to commercial banks.
  • Lack of expertise and technological advancements.
  • Challenges in competing with larger financial institutions.
  • Limited geographical reach and branch network.
  • Dependency on member contributions for capital and growth.


In conclusion, cooperative banks offer localized banking services, prioritize the needs of their members, and promote financial inclusion. They provide a sense of ownership to members and focus on community development. However, they may face limitations in terms of resources and technology. Despite challenges, cooperative banks offer an alternative model of banking centered around cooperation and community support.

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