Unlike commercial banks in India, where responsibility for enforcing both prudential and governance standards rests with the Reserve Bank of India, cooperative banks operate under a system of divided responsibility. While the RBI regulates banking functions, the Registrar of Cooperative Societies or the Central Registrar governs management, elections, audit, and administration.

Supervisory functions are also divided between the RBI and NABARD. The RBI supervises urban cooperative banks, and NABARD supervises rural cooperative banks.

Such fragmented responsibility is inherent in cooperative banking. The accountability system is, therefore, fragile, which is reflected in suboptimal performance.

Given the changing dynamics of the banking business and the sector’s avowed objective of improving the living standards of Indians in rural, semi-urban and urban areas, initiatives were taken to enhance governance standards in this sector.

Given cooperative banks’ large membership, substantial asset size, rising number of professional employees and increasingly complex operations, their governance standards can no longer be limited to questions of elections, board composition and compliance with statutory requirements. Their ability to remain autonomous, accountable and resilient is increasingly important if the sector is to remain competitive in the financial landscape.

Accordingly, the reforms undertaken by RBI and GOI during the recent years included, among other measures, watershed changes relating to mandatory professional directors, fit-and-proper criteria and defined board roles and responsibilities, as well as a 10-year cap on board tenure. Professional management, transparency, accountability, director training, conflict-of-interest safeguards and stronger oversight have been highlighted as areas requiring greater attention.

These represent a very important shift in the thought process. But are they enough for the institutions they are meant to govern? The answer lies in the standards, the institutional architecture and the capability of boards to exercise effective oversight.

Gaps Remain
The direction of reform is encouraging, with greater emphasis on board accountability, fiduciary responsibility, conflicts of interest, committees, continuing education, performance evaluation, and the separation of governance from management. Yet comprehensive standards on paper cannot compensate for weak governance capability in practice.

There are at least four loose ends.

First, expertise is not consistently institutionalised. The availability of professional expertise may depend on the composition of a particular board or the willingness of an institution to seek external advice. That creates discontinuity.

Second, professional expertise is not the same as independence. A professional director may bring valuable technical knowledge, but independence involves an additional quality: the ability to exercise objective judgement without relationships or interests that compromise, or appear to compromise, that judgement.

Third, governance provisions are not necessarily uniform across the cooperative landscape. State cooperative laws have evolved differently, while multi-state cooperative societies operate under a separate central framework. The result is a fragmented governance environment in which broadly similar institutions may operate under different expectations relating to board composition, professional participation, accountability and oversight.

Fourth, implementation remains as important as prescription. Director eligibility, training, conflict disclosures, board evaluation and governance reporting have limited value if they become procedural exercises rather than mechanisms through which boards genuinely improve decision-making.

The central problem, therefore, is not simply the absence of governance standards. It is the gap between standards, institutional architecture and governance capability.

But two other principles should not be compromised while improving the quality of board functioning.

One, the democratic character of a cooperative is fundamental. Members elect representatives to govern an institution that they collectively own. Professional appointments cannot substitute for that legitimacy, nor should cooperative governance be remodelled on corporate lines simply because some corporate governance principles are useful.

The governance challenge is therefore not to choose between elected representation and professional competence. It is to ensure that the two can operate together.

Two, the functional and institutional diversity in this space is considerable. A small primary cooperative does not face the same risks as a large dairy federation, an apex marketing institution, a housing cooperative with substantial assets or a cooperative financial institution with significant public exposure.

Governance standards that ignore these differences will either impose unnecessary requirements on smaller societies or remain inadequate for larger and more complex institutions. Proportionality must therefore become an important principle of cooperative governance.

Expertise vs Judgement
This distinction is particularly important in considering the role of an independent director.

A professional director brings expertise. An independent director brings expertise together with independence of judgement, subject to the legal framework governing the appointment.

The two should not be conflated.

A cooperative may have access to a finance professional, lawyer, technology specialist or experienced manager and still lack a person who can independently question assumptions, scrutinise conflicts, challenge management proposals and bring an external perspective to strategic decisions.

The purpose of independent professional participation should not be to create a parallel authority within the cooperative. Nor should such individuals become involved in day-to-day administration. Their role should be to strengthen the quality of board deliberation and oversight.

This is where selective learning from corporate governance can be useful. Principles such as independent oversight, audit, risk management, related-party safeguards and board evaluation did not emerge because companies are inherently better governed than cooperatives. They emerged from institutional experience with the risks that arise when decision-making power is insufficiently challenged.

Cooperatives can learn from those principles without becoming companies.

What could be considered?
A national approach to cooperative governance could consider creating a clearer framework for independent professional participation, while leaving sufficient flexibility for different classes of cooperatives and state legislative frameworks.

The first principle should be proportionality. Independent professional participation should not become a mandatory compliance requirement for every cooperative. Triggers could instead be based on factors such as assets, turnover, membership, employee strength, geographical footprint, borrowing, complexity of operations, subsidiaries or joint ventures and the nature of regulatory exposure.

The second should be clearly defined independence criteria. Professional qualifications alone should not be sufficient. Eligibility should address conflicts of interest, material relationships with the cooperative, cooling-off requirements where appropriate, disclosure obligations and the ability to exercise independent judgement.

The third should be competency and accreditation. India could consider developing a recognised pool or registry of professionals with expertise relevant to cooperative governance. Such a framework could establish minimum competency standards, sector-specific training, continuing education and appropriate standards of professional conduct.

The fourth should be institutional accountability. Independent professionals should not simply be added to boards without defining what their contribution is expected to achieve. Board evaluation, committee effectiveness, conflict disclosures and governance reporting should provide mechanisms for assessing whether the additional expertise is actually improving oversight.

Finally, reform must recognise the federal structure of cooperative legislation. A single mandatory board model is unlikely to be appropriate for the entire sector. National principles, model provisions and competency standards could instead provide a common direction, while states and the relevant central framework determine how these principles are incorporated according to the nature and scale of their cooperatives.

Strengthening, not corporatising Cooperatives
The case for independent professional expertise is ultimately about institutional resilience. Cooperatives should not depend on the expertise of those elected at a particular point in time; governance systems should retain sufficient knowledge and capacity as boards change.

The objective is not to replace elected representatives with professionals, but to ensure that elected boards have access to the expertise and independent judgement needed to govern effectively. Members should remain the owners, democratic participation should remain central, and management should remain responsible for execution.

Where scale and complexity warrant it, independent professional judgement should form part of the governance architecture. India has moved beyond representation alone towards greater emphasis on competence, accountability, transparency, professional management and oversight. The task now is to bring these elements together without corporatising the cooperative model.

The aim is to build stronger institutions, develop better-informed boards and ensure greater accountability, while preserving the democratic character of cooperatives.