Appreciative of co-op banks in 2013, is RBI doing a U-turn three years later?

2013 RBI study termed co-op banks more approachable than commercial ones, in 2016 slaps ban
Appreciative of co-op banks in 2013, is RBI doing a U-turn three years later?
Appreciative of co-op banks in 2013, is RBI doing a U-turn three years later?
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In a study conducted just three years ago as part of a Development Research Group Project by the Reserve Bank of India and Kochi’s Centre for Socio-Economic and Environmental Studies, it was found that cooperative banks were deemed more approachable than commercial ones among rural households.

Fast forward to 2016, and the very same RBI has slapped a ban on cooperative banks from accepting or exchanging devalued notes as part of the Centre’s recent demonetisation move.

The study titled ‘How the poor manage their finances: A study of the portfolio choices of poor households in Ernakulam district’ was undertaken on the suggestion of the then RBI governor in April 2013 to ‘develop a grass-root level understanding’, so as to devise schemes for meaningful financial inclusion and inclusive growth.

Conclusions were drawn on the data provided by 107 poor households selected from three rural localities and urban slums in Kochi city of Kerala, a state known for its ‘achievements in poverty reduction and social development’.

The household profile included their composition, the household head and/or chief wage earner, and living conditions.

Data was gathered based on one month of diary keeping (Sep-Oct 2012) by the said households as well as a household survey of only Below Poverty Line (BPL) households eligible for subsidized ration from the public distribution system. The richness of the analysis compensated for the smallness of the sample (Collins and Murdoch 2007).

Close monitoring of the economic and portfolio profiles of the poor is a vital process for ‘any meaningful involvement of the banks in the financial lives of the poor’, says the study. This greatly depends on the ‘ability of banks to meet the credit requirements of the poor’.

A number of financial schemes have been implemented by both the Centre and state governments to ensure that the post-liberalization benefits trickle to the poor, but this has not translated on the ground to the ‘envisaged or desired extent’.

With the RBI making financial inclusion a policy priority, and the Centre citing inclusive growth as a policy agenda, it is imperative to understand that financial inclusion and inclusive growth are inter-related phenomena.

It is only when financial inclusion facilitates inclusive economic growth that the latter eventually leads to widening of the customer base of the banks. In this scenario, it is ironically the cooperative societies that the poor identify with, as banks in the general sense of the term.


About 3/4th of the poor in rural areas and 2/3rds in urban areas have an account in a commercial bank. 74.4% of the rural poor and 68% of urban poor were found to have savings or ‘borrowal’ accounts in commercial banks, making it a total of 72.9%.

Include co-operative banks and societies, the percentage shoots up to 96.3% among the rural poor and 72% of the urban poor, totaling 91%.

That means 1/3rd of the rural poor households are catered to by commercial banks, while 1/5th are by co-operative societies, with 60% among the rural poor being members of some co-operative institute or the other.

An interesting factor that cropped up in the study was that the rural poor had better access to banks and co-operative institutions for their credit and saving requirements than the urban poor.

One major reason for the same is that Self-Help Groups (SHG) like Kudumbashree have strong links with co-operative institutions. Kudumbashree is the state government-sponsored principal agency for implementing the Centre’s National Livelihood Mission. And the rural poor depend a great deal on SHGs and MFIs (Micro Finance Institutions) for loans.

Quoting from the study:

“The dependence on the money lenders for gold loans despite the lower interest rate in the banks indicates that more than the interest rates, it is the easy and timely availability which matters to the poor.

Here, cooperative societies and moneylenders score over commercial banks. Cooperative societies are seen by the poor as the most approachable among banks. Commercial banks suffer from a perception problem, as they are not considered a friendly neighbourhood institution which one can rely on, for their financial requirements.”

The study also found that the financial liabilities of the poor exceeded their financial assets, with the said difference more among rural households, despite having a better financial base.

Financial struggles of the poor

The poor not only have to grapple with insufficient income, but also deal with ‘irregular and unpredictable income flows’.  The majority of loans availed were for house construction or maintenance and healthcare financing.

While the monthly cash inflow was Rs 15,553 on an average, only 61% of the same was on account of income. The difference between the outflow and inflows were met mainly through loans, averaging Rs 5322 per household, with three to four loan transactions per month.

About 5% of the shortage is usually met through ‘donations, hand loans returned by others, drawing from one’s own savings, and sale of assets or durables in hand’.

What the poor need

- Easily available credit to tide over the gaps in income inflows and consumption outflows.

- Small consumption loans/credit/overdraft.

- Credit schemes to deal with financial emergencies.

- Procedures made more flexible and simple.

- Quicker responses from banks.

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