Credit cooperatives

Also called: Cooperative credit societies · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 10, Ch 3 "Money and Credit"

Meaning

Credit cooperatives (also called cooperative credit societies) are member-owned societies, such as PACS (Primary Agricultural Credit Societies). They pool their members' deposits, borrow from higher-tier cooperative banks, and lend to members at low interest.

• They are a part of formal credit, which comes from banks and cooperatives and is supervised by the RBI. Moneylenders, traders and landlords give informal credit, and nobody supervises its terms.
• At independence, moneylenders kept small farmers in a debt trap. In a debt trap, a borrower keeps taking new loans to repay old ones and never becomes free of debt. Credit cooperatives were one of the first institutions set up to break this trap.

Explanation

How a credit cooperative works (the Krishak Cooperative chain, Class 10)

• Step 1: Pooling. Members put their savings into the society as deposits.
• Step 2: Collateral. The society pledges these pooled deposits as collateral (an asset pledged to secure a loan). This lets it get a large loan from a bank.
• Step 3: Lending. The society gives loans to members for:
• farm implements
• cultivation
• fishery
• housing

• trade

• Step 4: Recycling. Members repay their loans, and the society uses that money for a new round of lending.

• Why the loans are cheap:
• The members own the society, so it is not trying to earn profit from them.
• Its money comes from members' deposits and from loans given by higher-tier cooperative banks.
• So it can charge members much less than a moneylender.

The structure: two separate systems

Tier	Short-term (crop loans)	Long-term (land and investment)
Village	PACS	PCARDB (primary branch)
District	DCCB (District Central Cooperative Bank)	—
State	StCB (State Cooperative Bank)	SCARDB

• Short-term structure (PACS → DCCB → StCB):
• It gives crop loans, usually for one season. These pay for things like seeds and fertiliser.

• The PACS borrows from the DCCB, and the DCCB borrows from the StCB. Money flows down the tiers to the village.

• Long-term structure (PCARDB → SCARDB):

• These were earlier called land development banks.
• SCARDB is the State Cooperative Agriculture and Rural Development Bank. PCARDB is its unit at the primary (village) level.
• They give long-term loans against a land mortgage, which means the farmer pledges land as security.
• These loans pay for investments such as tubewells and machinery.

What makes cooperatives strong or weak

• Strengths:
• They have deep local reach, because a PACS sits inside the village.

• The members know each other, so the society can judge who will repay.

• Weaknesses:

• Their finances are weak, so they depend on higher tiers for funds.
• Their accounts are poor.
• They suffer elite capture: a few powerful members control the society.

• They depend on credit alone and have no other business income.

• What happens when repayment fails:

• Loan waivers or poor recovery → less money comes back to the society → the next round of lending shrinks → the cooperative becomes weaker.

In India

• The legal start: the Cooperative Credit Societies Act of 1904 was the first legal base for institutional rural credit.
• The AIRCS verdict (1954): the All-India Rural Credit Survey said, "Cooperation has failed, but cooperation must succeed."
• It proposed that the state become a partner in cooperatives.

• It also proposed a state-owned commercial bank, which led to the SBI in 1955.

• The multi-agency approach: cooperatives are one of four channels of rural credit. The other three are commercial banks, RRBs and land development banks. Class 11 says these institutions are "expected to dispense adequate credit at cheaper rates".

• NABARD (set up on 12 July 1982, under the NABARD Act 1981) [6]:
• It supervises cooperative banks and RRBs.

• It refinances lenders. This means it gives money back to a bank that has already lent to a rural borrower, so the bank can lend again.

• Ministry of Cooperation (2021): this is a separate ministry for the cooperative sector. Its motto is "Sahkar se Samriddhi" ("prosperity through cooperation") [4].

• Model bye-laws for PACS (5 January 2023) [2][4]:
• They let a PACS take up more than 25 business activities, not only credit. This turns it into a multi-purpose PACS.
• They aim to improve governance, transparency and accountability [4].

• 32 States/UTs had adopted them by 2025 [4].

• PACS computerisation: this is a Centrally Sponsored Scheme (a scheme funded jointly by the Centre and the states). It was approved on 29 June 2022 [3][4].

• Target: 67,930 PACS to be made digital by 31 March 2027.
• Funds released: ₹752.77 crore to the states and ₹165.92 crore to NABARD.

• Progress in 2025: 54,150 PACS were on ERP software (a common accounting and management system), and 43,658 of them were live [4].

• "World's Largest Grain Storage Plan in the Cooperative Sector" (approved 31 May 2023) [5]:

• It builds warehouses, custom hiring centres and primary processing units at the PACS level.
• It does this by convergence, which means it combines money from existing central schemes [5].
• Its aims are to cut grain wastage and transport costs and to help farmers get better prices [5].

Don't confuse with

• Regional Rural Banks (RRBs): an RRB is not member-owned. It is jointly owned by the Centre (50%), the sponsor bank (35%) and the state (15%). A credit cooperative is owned by its own members.
• Commercial banks: their shareholders or the government own them, and they aim to earn profit from customers. In a cooperative, the borrowers are also the owners.
• Short-term vs long-term cooperatives: the PACS → DCCB → StCB tier gives seasonal crop loans. The PCARDB → SCARDB tier (land development banks) gives long-term loans against a land mortgage. Do not mix the two.
• Informal credit (moneylenders, traders): a cooperative is formal credit under RBI supervision, so its lending terms are regulated. A moneylender's terms are not supervised by anyone.

Prelims Hooks

• The first law for institutional rural credit was the Cooperative Credit Societies Act of 1904.
• "Cooperation has failed, but cooperation must succeed" comes from the AIRCS report of 1954. Its idea of a state-owned bank led to the SBI in 1955.
• Short-term tiers: PACS (village) → DCCB (district) → StCB (state). Long-term tiers: PCARDB → SCARDB.
• NABARD supervises cooperative banks and RRBs. Trap: NABARD does not regulate commercial banks; the RBI does that.
• The Model bye-laws for PACS (5 January 2023) let a PACS run 25+ activities [2][4]. The PACS computerisation scheme was approved on 29 June 2022 [3].
• The Ministry of Cooperation was set up in 2021, with the motto "Sahkar se Samriddhi" [4].

Mains Points

• Local reach vs financial strength:
• Cooperatives reach small and marginal farmers whom commercial banks often miss.
• But weak finances, poor accounts, elite capture and political loan waivers have hurt them.

• This is why India uses a multi-agency approach, in which cooperatives, commercial banks and RRBs cover each other's gaps and NABARD refinances and supervises. Small farmers still borrow from informal lenders, so the aim should be to strengthen cooperatives, not replace them.

• Cooperative revival as a governance reform:

• The Ministry of Cooperation (2021), the model bye-laws, ERP-based computerisation and the grain-storage plan target the old problems of PACS [2][3][5].

• Together they push PACS to become multi-purpose, transparent village institutions that do not depend on credit alone.

• Federalism debate:

• Agriculture and cooperation are State List subjects (Entries 14 and 32).
• A strong central role, through a Union ministry and central model bye-laws, therefore raises questions about the balance of power between the Centre and the states. This is useful for GS-II answers.

Related concepts

• Social banking
• Multi-agency approach to rural credit
• Regional Rural Bank

Read more

• Building the institutions: social banking and the multi-agency approach