Introducing Operational Excellence in Rural Cooperative Banks

 

Introducing Operational Excellence in Rural Cooperative Banks
By Dinesh K Kapila                                          CGM (Retd) NABARD

(Published in Business Sandesh 01/10/2025)

There are challenges and opportunities for introducing operational excellence within our  rural cooperative banking (RCB) sector. The RCBs are a critical pillar of the nation's financial inclusion strategy, they are hampered by deep-seated issues across financial performance, governance, technology, and human capital. The recent improvements in profitability and non-performing assets are certainly a positive development but are they masking underlying structural inefficiencies that may erode their long-term sustainability.

The fundamental challenge is not merely operational but systemic, rooted in weak governance structures and a reluctance to embrace technological and cultural change. To achieve genuine and lasting operational excellence, multi-pronged initiatives  are  required. The route lies through working on three complementary pillars: a need based  approach to technological modernization, a systematic overhaul of governance and regulatory frameworks, and a concerted effort toward human capital development. This integrated approach will transform the StCBs and DCCBs as the "second engine of India's development," as envisioned by the National Cooperation Policy 2025.

The Rural Cooperative Banks serve as a vital component of the rural credit delivery system, its mainly their internal infirmities and to a limited degree, more leeway accorded to commercial banks over years, that have hobbled them. These institutions still have a wide-reaching network and they certainly have the local feel and acceptability. Their mandate is to provide credit primarily to the agricultural sector, serving small and marginal farmers, rural artisans, and other weaker sections of society. The extensive network of short-term cooperative credit institutions—including 34 State Cooperative Banks (StCBs), 351 District Central Cooperative Banks (DCCBs), and over 1 lakh Primary Agricultural Credit Societies (PACS)—collectively serves close to 6.5 lakh villages, underscoring their function as the backbone of rural credit.

We often mistake operational excellence with a narrow focus on efficiency metrics, as in the commercial banking sector. But in cooperative banks, operational excellence is adroitly balancing the focus on the pursuit of efficiency, innovation, and market dynamism with the principles of equity, inclusivity, social welfare and a focus on members. A cooperative, even a cooperative bank, is an association, democratic, member controlled, coming together to meet common economic needs. They have to be  financially viable, sustainable and competitive while remaining deeply rooted in their community-oriented mission.

The RCBs have to leverage modern tools and governance practices to fulfill their unique social mandate. The financial health of India's rural cooperative banking sector presents a complex scenario. First is the wide variation across states and within states. Then there is the systemic burden of non-performing assets. A high level of NPAs, coupled with weak recovery and weak governance mechanisms, abysmal HR practices and fragmented regulation, are the  major contributing factors to the weak performance of RCBs. A comprehensive study using data from 2013 to 2019 reveals a "continuous deterioration" in the technical efficiency of rural cooperative banks. This data points to significant operational deficiencies.

While the StCBs and DCCBs have indicated a clear uptick in financial metrics,  systemic weaknesses in risk management and lending operations continue. The dual regulatory structure creates significant coordination and management problems and facilitates   political influence. The absence of strong corporate governance and professional management does continue. The provisions of the Banking Regulation Act, 1949, which require professional directors and specify the criteria for CEOs, are not fully applicable to RCBs. We can summarise that a flawed governance structure, poor management quality and poor financial performance are interlinked.

RCBs have to be adept in the adoption of technology and create that culture of acceptance. Though major initiatives are underway, but the staff at the cutting edge needs to understand the need to be competitive. Financial constraints are understandable but it is cultural and institutional too. The fact is there is a general lack of digital literacy among both bank staff and importantly  their customer base in rural areas.

Human capital and an adroit cum adaptive institutional culture are often overlooked. Technology cannot supplant human resource management practices. The forces say the ‘man behind the gun’, for banks it is the ‘person behind the desk’. At the delivery level particularly. Professional management is lacking and the recruitment and retention of skilled personnel are inconsistent. The absence of a standardized framework affects critical areas such as manpower planning, training, and career progression.
The youth do not view the RCBs as an attractive career proposition, this does impact the drive for technology. Post recruitment, the smooth integration of youth within the operational stream is a core concern. Attracting and retaining talented young professionals will bring fresh perspectives and a readiness to embrace technology. RCBs have to develop a clear path for professional development and career progression.

The RCBs may focus on a robust Core Banking Solution and loan origination system. A loan origination system automates and optimizes the entire loan lifecycle, from application to disbursement, reducing manual errors, accelerating processing times, and enhancing data accuracy. Incrementally, Harnessing Business Intelligence and Analytics
Business intelligence (BI) and analytics will be as essential as leveraging emerging technologies, particularly digital payments. Rather than a complete and costly overhaul, an approach involving prioritizing the digitalization of specific, high-impact functions, such as loan origination or customer-facing services, that can deliver tangible and immediate benefits would be better.

The professionalization of management is compulsory for the sustainable success of RCBs. Could there be a new organizational structure that segregates the ownership of the bank (as a cooperative society) from its functions as a bank. Professional directors on the board are crucial for instilling a culture of financial discipline and accountability.
The successful implementation of any technological or governance reform is contingent on the human element. A comprehensive training roadmap is necessary to equip the staff  with the quantitative and technical skills required for a digital-first environment with a strong communication and change management plan to create a culture that is receptive to new processes and technologies. A focus on performance management and a professional attitude at all levels of the organization is essential to improve overall operational efficiency and ensure financial discipline.

Furthermore, to overcome the challenge of digital illiteracy among customers in rural areas, banks must engage in awareness campaigns and training programs that help members effectively use digital payment systems and other new services.
Apathy often characterizes the members of the cooperatives, regular training, outreach  programmes and communication is a must.

These initiatives should enable, in conjunction with Government led interventions on technology and the introduction of comprehensive brand building cum marketing initiatives, a sustained move towards operational excellence at a higher level in terms of performance parameters. We have to carefully plan and calibrate the transition.