Why Cooperative Banks Ail in the State ?

Cooperative banks play a vital role in the economy particularly in the rural areas. However, these banks in the state face a multitude of challenges that contribute to their ailing state. These issues are often interconnected and lead to financial distress, loss of public trust, and a diminished role in the evolving banking landscape. These can be summed up as under :

Dual Regulatory Structure and Weak Governance: Cooperative banks are regulated by the RBI for banking operations and state governments for management. NABARD also comes to play a role for agricultural loans through cooperative banks and its supervision. This control by different authorities often leads to regulatory ambiguities, lack of clear accountability, and ineffective supervision. A significant problem in cooperative sector is the strong political influence over cooperative banks. Board members often have political affiliations, leading to financial mismanagement, fraudulent lending, and sometimes even money laundering. This is exacerbated by lack of transparency, professional ethics, weak internal controls and absence of independent directors.
State audits are frequently irregular and lack depth, allowing financial discrepancies and frauds to go unchecked for years together. This makes it difficult to detect and address problems in a timely manner.

Financial Irregularities and Poor Asset Quality: There have been numerous instances of large-scale misappropriation of funds in cooperative banks across Odisha, leading to significant losses and even closure in some cases. Cooperative banks often suffer from high levels of NPAs due to lax credit appraisal, poor post-sanction monitoring, and a lack of effective recovery mechanisms. Loans are sometimes given without proper collateral or to uncreditworthy borrowers, contributing to bad debts. Cases of issuing unsecured loans to local financiers and real estate entities , facilitating black money transactions, have been reported in some instances. Many cooperative banks have a lower capital and resource base, making it difficult for them to expand their loan portfolios and compete effectively in the market.
Operational Deficiencies and Lack of Modernization: Most cooperative banks lag behind commercial banks in adopting modern technology. They often rely on outdated software and manual record-keeping, making them vulnerable to fraud and operational inefficiencies. This also limits their ability to offer modern banking services like net banking, mobile banking, and ATMs, making them less attractive to new customers. In the past there was effort to introduce mobile ATMs in remote areas but this has become ineffective.
Many primary cooperative societies ( PACS) are managed by individuals who lack proper knowledge of financial implications. Staff often aren't qualified or trained in accounting and modern banking practices, leading to errors and inefficiencies. Excessive paperwork, lack of awareness campaigns, and limited branch networks contribute to poor customer experience, pushing potential customers towards other banks.

Erosion of Public Trust and Competition: Incidents of bank closures and misappropriation of funds, as seen with the Urban Cooperative Bank, Bhubaneswar, have severely eroded public trust in the cooperative banking system. The government's efforts to refund depositors after years indicate the seriousness of this issue. The rise of microfinance institutions (MFIs), non-banking financial companies (NBFCs), fintech platforms, and payment banks has significantly increased competition, diminishing the role and market share of cooperative banks. These newer entities often offer more agile and tech-driven services.
Structural and Systemic Issues:
There can be a lack of proper coordination and collaboration among different cooperative societies at various levels. There are conflicting interests and lack of coordination among them.

Cooperative banks often exhibit a high dependence on government support rather than fostering member-driven and self-sustaining operations.

Insufficient internal checks and control systems make them susceptible to fraud and irregularities.

In conclusion , it may be mentioned that cooperative banks in Odisha are caught in a vicious cycle of mismanagement, financial irregularities, technological backwardness, and a dwindling customer base, all compounded by a challenging regulatory environment and intense competition. Addressing these issues would require comprehensive reforms, including strengthening governance, improving professional management, embracing technology, and rebuilding public trust. Best practices in other states can also help to improve the quality and efficiency of the cooperative banks in the state.