Cooperative banks play a major role in developing and maintaining the integrity of our financial infrastructure. However, do we know about the financial entity?
Cooperative bank is perhaps the only bank in the market that is owned by its customers. Yes, you read it right. To know more about it, stay with us throughout the discussion.
Cooperative Bank Explained
Cooperative bank is a financial entity that provides retail and commercial banking solutions and services to its clients. The twist in the tail is, unlike other banks, where they are owned by the government or a private body, the customers are the owners.
The word ‘cooperative’ explains a lot in this manner. Suppose, you have a group of people in your area with the same intent and common interest. Everyone in the group is willing to save money ‘together’.
In this particular case, a cooperative bank will help you. The group can save their money and also invest that in a common sector. The interest will be mutually divided. A certain member of the group can also seek loans and other financial assistance from the bank as well.
How Many Types of Cooperative Banks are there?
Cooperative banking in the USA has been very productive and successful throughout the years. Cooperative banking is very profitable in other parts of the world like the European Union, India, the UK, and other countries.
National Cooperative Bank is one of the biggest cooperative banks in the States, having over 3,100 members currently contributing. This sector can be of 4 types, depending on their public and private dealings. These are:
Primary Cooperative Credit Society
Commonly known as credit unions, these institution has a purpose of promoting thrift, providing loans and other financial services at a very reasonable rate, and also maintaining the financials of their customers AKA owners.
The members tend to share a common point of interest. Either they can be living in the same geographical area or may share a common ground. This group of people funds the entire financial entity.
For that, only the members of the credit union can avail the solutions and financial services. As the institution does not get any sort of outside funding, the interest rates are lower than usual.
However, this is limited to a small group of people and can be referred to as the smallest institution of cooperative banking.
Land Development Banks
Though not commonly seen in the US, Land Development Banks are very popular in developing countries like India. These banks provide long term loans to their members and farmers to develop the infrastructure of their businesses and other entities.
These banks are also cooperative banks as the members of these institutions invest in the financial flow.
Central Cooperative Banks
Central Cooperative banks look for central intervention of other cooperative banks. They can be of two types.
Cooperative Banking Union, where the investors are solely cooperative societies and credit unions.
And the other is Mixed Control Cooperative Bank, where the cooperative societies, as well as, individuals can become members.
Many might take central and state as the same institution. However, they are not the same. Central banks can provide loans to affiliated primary societies with a tenure of 1 to 3 years. State cooperative banks, on the other hand, lie higher up the hierarchy.
State Cooperative Banks
As you might have guessed by the name, these banks work within the state or the district of a particular area. These banks workings like a mother bank for small credit unions as well as individuals.
The main benefit of these banking institutions is the flexibility and services. If you are a member of the credit union entitled under the institution or are a direct member of the state cooperative bank, you will be able to get a loan in lower interest.
The main motive of this institution remains intact, helping its members and making them financially sound.
It is more like upscaling credit unions.
Functions of Cooperative Banks
Functions of the cooperative banks are like other retail or commercial banks. However, they are smaller in scale and availability. Only the members of the society or the institution can have access to their services.
Providing Loans
Cooperative banks provide small to medium-sized loans to their members and credit unions. Usually, they charge 1% to 2% lower than usual banks.
These can be short-term or long-term. As the loans are limited to members, the return percentage is significantly higher than other banking systems.
Deposits
The members of the bank can deposit their money, just like other banks. The interest rate is a bit lower as the bank does not seek foreign interventions.
Their sole purpose is to help each other financially. That is why the interest rate is lower.
Long-Term Development Loans
These loans are generally provided by Land Development banks. These are long term loans, especially provided to farmers and small business owners to upscale their business entities on a long-term basis.
How Cooperative Banks Generate Income?
As the institution is limited exclusively to its members and affiliated credit unions and societies, the income source is also limited to the same grounds.
The loans that are provided to the members are the prime source of income. The number of return interests allows the institution to run the organization, also providing other members their interest based upon the deposits.
However, many cooperative societies rely on other investments like government and non-government contracts, businesses, and such sort. But, these cases are rare. The institution does not contaminate its cellular integrity at any cost.
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Final Thoughts
Cooperative banks are crucial for our society. It not only meets up certain financial needs, it also encourages people to work and thrive together.
The only major downfall of this banking system is the lack of scalability. You cannot just upscale the operations as it is only limited to the members.
Also, you cannot take other people to other grounds in your bank. Other than that, this is a good institution for medium to small banking solutions.