Cooperative Credit Societies in India: Roles and Functions

India’s agricultural economy depends heavily on timely and affordable credit reaching millions of small and marginal farmers. Yet, commercial banks often struggle to serve remote villages. This is where cooperative credit societies step in – grassroots financial institutions that have been channelling institutional credit to rural India for over a century. Rooted in the principles of mutual help and democratic management, these societies form the backbone of India’s short-term cooperative credit structure and continue to play a vital role in agricultural development and financial inclusion.

What are cooperative credit societies? 🔗

Cooperative credit societies are member-owned financial institutions where individuals with shared economic interests pool their savings to meet mutual credit needs. Unlike commercial banks that aim to maximise profits, these societies exist primarily to serve their members – farmers, artisans, and other rural workers – by providing affordable loans and encouraging savings.

Every member has an equal say in decision-making, following the principle of one member, one vote, regardless of how much capital they have contributed. This democratic structure makes cooperative credit societies particularly well-suited for serving economically weaker sections of society. They are registered under respective state cooperative laws and operate under a dual regulatory framework involving state governments and the Reserve Bank of India.

Historical background of cooperative credit in India 🔗

The cooperative credit movement in India was born out of the urgent need to free farmers from exploitative moneylenders. The Cooperative Credit Societies Act of 1904 provided the first legal framework for setting up these institutions, marking the formal beginning of cooperative finance in the country. The very first Primary Agricultural Credit Society was also established in 1904.

After independence, cooperative credit societies became a cornerstone of India’s planned economic development. They were actively promoted across five-year plans to expand institutional credit in rural areas and support small farmers. Over the decades, multiple committees – including the Maclagen Committee, the All India Rural Credit Survey Committee, and later the Vaidyanathan Committee (2004) – have examined and recommended reforms for strengthening these institutions.

The three-tier cooperative credit structure 🔗

India’s short-term cooperative credit system is organised into a three-tier federal structure. Each tier has a distinct role, and funds flow from the top tier down to the village level where farmers actually receive credit.

Primary Agricultural Credit Societies (PACS) 🔗

PACS operate at the village level and form the foundation of the entire cooperative credit structure. They deal directly with farmers, providing short-term and medium-term loans for crop production, purchase of seeds, fertilisers, and other agricultural inputs. Beyond credit, many PACS also distribute consumer goods, arrange for marketing of produce, and encourage savings among members.

As of November 2024, there were 1,01,524 functional PACS across India. These societies now cover more than 93% of the country’s gram panchayats. PACS account for roughly 41% of all Kisan Credit Card loans disbursed nationally, with 95% of these KCC loans going to small and marginal farmers.

However, not all PACS are financially healthy. An RBI report noted that at the end of March 2021, only about 47,297 PACS were operating in profit – less than half the total. This highlights the ongoing challenge of making these grassroots institutions financially sustainable.

District Central Cooperative Banks (DCCBs) 🔗

DCCBs function at the district level and serve as the crucial link between PACS and State Cooperative Banks. Their primary role is to channel funds from higher-tier institutions to PACS, enabling them to meet the credit demands of farmers. DCCBs also accept deposits from the public, offer various banking services, and monitor and supervise the functioning of PACS within their jurisdiction.

There are approximately 352 DCCBs operating across 20 states and union territories. One of their most important responsibilities is ensuring that PACS follow regulatory guidelines and operate efficiently. DCCBs also provide technical guidance and administrative support to the societies under them.

State Cooperative Banks (SCBs) 🔗

State Cooperative Banks sit at the apex of the short-term cooperative credit structure, operating at the state level. They mobilise resources through public deposits and refinance from NABARD, and then channel these funds to DCCBs for onward lending to PACS. SCBs also manage the surplus funds of affiliated cooperative societies and provide expertise in funds management.

There are 33 State Cooperative Banks in India. The Department of Financial Services notes that SCBs and DCCBs fall under the regulatory purview of the RBI through the Banking Regulation Act, while PACS remain outside its direct regulatory ambit.

Key functions of cooperative credit societies 🔗

Cooperative credit societies perform several interconnected functions that go beyond simple lending.

Providing agricultural credit 🔗

The most fundamental function is delivering timely crop loans and working capital to farmers. These loans help farmers purchase seeds, fertilisers, pesticides, and meet other production costs. The short-term nature of these loans (typically 6-18 months) aligns with the agricultural cycle, making repayment more manageable. Medium-term loans are also available for activities such as purchasing farm equipment or investing in dairy and fisheries.

Mobilising rural savings 🔗

Cooperative credit societies encourage their members to save regularly. These small deposits, when pooled, create a local fund that can be lent to members in need. This savings mobilisation function reduces dependence on external borrowing and builds financial resilience within the community.

Distributing agricultural inputs 🔗

Many PACS go beyond credit to serve as distribution centres for seeds, fertilisers, and pesticides. Some also operate as fair price shops, selling essential commodities to rural households. This multi-service role makes them a one-stop solution for many of the everyday needs of farming communities.

Supporting rural development 🔗

Cooperative credit societies participate in various government-sponsored rural development programmes. They support infrastructure building, promote sustainable farming practices, and help implement schemes like the Kisan Credit Card (KCC). Under the government’s broader vision, PACS are being transformed into multi-service centres that can offer dairy, fishery, storage, and other livelihood services alongside credit.

Role in financial inclusion 🔗

Cooperative credit societies hold a unique position in India’s financial inclusion landscape. Their presence in remote villages – where commercial bank branches are often absent – makes them the primary interface between the formal banking system and rural households. They provide affordable credit with minimal paperwork and quick processing, which is particularly important for small farmers who cannot navigate complex banking procedures.

By offering accessible and affordable financial services, these societies reduce farmers’ dependence on informal moneylenders who typically charge exorbitant interest rates. This was, in fact, the original purpose behind the Cooperative Credit Societies Act of 1904 – protecting rural populations from the clutches of exploitative private lending.

Challenges facing cooperative credit societies 🔗

Despite their extensive network and historical significance, cooperative credit societies face several persistent challenges that limit their effectiveness.

High overdues and weak recovery 🔗

Loan overdues remain one of the biggest problems. The seasonal and unpredictable nature of agriculture means that crop failures due to drought or monsoon irregularities often push loans into default. These overdues restrict the recycling of funds, reducing the overall lending capacity of the institution and creating a self-reinforcing cycle of financial decline. The Vaidyanathan Task Force found that nearly half of all PACS were incurring losses, largely due to frozen assets from heavy overdues.

Governance and political interference 🔗

PACS are managed by bodies elected from local village groups, which often leads to political interference in their operations. Lack of transparency, inadequate accountability mechanisms, and the use of cooperatives as instruments of political patronage have weakened many institutions. The fundamental problem of state governments acting simultaneously as regulators, shareholders, and political beneficiaries has not been fully resolved.

Dual control and regulatory gaps 🔗

The dual control structure – where state governments oversee management and the RBI regulates banking functions – creates persistent coordination gaps. The RBI may want to address a governance failure but lacks direct authority, while state registrars may lack the technical capacity or political will to act on banking issues. This split has been identified as a structural barrier to effective oversight.

Limited technology adoption and human resources 🔗

Many PACS still lack basic digital infrastructure such as computerised accounting systems. Poor internet connectivity in rural areas further limits their ability to modernise. Additionally, insufficient trained staff and weak managerial skills among PACS personnel continue to hamper efficient functioning.

Regional disparities 🔗

The cooperative credit movement is unevenly spread across India. PACS are heavily concentrated in western and southern states like Maharashtra, Gujarat, Karnataka, and Tamil Nadu. Parts of the northeast and several northern states have significantly lower cooperative penetration, leaving many farming communities underserved.

Reforms and the road ahead 🔗

Recognising the need to revitalise cooperative credit institutions, the government has undertaken several reform initiatives over the years.

Vaidyanathan Committee revival package 🔗

Based on the recommendations of the Vaidyanathan Committee (2004), the Government of India launched a comprehensive revival package for the short-term cooperative credit structure. The government released ₹9,245 crore under this package, aimed at clearing accumulated losses, recapitalising institutions, and driving legal and governance reforms. While the package led to improved financial indicators in many cooperative banks, implementation varied significantly across states, with some resisting governance reforms.

Computerisation of PACS 🔗

One of the most significant recent initiatives is the Computerisation of PACS project, implemented by NABARD on behalf of the Ministry of Cooperation. With a total budget of ₹2,516 crore, this project aims to digitise approximately 67,000 functional PACS using a unified ERP-based software platform. The goal is to bring transparency to PACS operations and seamlessly integrate them with the Core Banking Solutions of DCCBs and SCBs. In February 2024, 18,000 digitised PACS were formally inaugurated by the Prime Minister.

Ministry of Cooperation and new policy direction 🔗

The establishment of a dedicated Ministry of Cooperation in 2021 signalled renewed policy attention to the cooperative sector. The government has also approved plans to establish two lakh new multipurpose cooperative societies – including PACS, dairy, and fishery cooperatives – to ensure coverage in every gram panchayat. Since January 2021, over 7,768 new PACS have been established across states.

Transforming PACS into multi-service centres 🔗

The government’s vision is to transform PACS from mere credit institutions into multi-service centres that can offer warehousing, fair price shop services, Common Service Centre (CSC) facilities, custom hiring centres, and more. Over 35,000 PACS have already started providing CSC services to rural citizens. This diversification is expected to improve the revenue base of PACS and make them more sustainable.

Why cooperative credit societies still matter 🔗

In an era of digital banking and fintech solutions, it might seem that cooperative credit societies are outdated. But the reality is different. With over one lakh PACS covering more than 93% of gram panchayats and serving 13.8 crore members, no other institutional form matches their reach in rural India. Their strength lies in relationship banking – PACS managers know their members personally and understand their needs and aspirations. This local knowledge and social trust cannot be easily replicated by commercial banks or digital platforms.

The cooperative credit structure is not without serious weaknesses. But with ongoing digitisation, governance reforms, and the push to make PACS into diversified service centres, there is potential for these century-old institutions to become more relevant than ever in achieving the goals of agricultural development and rural financial inclusion.

What do you think? Can the ongoing computerisation and governance reforms truly transform cooperative credit societies into efficient, self-sustaining institutions? And should PACS focus on expanding their non-credit services – like warehousing and input supply – to become financially viable, or should strengthening their core lending function remain the priority?

References

1. https://financialservices.gov.in/beta/en/agriculture-credit
2. https://www.rbi.org.in/
3. https://www.nabard.org/digitalizing-cooperatives.aspx
4. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2077945&reg=3&lang=2
5. https://www.researchgate.net/publication/265167607_Revival_of_Cooperative_Credit_Institutions_-_Recommendations_of_the_Vaidyanathan_Committee
6. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1578809
7. https://www.cooperation.gov.in/en/about-primary-agriculture-cooperative-credit-societies-pacs