The Missing Test of Governance in Cooperative Sector

In May 2026, the Reserve Bank of India cancelled the banking licence of Sarvodaya Co-operative Bank Ltd., Mumbai. The bank ceased operations at the close of business on 12 May, and the Maharashtra Registrar of Cooperative Societies was advised to initiate winding-up proceedings. RBI cited inadequate capital and earning prospects, along with non-compliance with statutory requirements. 

This episode is a regulatory matter concerning one cooperative bank. It also raises a larger question: what should constitute the test of good governance in a cooperative institution before weaknesses become a regulatory event?

The question extends well beyond cooperative banking. India's cooperative sector comprises more than eight lakh societies and around 30 crore members, operating across credit, dairy, agriculture, housing, consumer services, fisheries, textiles, healthcare and other activities. These institutions vary enormously in size, business model, geographical reach and complexity. The governance arrangements required for a small primary cooperative cannot simply be assumed to be adequate for a large federation or financial institution.

This is where the governance debate in the cooperative sector needs greater precision.

An institution may have an elected Board, statutory audit, regular meetings and prescribed committees. These are important elements of governance, but their existence does not establish that the institution is being governed effectively. More consequential questions are whether directors possess the knowledge required to discharge their responsibilities, whether management is properly accountable, whether material information reaches the Board in time, whether conflicts of interest are identified and managed, and whether emerging risks are recognised early enough for corrective action.

In other words, governance structures and governance capability are not the same thing.

The experience of Urban Co-operative Banks (UCBs) provides a useful example. RBI's governance framework for UCBs requires them to have at least two professional directors with suitable banking experience or relevant professional qualifications in law, accountancy or finance. UCBs with deposits of ₹100 crore and above are also required to constitute a Board of Management comprising persons with special knowledge or practical experience in banking. RBI introduced the arrangement to facilitate professional management and focused attention on banking-related activities.

There is a broader principle here. Democratic representation and professional competence need not be competing objectives.

A cooperative is not a conventional company. Member ownership and democratic participation are fundamental to its identity. Corporate governance principles therefore cannot simply be transplanted into the cooperative sector. However, several principles of effective governance are relevant irrespective of ownership structure.

These include:

• Board capability: representation needs to be accompanied by the expertise required to understand finance, risk, law, technology and the institution's business.

• Clarity of responsibility: the Board should exercise direction and oversight, while professional management should have clearly defined authority to execute.

• Access to information: directors need timely and reliable information to exercise meaningful oversight.

• Conflict and fiduciary safeguards: institutions need mechanisms to identify related-party interests, conflicts and failures of fiduciary responsibility.

• Continuous assessment: Board effectiveness, compliance, risk oversight and governance processes should be reviewed before weaknesses become institutional failures.

RBI's regulatory framework for Tier 3 and Tier 4 UCBs provides an important precedent. It adopts the principle of proportionality and requires UCBs to frame their compliance arrangements with regard to their corporate-governance framework, scale of operations, risk profile and organisational structure. RBI also treats the compliance function as an integral part of effective governance, alongside internal control and risk management.

The wider cooperative sector can draw from the same principle.

Credibility Gap 

The National Cooperation Policy 2025 (NCP) explicitly identifies good governance, transparency, technology adoption and the transformation of cooperatives into professionally managed economic entities based on cooperative principles among its objectives. It also recognises the need to strengthen the cooperative structure and make institutions future-ready.

The policy challenge, however, is not to create one uniform governance template for the entire cooperative movement. The constitutional and institutional architecture of cooperation makes such an approach neither practical nor desirable. State cooperatives operate within state legislative and administrative frameworks, while multi-state cooperatives are governed under the central framework. National policy therefore has to work through cooperative federalism, reference standards and institutional capacity rather than assume that a single prescription can govern every cooperative.

This is where the next stage of reform can become more purposeful.

A national governance framework can provide reference standards, model governance tools, professional education and mechanisms for institutional assessment, while allowing requirements to be calibrated according to the size, complexity and risk profile of individual cooperatives. The NCP itself encourages national and state-level cooperative institutions to promote best practices in transparency and good governance, while also calling for professional education and need-based capacity building.

Such an approach would also change how governance weaknesses are identified.

A governance review should not become another compliance exercise conducted after a crisis. Board effectiveness, risk oversight, information flows, conflicts of interest and internal controls should be assessed while corrective action is still possible. The objective should be to identify institutional weakness before it becomes financial distress, regulatory intervention or loss of member confidence.

This is particularly relevant because India's cooperative movement has already demonstrated that member ownership can coexist with scale, professional management and institutional performance. The task is not to make cooperatives resemble companies. It is to ensure that cooperative institutions have the governance capability necessary to fulfil their responsibilities as they become larger and more complex.

That brings us to the missing test.

The question should not simply be whether a cooperative has complied with prescribed governance requirements. It should be whether its governance arrangements are commensurate with the institution it has become.

Does the Board have the capability to challenge management when required?

Does it receive material information early enough to identify emerging risks?

Are responsibilities between elected representatives and professional management clear?

Are conflicts properly managed?

Does the institution have the expertise to govern financial, operational and technological risks?

And are governance weaknesses identified before a regulator, an auditor or a financial crisis is forced to expose them?

These are not questions of form. They are questions of institutional capability.

For India's cooperative movement, that distinction is becoming increasingly important. The quality of governance will determine not only whether individual institutions remain compliant, but whether they can remain accountable, resilient and capable as their responsibilities grow.

The real test of cooperative governance is therefore not whether the architecture exists on paper. It is whether that architecture enables the institution to govern itself effectively.