Krishna Kumar Gupta
( Retd) Chief General Manager of NABARD
1. Do you see rural financial cooperatives playing a significant role in the rural economy of India?
A; Well, the Primary Agricultural Credit Societies (PACS) were the first institutional mechanism established to meet the seasonal crop production credit requirements of farmers with limited means in rural areas. These institutions came into existence during the early years of the twentieth century. Over time, the cooperative credit system evolved with the establishment of the District Central Cooperative Banks (DCCBs) and the Apex State Cooperative Banks (StCBs), thereby creating the Short-Term Cooperative Credit Structure (STCCS).
Simultaneously, the Land Mortgage Banks emerged in the rural financial landscape with the objective of financing long-term investments for the development of land-based resources of farmers. Together, these institutions came to be known as the Long-Term Cooperative Credit Structure (LTCCS).
These cooperative institutions continued to play a significant role in rural finance until the advent and expansion of commercial banks in rural India. During the financial year 1983–84, cooperative institutions disbursed agricultural credit amounting to ₹2,938 crore, which constituted more than 56 per cent of the total agricultural credit disbursed in the country. Over the next four decades, the volume of agricultural credit disbursed by cooperatives increased to ₹2,42,008 crore, representing a growth of more than 82 times.
2. However, a recent RBI report reveals that the share of rural financial cooperatives in agricultural credit has declined to only 9.00 per cent. What is your assessment of this deceleration?
A; Yes, this reality must be acknowledged and analysed in depth. The limitations of rural financial cooperatives began to be felt during the Green Revolution era. Consequently, the Government of India initiated the involvement of commercial banks in rural credit delivery and established Regional Rural Banks (RRBs) to serve specific categories of rural clientele. Over time, several other rural financial institutions were also permitted to enter the rural financial space and establish their own role within the sector.
In FY 1983–84, commercial banks and RRBs together accounted for around 44 per cent of agricultural credit disbursement, while cooperatives accounted for 56 per cent.
However, in FY 2023–24, out of the total agricultural credit disbursement of ₹25,48,635 crore, the cooperative sector disbursed only ₹2,42,008 crore, translating into a market share of 9.50 per cent. During FY 2024–25, the share of cooperatives further declined to 9.00 per cent.
The reasons behind this decline are not difficult to identify. The agriculture sector has witnessed tremendous growth in demand for credit owing to a wide range of developments requiring substantial investments over time. These developments include the increasing use of high-yielding varieties (HYVs) and high-income commercial crops despite shrinking landholdings; the gradual but extensive adoption of emerging agricultural technologies and production processes; and the implementation of various crop-efficiency measures related to land improvement, modernisation of irrigation systems, timely access to inputs, use of farm machinery and implements, rural electrification, harvesting systems, storage facilities and marketing infrastructure, as well as primary processing at both individual and collective levels.
Agriculture has also witnessed the emergence of organic farming, hydroponics, multi-layer farming, plasticulture, controlled-environment agriculture, precision farming and several other specialised technologies. New forms of collectivisation and group-based farming arrangements, including cooperative farming, contract farming, Joint Liability Groups (JLGs), Farmers’ Producer Organisations (FPOs) and combined farming models, have further expanded investment requirements.
In addition, investments are increasingly required in custom-hiring services, post-harvest technologies, aggregation and segregation centres, packing houses, primary processing facilities, modern storage systems equipped with digital inventory management, rapid transportation systems and integrated farm-to-market value chains. The growing use of mobile and digital application-based crop information systems, GPS-enabled technologies, remote sensing, space-based technologies, drone-enabled agricultural solutions, hand-held digital tools, Artificial Intelligence, blockchain technologies and similar innovations has also contributed to the emergence of a vibrant agri-startup ecosystem. Institutional initiatives such as e-NAM, AgriStack, Agmarknet, NCEL, NOCL and BBSSL have further accelerated this transformation.
Commercial banks and RRBs adapted themselves to these changing requirements by continuously evolving their policies, systems and procedures. They positioned themselves to provide a comprehensive range of banking and financial services under one roof. In contrast, the STCCS largely continued to focus on short-term crop loans, while the LTCCS remained confined to financing a limited range of investment activities through traditional approaches, often overlooking the emerging needs of the modern agricultural economy .As a result, the LTCCS has virtually become dormant, while the STCCS has experienced a significant erosion of its market share.
3. The Government is considering a substantial role for cooperatives in the vision of ‘Viksit Bharat’. How do you view the initiatives being taken in this direction?
A: Yes, the Ministry of Cooperation, Government of India, has been advocating a larger role for cooperative institutions. The National Cooperative Policy, 2025 has also outlined a comprehensive roadmap for the large-scale expansion of cooperatives across various sectors of the economy.
In line with these initiatives, the role of rural financial cooperatives is also expected to expand substantially. These institutions will have to meet the rapidly growing demand for financial resources from emerging cooperative enterprises and fulfil the objective of “Cooperation among Cooperatives.” It must be recognised that the Long-Term Cooperative Credit Structure (LTCCS) is virtually dormant at present. Consequently, the Short-Term Cooperative Credit Structure (STCCS) will have to assume responsibility not only for short-term lending but also for meeting the long-term investment requirements of different categories of cooperatives as well as individual cooperative customers.
Apart from the emerging requirements of the agricultural sector, cooperatives are expected to strengthen their presence in several traditional sectors. These include finance, thrift and credit; insurance; procurement and supplies; fertilizers, pesticides, agribiologicals and other agricultural inputs; consumer operations; storage and warehousing; sugar, sugarcane development and processing, including sugar mills; dairy and animal husbandry; fisheries; cotton, handloom, textiles and weavers; housing and real estate; labour and construction cooperatives; agro-processing and industrial activities; and agri-exports.
The cooperative sector is also poised to make significant inroads into several new and emerging sectors, as emphasised in the National Cooperative Policy, 2025. These include tourism and transport, education, healthcare and hospitals, electronics and information technology, MSMEs and heavy industries, pharmaceuticals and nutraceuticals, petroleum and petro-products, and infrastructure development.
Encouragingly, Bharat Taxi, the first initiative of its kind in the cooperative sector, has already begun expanding its presence across different parts of the country.
Cooperative financial institutions must recognise the enormous business potential arising from the investments flowing into these sectors. They need to adopt a paradigm shift from their present focus on short-term credit towards a universal banking approach. This transformation would enable them to provide the full spectrum of banking services under one roof, similar to those offered by scheduled commercial banks. Such a shift is essential if rural financial cooperatives are to remain competitive and evolve into “future-ready” institutions, as envisaged in the National Cooperative Policy, 2025.In this process, the middle-tier and apex-level institutions within the rural cooperative financial structure—many of which are scheduled banks—must also undertake long-pending reforms without delay. They need to broaden the range of services they offer and position themselves to harness the vast opportunities emerging under the vision of ‘Viksit Bharat’.
4. However, the adoption of universal banking to provide all kinds of credit and banking services to cooperatives on a much larger scale would require a substantial amount of additional capital. Do you foresee any constraints in this regard?
A ; At the foundation of any viable business lies the availability of adequate capital in a timely manner, at an affordable cost and on reasonable terms. Capital represents cost-free funds for any enterprise and is fundamentally mobilised by its owners.
In the case of cooperatives, capital is mobilised through the initial contribution made by members at the time of joining and through subsequent proportional contributions linked to the benefits they receive from the cooperative society. Primary Agricultural Credit Societies (PACS), which form the grassroots level of the rural cooperative financial structure, are largely constituted by farmer-members, along with a smaller number of non-farmer members. The share capital of District Central Cooperative Banks (DCCBs) is contributed primarily by PACS and other cooperative societies availing themselves of financial facilities from the DCCBs, along with a relatively small contribution from individual members and other cooperatives. At the next level, the DCCBs constitute the principal contributors to the paid-up share capital of the State Cooperative Banks (StCBs).
State Governments also provide a limited amount of capital support to cooperative institutions, particularly under schemes of public interest implemented through these organisations, subject to the provisions of the respective State Cooperative Societies Acts.
The capital mobilised by PACS is expected to meet their own capital expenditure requirements as well as their proportional contribution to the capital of the DCCB against loans obtained from the DCCB for onward lending to their members. PACS also contribute capital to various national and state-level cooperative institutions from which they receive services.
Once a capital contribution is made, it remains invested in the concerned institution and is generally not refunded upon repayment of the loan. Instead, it is adjusted and taken into account at the time of future loan availing. Members do not receive periodic interest on such capital contributions; they are entitled only to dividends, if declared by the respective cooperative institution. Quite often, the amount reflected as “investment in the share capital of various cooperatives” in the balance sheet of a PACS exceeds the share capital of the PACS itself, with the difference effectively financed through borrowings from the DCCB. This situation adversely affects the financial health of PACS and acts as a double-edged sword.
According to the latest Agricultural Census (2015), the number of operational farm holdings in India stood at 1,464.54 lakh, while the number of cultivators was 1,188 lakh. Over the last decade, the number of operational holdings may have increased marginally due to the continued fragmentation of land among successors, without any significant increase in the total cultivable area. In fact, cultivable land may have declined because of increasing demands arising from urbanisation and greenfield projects in the housing, real estate and infrastructure sectors.
Additionally, around 1,443 lakh people depend on agriculture as agricultural labourers. Data available through the Agricultural Statistics of the Ministry of Agriculture and Farmers Welfare indicate a continuous decline in the number of people dependent on agriculture, largely due to the movement of rural labour towards secondary and tertiary sector activities. Further, it must be recognised that more than 86 per cent of operational landholdings belong to small and marginal farmers (17.62 per cent small and 68.45 per cent marginal), who possess very limited capacity to make additional capital contributions to grassroots-level PACS.
Moreover, a substantial proportion of these operational holdings may be engaged in activities such as sugarcane cultivation, dairy farming, horticulture and other specialised agricultural enterprises for which separate lines of credit are available. Consequently, many of these farmers are not active beneficiaries of PACS and, therefore, do not constitute a significant source of capital expansion for these institutions.
Data available from NAFSCOB indicate that the total membership of PACS as on 31 March 2024 stood at 1,636.65 lakh, including non-farmer members. Of these, only 494.97 lakh were borrowing members, constituting around 30 per cent of the total membership. Time-series data further indicate a continuing decline in the number of borrowing members.
Around 75 per cent of the total borrowers belong to the small, marginal and SC/ST farmer categories, which have limited capacity to contribute additional share capital to PACS. These facts, coupled with the decline in the share of rural financial cooperatives in aggregate agricultural credit to 9.00 per cent, lead to the conclusion that a growing number of farmer-members are shifting to alternative banking channels for their credit requirements.
The above facts, coupled with the decline in the share of rural financial cooperatives in aggregate agricultural credit to 9.00 per cent, lead to the conclusion that a growing number of farmer-members are shifting to alternative banking channels for their credit requirements. Further, the incidence of default remains as high as approximately 20 per cent. As a result, these defaulting borrowers are unable to contribute any additional capital to PACS. Once capital augmentation at the PACS level becomes constrained, the capital base of the DCCBs also comes under pressure and is often artificially expanded through debits to the loan accounts of PACS, a practice that is detrimental to their financial health.
Therefore, the prospects of raising substantial additional share capital from farmers, both for the existing rural financial cooperatives and for the new cooperative institutions envisaged by the Government, appear to be quite limited. The scope for enhanced government contribution to cooperative capital is also constrained by budgetary limitations and by the restrictions arising from the implementation of the Vaidyanathan Committee recommendations. Similarly, the accumulation of reserves as a source of capital formation depends upon profitability, which currently remains modest at most levels of the rural cooperative financial structure. Consequently, it appears that the growth of capital accretion within rural financial cooperatives has reached a plateau.
The Reserve Bank of India permits cooperative banks to treat accumulated reserve funds and government grants received for the creation of special reserves as part of their capital base. They are also allowed to raise alternative capital instruments such as Innovative Perpetual Debt Instruments (IPDIs), Long-Term Subordinated Deposits (LTDs), preference shares and other debt instruments.
However, practical experience suggests that access to these permitted sources of capital remains limited for DCCBs and StCBs and is insufficient to meet the rapidly growing future demand for capital. It is also relevant to note that, under RBI norms, cooperative banks are required to maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9.00 per cent. The CRAR calculation includes several components in addition to paid-up share capital. Owing to these additional components, most DCCBs and StCBs are currently able to comply with the prescribed capital adequacy norms. However, mere compliance with CRAR requirements is not sufficient to meet the substantial additional capital needs that would arise from a quantum leap in business growth under a future-ready cooperative banking framework.
5.Then what should be the approach in this regard and what are the options?
A; First of all, there is a need to move beyond the traditional perception of cooperatives as “closed-group” organisations that raise equity or share capital solely from their members and only within their area of operation. If cooperatives are to emerge as commercially vibrant and competitive institutions, they must adopt more innovative and inclusive approaches.
In the present economic environment, where institutional equity funding plays a crucial role in business expansion, external equity participation can no longer be ignored by the cooperative sector. Policymakers and regulatory authorities need to consider enabling cooperatives to raise equity capital from sources beyond their existing membership base, including investors from other parts of the state or even the country, subject to appropriate safeguards. The modalities and models for such participation need careful deliberation.
The Government of India and the State Governments may consider establishing Cooperative Equity and Venture Capital Funds at both national and state levels to provide non-interventionist equity support to cooperative institutions. Such funds could be capitalised through contributions from the Government of India, large cooperatives with surplus resources, apex cooperative organisations, and institutions such as NABARD and NCDC.
The Ministry of Cooperation could act as the nodal agency for these funds and formulate detailed frameworks relating to governance structures, operational guidelines, eligibility criteria, monitoring mechanisms, time-bound business plans and other relevant aspects.
Given their social relevance, cooperatives may also be provided access to Corporate Social Responsibility (CSR) resources under specific schemes designed for social institutions. Appropriate policy guidelines could be framed by the Government of India to facilitate such support.
The Government may further consider allowing cooperatives to mobilise equity through carbon credit and social impact credit monetisation. Cooperative institutions engaged in, or financing, eligible agricultural and developmental activities could potentially generate and monetise such credits. To operationalise this mechanism, cooperatives would need to establish suitable institutional arrangements and compliance systems for measuring, verifying and monetising carbon and social impact credits in accordance with internationally accepted standards and protocols. The Ministry of Cooperation could formulate detailed guidelines to facilitate this process.
Another innovative possibility is providing cooperatives access to “Zero Coupon Zero Principal” equity contributions from philanthropic organisations, donor agencies and social investors interested in promoting sustainable social change through cooperative enterprises. Many such organisations are willing to make permanent capital contributions without expecting financial returns. Their primary interest lies in achieving measurable social outcomes rather than securing management control or direct participation in governance. However, they generally maintain a strong focus on monitoring the social impact generated through their investments. Cooperatives may selectively access such resources, provided the Government develops suitable guidelines and, where necessary, establishes guarantee mechanisms to enhance investor confidence.
At present, cooperatives do not have access to financial or stock markets for raising equity capital, unlike companies registered under the Companies Act, even when both categories of institutions undertake similar activities on a comparable or larger scale.
Regulated stock markets have existed in India for many decades and have become a major source of capital mobilisation for entities governed under the Companies Act. Recognising the need to support socially oriented enterprises, the Securities and Exchange Board of India (SEBI), through its notification dated 25 July 2022, introduced the Framework on Social Stock Exchange (SSE), enabling social enterprises to raise funds from the public and institutional investors.
Social enterprises are defined as entities engaged in creating positive social impact and are categorised either as Not-for-Profit Organisations (NPOs) or For-Profit Enterprises (FPEs), depending upon their legal structure and registration status. A wide range of funding opportunities is available through the Social Stock Exchange for social enterprises and voluntary organisations pursuing social welfare objectives. However, cooperatives remain outside the ambit of the Social Stock Exchange despite being socially relevant organisations established under State Cooperative Societies Acts or the Multi-State Cooperative Societies Act.
Therefore, there is a strong case for creating an institution similar to a “Cooperative Stock Exchange,” which could provide a dedicated platform and investment ecosystem that brings together cooperatives seeking capital and investors interested in generating positive social impact through cooperative enterprises.
Even large and financially strong cooperatives with surplus resources could be encouraged to invest in other cooperatives through such a platform. At first glance, this idea may appear unconventional. Nevertheless, it deserves serious deliberation by cooperative leaders, policymakers and the Ministry of Cooperation so that a clear direction can emerge regarding the structural, functional, operational, legal and governance dimensions of such an initiative, much as was done in the case of the Social Stock Exchange.
6. How can rural financial cooperatives prepare themselves to take advantage of these opportunities for capital augmentation?
A;If cooperatives are to gain access to external sources of capital, urgent legal, policy and regulatory reforms will be necessary to enable them to mobilise resources beyond traditional member contributions, while simultaneously ensuring a robust compliance framework.
Such reforms would also require significant improvements in governance structures and practices, enhancement of operational efficiency, establishment of recognised standards for documenting and measuring the social impact of cooperative institutions, and the adoption of transparent financial reporting and disclosure systems.
In addition, cooperatives will need to demonstrate their broader financial capabilities and their ability to utilise external capital efficiently and responsibly.
Above all, cooperatives must display a strong commitment to developing a greater “propensity for change” within the cooperative fraternity. In an evolving economic environment, adaptability, innovation and openness to reform will be critical determinants of their future growth and sustainability.
