Budget 2022: Cooperatives seek level playing field with commercial banks

Parity with commercial banks sought in tax treatment, and for deposits, loan products

From parity in tax treatment to being allowed to participate in central government schemes, cooperative banks are looking to the Union Budget to provide a level playing field with commercial banks.

In a pre-Budget memorandum to the government, Sahakar Bharati, a body of cooperative societies, said there were many activities that cooperative banks were not allowed to perform, like extending housing loans under Pradhan Mantri Awas Yojana (subsidised housing loan scheme) and offering deposit products under the Sukanya Samriddhi Yojana.

These lenders don’t even get refinance from agencies like the Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (Nabard), neither do they get the Emergency Credit Line Guarantee Scheme (ECLGS) facility, even though many of them cater to sectors classified as priority sectors.

In the memorandum, Sahakar Bharati has requested that activities that are allowed for commercial banks should be extended to cooperative banks.

The aggregate balance sheet size of the cooperative banking sector was Rs 18.8 trillion as of March 31, 2020, which is about 10 per cent of the scheduled commercial banks’ (SCBs’) consolidated balance sheet, down from 19.4 per cent in 2004-05, according to RBI data. Over time, the relative size and influence of cooperative banks has shrunk, the RBI observed in its annual Trends and Progress Report.

Sahakar Bharti has also requested that a separate section be set up in the Department of Financial Services in the finance ministry for cooperative financial institutions.

“We have been requesting this for quite some time that in the Department of Financial Services, a section to be set up, which looks after the requirements of the co-operative financial institutions,” Satish Marathe, the founder member of Sahakar Bharati, told Business Standard.

“When I say cooperative financial institutions, it includes all types of cooperatives that are engaged in financial services, including credit cooperative societies. There are over 100,000 such societies in the country,” Marathe, who is also a member of the central board of the RBI, said.

In 2019, a committee formed by the RBI suggested that an umbrella organisation be created with a minimum capital of Rs 300 crore that can act as a self-regulatory body for small UCBs. Marathe said a request has been made that the initial capital for the umbrella organisation should come from the central government or the RBI, which can be redeemed over 5-7 years.

Sahakar Bharati also asked for differential tax treatment for depositors of cooperative banks vis-à-vis SCBs to be done away with. SCB depositors can avail of the benefit under section 80C for deposits of more than five years. This should be allowed for cooperative bank depositors as well, it said.

The organisation has also asked for the restoration of benefits under Section 80P of the Income Tax Act to cooperative societies. Under the section, such societies were exempted from paying income tax. However, the previous government had done away with the exemption.

“In our memorandum to the finance minister, we said that in various parts of the world, cooperatives are completely exempted from paying income tax because cooperatives are not ‘for profit’ institutions. After declaring a small dividend on the risk capital, the entire surplus is ploughed back into the working of a cooperative institution. It does not go in the hands of individuals. It adds to the capital formation in the country,” Marathe said.

The structure of cooperative banking in India is multi-layered, with urban and rural cooperatives as its main pillars. At the end of March 2021, there were 98,042 cooperatives — 1,534 UCBs and 96,508 rural cooperatives.

Last year, the Centre created a Ministry of Cooperation, headed by Union Home Minister Amit Shah. The move aims to provide a separate administrative, legal, and policy framework to enable the development of multi-state cooperatives.