Hi everyone,

Welcome to the 69th edition of The Pattern, a weekly newsletter where we unpack the latest from the worlds of finance, technology, and the economy.

It’s been a rough week (or even year) for cooperative banks. The RBI cancelled the licences of 12 such banks in 2022, and several this year - with the latest one to face the chopping block being Uttar Pradesh-based United India Cooperative Bank Limited.

But let’s first take a step back.

The origins of cooperative banking can be found back in 1904, when the Cooperative Societies Act came into effect. The objective of this Act was to establish cooperative credit societies that would “encourage thrift, self-help, and cooperation among agriculturists, artisans, and persons of limited means.”

In the years since, thousands of cooperative banks have been set up across the country, and they’ve played a crucial role in enabling financial inclusion. This  paper  goes as far as to term cooperative banks a ‘vital lifeline’ for the Indian economy, while  another  states that “demographically, these institutions have enabled access to financial services to low and middle-income groups in both rural and urban areas.”

Why, then, is the RBI cracking down on them?

Truth is, despite their crucial role in the Indian economy, cooperative banks have seen their share of struggles - which came under a specially harsh spotlight after the  collapse  of the Punjab and Maharashtra Cooperative Bank in 2019. Soon after, the government amended the Banking Regulation Act to give the RBI supervisory powers over such banks - and the regulatory body wasted no time in penalising those that violated set regulations.

The latest victim, United India Cooperative Bank Limited, faced the music due to ‘lack of capital and adequate earning prospects.’

However, on peeling back the layers, it’s clear that the challenges faced by cooperative banks are a lot more complex than they seem. Poor corporate governance practices, rising frauds, and dual regulation from the RBI and the government seem to have created a recipe for disaster. It’s not just my opinion - the number of urban cooperative banks  fell from 1,926  in 2004 to 1,551 in 2018, as per RBI data.

The cooperative bank story is one of involuntary obsolescence. It’s what happens when innovation doesn’t keep pace with the competition. There’s an equally important role of enabling regulation too here but it does no good to dwell on the past. 

The big picture 

The key takeaway from this story is that financial services morph and evolve with time but if the players and the regulation doesn’t keep up, there’s heartburn and mess all around. In the case of cooperative banks, they found themselves at the rough end of a bargain where their utility for financial access was trumped by modern and legacy lenders’ gambit to digitise and go where no one’s been. 

This isn’t the only collateral damage of the financial and digital evolution in the country. Payment banks have largely suffered a similar fate. But, lessons can be learned from Small Finance Banks - the underdogs that nobody bet on - and how they  turned around from ashes  with aggressive product building, marketing and  beating  their Goliath counterparts at their own game. 

It might be too late for cooperative banks but those in fintech or banking reading this would do well to ask themselves if they’re avoiding failure or setting themselves up for success - two very different outcomes that require wildly different approaches. 

That’s all from me this week. As always, leaving you with interesting reads and numbers:

Between the digits:

• INR 70:  The price of  subsidised  tomatoes in key cities, down from INR 80

• 7.6%:  The rate at which India’s  GDP  needs to grow for it to become a developed country by 2047

• INR 49:  The price of the ‘ world’s cheapest pizza ’ launched by Dominos in India

• 6.4%:  Asian Development Bank’s  growth  prediction for India (for the current fiscal)

Reading recommendations:

• India will soon become the third largest economy. Does it matter?

• Fintech startups crowd NBFC queue to enter credit lane

• India will be shielded from risks of global slowdown: World Bank President

• SEC is worried chatbots could fuel a market panic

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to never miss any updates.  

 Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.