inclusive growth rural sector
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CHAPTER I
INTRODUCTION
The earliest co-operatives were set-up among the weavers, in other words workers
in cottage industries, who were the first and the hardest hit by the development of
the mercantile economy and the industrial revolution.
So the weavers, in order to gain access to the market in the tools of their trade or
to the market in foodstuffs set up the first co-operative in Scotland (Fenwick,
1761; Govan, 1777 ; Darvel, 1840 ), in France (Lyons, 1835 ), in England
(Rochdale, 1844 ) and in Germany ( Chemnitz, 1845 ).
Though co-operation and mutual enterprise has been an essence of human-society
ever since it evolved, the real co-operative movement can be credited to the
Rochdale Pioneers who established a co-operative consumer store in North
England. This store can be called as the first in the co-operative consumer
movement.
The "Rochdale Pioneers", made their first aim to establish co-operatives where
the members would not only be their own merchants but also their own producers
and their own employers.
Around this time the co-operative movement was more at an utilitarian level. The
concept though old, was just being implemented and was growing slowly. Many
great thinkers, far-sighted men and visionaries were applying their minds to find
practical solutions to the new problems and to work out better systems of social
organization.
In Great Britain Robert Owen (1771-1858) conceived and set up self-contained
semi-agricultural, semi-industrial communities.
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Dr. William King (1758-1865) helped to spread Owens doctrine; his ideas were
more reasonable than Owens and achieved more results.
In France Charles Fourier (1722-1837), a commercial clerk, published in 1822 his
main work, a Treatise on Domestic Agricultural Association. This could be one of
the first works on co-operation.
Though all these visionaries had articulated the philosophy of co-operation it was
not until the World-War II that an Authoritative Commission was appointed by
the International Co-operative Alliance.
This Commission formulated or rather formalized the principles of co-operation.
They are
Voluntary and open membership
Democratic Management
Limited interest on capital
Patronage dividend in proportion of members transactions
Education and Training and
Co-operation among co-operatives
1.1 Introduction to Banking Industry
While walking in the streets of any town or city you might have seen some
signboards on buildings with names-Canara Bank, Punjab National Bank, State
Bank of India, United Commercial Bank, etc. What do these names stand for? Did
you ever try to know about them? If you enter any such building you will find
some kind of a business office. You will see some employees sitting behindcounters dealing with visitors standing in front of them. You will find that some
are depositing money at one counter while some are receiving money at another
counter. Behind the counters in the office you will see tables and chairs occupied
by officers. On one side of the office you will also see a chamber (small
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partitioned room) where the manager is sitting with papers on his table. This is the
office of a Bank.
Bank, as we know people earn money to meet their day-to-day expenses on food,
clothing, education of children, housing, etc. They also need money to meet future
expenses on marriage, higher education of children, house building and other
social functions. These are heavy expenses, which can be met if some money is
saved out of the present income. Saving of money is also necessary for old age
and ill health when it may not be possible for people to work and earn their living.
The necessity of saving money was felt by people even in olden days. They used
to hoard money in their homes. With this practice, savings were available for use
whenever needed, but it also involved the risk of loss by theft, robbery and otheraccidents. Thus, people were in need of a place where money could be saved
safely and would be available when required. Banks are such places where people
can deposit their savings with the assurance that they will be able to withdraw
money from the deposits whenever required. People who wish to borrow money
for business and other purposes can also get loans from the banks at reasonable
rate of interest.
Bank is a lawful organization, which accepts deposits that can be withdrawn on
demand. It also lends money to individuals and business houses that need it.
Banks also render many other useful services like collection of bills, payment of
foreign bills,
safe-keeping of jewellery and other valuable items, certifying the credit-
worthiness of business, and so on.
Banks accept deposits from the general public as well as from the business
community. Any one who saves money for future can deposit his savings in a
bank. Businessmen have income from sales out of which they have to make
payment for expenses. They can keep their earnings from sales safely deposited in
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banks to meet their expenses from time to time. Banks give two assurances to the
depositors
a.Safety of deposit, and
b. Withdrawal of deposit, whenever needed
On deposits, banks give interest, which adds to the original amount of deposit. It
is a great incentive to the depositor. It promotes saving habits among the public.
On the basis of deposits banks also grant loans and advances to farmers, traders
and businessmen for productive purposes. Thereby banks contribute to the
economic development of the country and well being of the people in general.
Banks also charge interest on loans. The rate of interest is generally higher than
the rate of interest allowed on deposits. Banks also charge fees for the various
other services, which they render to the business community and public in
general. Interest received on loan sand fees charged for services which exceed the
interest allowed on deposits are the main sources of income for banks from which
they meet their administrative expenses. The activities carried on by banks are
called banking activity. Banking as an activity involves acceptance of deposits
and lending or investment of money. It facilitates business activities by providing
money and certain services that help in exchange of goods and services.
Therefore, banking is an important auxiliary to trade. It not only provides money
for the production of goods and services but also facilitates their exchange
between the buyer and seller.
As we may be aware that there are laws which regulate the banking activities in
our country. Depositing money in banks and borrowing from banks are legal
transactions. Banks are also under the control of government. Hence they enjoy
the trust and confidence of people. Also banks depend a great deal on public
confidence. Without public confidence banks cannot survive.
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1.2 History of Banking
Banking industry in India originated in the last decades of the 18th century. Theoldest bank in existence in India is the State Bank of India, a government-owned
bank that traces its origins back to June 1806 and that is the largest commercial
bank in the country. Central banking is the responsibility of the Reserve Bank of
India, which in 1935 formally took over these responsibilities from the then
Imperial Bank of India, relegating it to commercial banking functions. After
India's independence in 1947, the Reserve Bank was nationalized and given
broader powers. In 1969 the government nationalized the 14 largest commercial
banks; the government nationalized the six next largest in 1980.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II
and III
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of Bengal
(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent unitsand called it Presidency Banks. These three banks were amalgamated in 1920 and
Imperial Bank of India was established which started as private shareholders
banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians,
Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of
India came in 1935.
During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks,
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mostly small. To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of 1965
(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers
for the supervision of banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath
deposit mobilization was slow. Abreast of it the savings bank facility provided by
the Postal department was comparatively safer. Moreover, funds were largely
given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960
on 19th July, 1969, major process of nationalizations was carried out. It was theeffort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major
commercial banks in the country was nationalised.
Second phase of nationalisation Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in
India under Government ownership.
The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
1949 : Enactment of Banking Regulation Act.
1955 : Nationalisation of State Bank of India.
1959 : Nationalisation of SBI subsidiaries.
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1961 : Insurance cover extended to deposits.
1969 : Nationalisation of 14 major banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by
11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector
in its reforms measure. In 1991, under the chairmanship of M Narasimham, a
committee was set up by his name which worked for the liberalisation of banking
practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net is
introduced. The entire system became more convenient and swift. Time is given
more importance than money.
Currently, India has 88 scheduled commercial banks - 27 public sector banks (that
is with the Government of India holding a stake), 31 private banks (these do not
have government stake; they may be publicly listed and traded on stock
exchanges) and 38 foreign banks. They have a combined network of over 53,000
branches and 17,000 ATMs. According to a report by ICRA Limited, a rating
agency, the public sector banks hold over 75 percent of total assets of the banking
industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
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banking, mortgages and investment services are expected to be strong. One may
also expect M & As, takeovers, and asset sales.
The growth in the Indian Banking Industry has been more qualitative than
quantitative and it is expected to remain the same in the coming years. Based on
the projections made in the "India Vision 2020" prepared by the Planning
Commission and the Draft 10th Plan, the report forecasts that the pace of
expansion in the balance-sheets of banks is likely to decelerate. The total assets of
all scheduled commercial banks by end-March 2010 is estimated at Rs 40, 90,
000/- crores. That will comprise about 65 per cent of GDP at current market
prices as compared to 67 per cent in 2002-03.
Bank assets are expected to grow at an annual composite rate of 13.4 per cent
during the rest of the decade as against the growth rate of 16.7 per cent that
existed between 1994-95 and 2002-03. It is expected that there will be large
additions to the capital base and reserves on the liability side.
1.3 Banking Institution
Functioning of a Bank
Functioning of a Bank is among the more complicated of corporate operations.
Since Banking involves dealing directly with money, governments in most
countries regulate this sector rather stringently. In India, the regulation
traditionally has been very strict and in the opinion of certain quarters, responsible
for the present condition of banks, where NPAs are of a very high order. The
process of financial reforms, which started in 1991 has cleared the cobwebs
somewhat but a lot remains to be done. The multiplicity of policy and regulations
that a Bank has to work with, makes its operations even more complicated,
sometimes bordering on illogical. This section, which is also intended for banking
professional, attempts to give an overview of the functions in as simple manner as
possible.
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Banking Regulation Act of India, 1949 defines Banking as "accepting, for the
purpose of lending or investment of deposits of money from the public, repayable
on demand or otherwise and withdrawal by cheques, draft, order or otherwise."
Deriving from this definition and viewed solely from the point of view of the
customers, Banks essentially perform the following functions:
1. Accepting Deposits from public/others (Deposits)
2. Lending money to public (Loans)
3. Transferring money from one place to another(Remittances)
4. Acting as trustees
5. Keeping valuables in safe custody
6. Government business
Banks are organized in a linear structure to performed these activities at the
base of which lies a Branch. The corporate office of a bank is normally called
Head Office.
Accepting deposits is one of the two major activities of the Banks
Banks are also called custodians of public money. Basically, the money is
accepted as deposit for safe keeping. But since the Banks use this money to earn
interest from people who need money, Banks share a part of this interest with the
depositors. However, accepting deposits and keeping track of the money involves
a lot of book-keeping and other operations. Let us see what the Banks must
maintain to provide this service
An effective branch network to reach the targeted customer base
A system of Intra branch accounting with separate account(s) for each
customer
A system of reconciliation at the end of the day
Availability of adequate funds at each branch
Trained staff for effective customer service
Infrastructural inputs like space, stationery, comfortable environment etc.
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Lending money to the public
Lending money is one of the two major activities of any Bank. In a way, the Bank
acts as an intermediary between the people who have the money to lend and those
who have the need for money to carry out business transactions.
This activity places its own requirements on the resources of the Bank. For
effective functioning of this, a bank must possess:
Sufficient deposits.Skills to appraise the potential borrowers and the activity.
Legal skills for documentation.
Legal skills for recovery of its dues through the courts.
Skills to follow up and monitor the end-use of money lent by it.
An effective credit delivery system.
Review of credit portfolio.
Remittance
Apart from accepting deposits and lending money, Banks also carry out, on behalf
of their customers the act of transfer of money - both domestic and foreign.- from
one place to another. This activity is known as "remittance business" . Banks
issue Demand Drafts, Banker's Cheques, Money Orders etc. for transferring the
money. Banks also have the facility of quick transfer of money also know as
Telegraphic Transfer or Tele Cash Orders.
To deliver this service, a Bank must have:
An effective branch network or correspondent relationships.
A system of Inter branch reconciliation
A system of reconciliation with the correspondents
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Availability of funds at all the centers
Trustee Business
Banks also act as trustees for various purposes. For example, whenever acompany wishes to issue secured debentures, it has to appoint a financial
intermediary as trustee who takes charge of the security for the debenture and
looks after the interests of the debenture holders. Such entity necessarily have to
have expertise in financial matters and also be of sufficient standing in the
market/society to generate confidence in the minds of potential subscribers to the
debenture. While Banks are the natural choice for the customers, Banks must
possess the following to be effective and retain that:
A track record of sufficient length.
Facilities for safe keeping.
Legal skills to take necessary steps for the trusteeship
Safe Keeping
Bankers are in the business of providing security to the money and valuables of
the general public. While security of money is taken care of through offering
various type of deposit schemes, security of valuables is provided through making
secured space available to general public for keeping these valuables. These
spaces are available in the shape of LOCKERS. The latter are small
compartments with dual locking facility built into strong cupboards. These are
stored in the Bank's Strong Room and are fully secure. Lockers can neither be
opened by the hirer or the Bank individually. Both must come together and use
their respective keys to open the locker. To make this facility available to its
customers, the Bank must provide:
Physical structures to house the lockers
Locker cabinets
Security arrangements
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Record of access to lockers
Government Business
Earlier Government business used to be exclusively carried out by GovernmentTreasuries where all type of transactions took place. However, now Banks act on
behalf of the Government to accept its tax and non tax receipts. Most of the
Government disbursements like pension payments and tax refunds also take place
through banks. While the Banks carry out this business for a fee to be paid by the
Government, providing this service requires a lot of effort and organisation. The
Banks must provide:
Interface with the public
Liaison with local government departments and government treasury
Arrangement for reconciliation with the Government Accounts Department
Necessary infrastructure, stationery etc. to cater to the numbers
1.4 Role of Banking
Banks provide funds for business as well as personal needs of individuals. They
play a significant role in the economy of a nation. Let us know about the role of
banking.
It encourages savings habit amongst people and thereby makes funds
available for productive use.
It acts as an intermediary between people having surplus money and those
requiring money for various business activities.
It facilitates business transactions through receipts and payments by cheques
instead of currency.
It provides loans and advances to businessmen for short term and long-term
purposes.
It also facilitates import export transactions.
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It helps in national development by providing credit to farmers, small-scale
industries and self-employed people as well as to large business houses which
lead to balanced economic development in the country.
It helps in raising the standard of living of people in general by providing
loans for purchase of consumer durable goods, houses, automobiles, etc.
Introduction to Cooperative Banks
Co-operative banks are small-sized units organised in the co-operative sector
which operate both in urban and non-urban centers. In India, co-operative banks
finance small borrowers in industrial and trade sectors, besides professional and
salary classes. Co-operative banks perform the main banking functions of deposit
mobilisation, supply of credit and provision of remittance facilities. They provide
limited banking products and are specialists in agriculture-related products. Co-
operative banks are regulated by the Reserve Bank of India and governed by the
Banking Regulations Act, 1949, and Banking Laws (Co-operative Societies) Act,
1965. Rural co-operative banks are regulated by state registrar of co-operatives.
The sources of funds for co-operative banks are: central and state government,
Reserve Bank of India and NABARD, other co-operative institutions, ownership
funds and deposits or debenture issues. Intra-sect oral flows of funds are much
greater in co-operative banking than in commercial banking. Inter-bank deposits,
borrowings and credit also form a significant part of assets and liabilities of co-
operative banks
Features of Cooperative Banks
Co-operative Banks are organised and managed on the principal of co-
operation, self-help, and mutual help. They function with the rule of "one
member, one vote". function on "no profit, no loss" basis. Co-operative banks,
as a principle, do not pursue the goal of profit maximisation.
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Co-operative bank performs all the main banking functions of deposit
mobilization, supply of credit and provision of remittance facilities.
Co-operative Banks provide limited banking products and are functionally
specialists in agriculture related products. However, co-operative banks now
provide housing loans also.
UCBs provide working capital loans and term loan as well
The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and
Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs
1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh
for housing purposes. The UCBs can provide advances against shares and
debentures also.
Co-operative bank do banking business mainly in the agriculture and rural
sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and
metropolitan areas also. The urban and non-agricultural business of these banks
has grown over the years. The co-operative banks demonstrate a shift from rural
to urban, while the commercial banks, from urban to rural.
Co-operative banks are perhaps the first government sponsored,
government-supported, and government-subsidized financial agency in India.
They get financial and other help from the Reserve Bank of India NABARD,
central government and state governments. They constitute the "most favored"
banking sector with risk of nationalization. For commercial banks, the Reserve
Bank of India is lender of last
ICICI bank, HDFC bank, GTB, IndusInd, BOP and UTI Bank have come out with IPOs as
per licensing requirement. Their technological edge and product innovation has seen them
gaining market share from the slower, less efficient older banks. These banks have targeted
non-fund based income as major source of revenue, with their level of contingent liabilities
being much higher then their other counterparts viz. PSU and old private sector banks. The
new private banks have been consistently gaining market shares from the public sector
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banks. The major beneficiary of this has been corporate clients who are most sought after
now.
The new generation private sector banks have made a strong presence in the most lucrative
business areas in the country because of technology upgradation. While, their operating
expenses have been falling as compared to the PSU banks, their efficiency ratios
(employees productivity and profitability ratios) have also improved significantly.
The new private sector banks have performed very well in the FY2000. Most of these
banks have registered an increase in net profits of over 50%. They have been able to make
significant inroads in the retail market of the public sector and the old private sector banks.
During the year, the two leading banks in this sector had set a new trend in the Indian
banking sector. HDFC Bank, as a part of its expansion plans had taken over Times Bank.
ICICI Bank became the first bank in the country to list its shares on NYSE.
The Reserve Bank of India had advised the promoters of these banks to bring
their stake to 40% over a time period. As a result, most of these banks had a
foreign capital infusion and some of the other banks have already initiated
talks about a strategic alliance with a foreign partner.
The main problems concerning the nationalized / state sector banks are as follows:
A. Large number of unprofitable branches
B. Excess staffing of serious magnitude
C. Non Performing Assets on account of politically directed lending and industrial
recession in last few years
D. Lack of computerization leading to low service delivery levels, non-reconciliation
of accounts, inability to control, misuse and fraud etc
E. Inability to introduce profitable new consumer oriented products like credit cards,
ATMs etc
Technology- The private banks have used technology to provide quality service
through lower cost delivery mechanisms. The implementation of new technology has
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been going on at very rapid pace in the private sector, while PSU banks are lagging
behind in the race.
Declining interest rates- in the present scenario of declining interest rates,
some of the new private banks are better able to manage the maturity mix. PSU Banks
by and large take relatively long-term deposits at fixed rates to lend for working
capital purposes at variable rates. It therefore is negatively affected when interest
rates decline as it takes time to reduce interest rates on deposits when lending has to
be done at lower interest rates due to competitive pressures.
NPAs- The new banks are growing faster, are more profitable and have cleaner
loans. Reforms among public sector banks are slow, as politicians are reluctant to
surrender their grip over the deployment of huge amounts of public money.
Convergence- The new private banks are able to provide a range of financial
services under one roof, thus increasing their fee based revenues.
Since 1950s, the cooperatives in India have made remarkable progress in the
various segments of Indian economy. During the last century, the cooperative
movement has entered several sectors like credit, banking, production,
processing, distribution/marketing, housing, warehousing, irrigation, transport,
textiles and even industries. In fact, dairy and sugar cooperatives have made
India a major nation in the world with regard to milk and sugar production.
Today, India can claim to have the largest network of cooperatives in the world
numbering more than half a million, with a membership of more than 200
million. Of the primary (village) level cooperatives, around 28 percent with 137million memberships are agricultural cooperatives, dealing directly or indirectly
with agricultural sector.
The cooperative network in the country is rather strong covering all the
villages in the country and more than 67 percent of the households have
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been brought under the cooperative hold. Cooperatives supply about 46 percent
of the total rural credit (including agricultural credit), account for 36 percent of
the total distribution of fertilizers, produce about 55 percent of the total sugar
and constitute for 28 percent of the rural fair shops (distributing consumer
articles). Though cooperative movement has made remarkable progress in
several areas, certain glaring defects have also developed in the movement, which
have been, in a way, defeating the very objectives of these institutions. The
following are the unique features of Indian cooperative movement:-
1. Historically, Governments and policy makers have paid more attention to
agricultural cooperatives and thus, the growth and development of the
Indian cooperative movement is heavily tilted in favour agriculturalcooperatives in general and in particular, credit cooperatives. In some areas
like dairy, urban banking and sugar, the cooperatives have achieved success
to an extent but there are larger areas where they have not been so successful.
2. The cooperative credit movement in modern India, curiously, is a state initiated
movement. The state partnership is, perhaps, the unique feature of the Indian
cooperative movement. As of today, Government contribution to the share
capital of primary agricultural cooperatives accounts for about 7.5 percent of the
total .
3. Paradoxically, the state partnership which was conceived as a measure
for strengthening the cooperative institutions had paved the way for ever-
increasing state control over cooperatives, their increasing officialization and
politicization culminating in virtually depriving the cooperatives of their vitality
as well as their democratic and autonomous character.
4. Dormant membership, lack of active participation of the members in the
management, lack of professionalism (and absence of corporate governance),
undue political and bureaucratic intervention, have made majority of the
cooperatives at the primary level almost moribund. Understandably, this
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has resulted in weakening of the cooperative edifice. The upwardly transmission
of the weaknesses of the primary societies have affected the capabilities of the
higher level cooperative federations in so far as their usefulness to the former is
concerned.
5. With regard to agricultural cooperative credit structure, although the
quantitative expansion has been somewhat satisfactory, the movement
continues to suffer from structural defects and operational deficiencies.
The acknowledged operational deficiencies of the cooperative credit structure
have been (I) weak recycling of credit, (ii) poor resource mobilization, (iii)
ineffective lending and (iv) poor recovery.
6. The agricultural credit cooperative system in general has become rather over
dependent on external support in terms of participation in share capital by
Government and refinance from Government owned Financial Institutions.
Figure 1: Indian Banks: trends in return on equity
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Cooperative Banking in India
Credit cooperatives are the oldest and most numerous of all the types of
cooperatives in India. The cooperative credit institutions in the country may be
broadly classified into urban credit cooperatives and rural credit cooperatives.
There are about 2090 urban credit cooperatives and these societies together
constitute for about 10 percent of the aggregate banking business and therefore
regarded as an important segment of the banking system. The urban credit
cooperatives are also popularly known as Urban Cooperative Banks.
The rural credit cooperatives may be further divided into short-term credit
cooperatives and long-term credit cooperatives. With regard to short-term credit
cooperatives, at the grass-root level there are around 92,000 Primary
Agricultural Credit Societies (PACS) dealing directly with the individual
borrowers. At the central level (district level) District Central Cooperative Banks
(DCCB) function as a link between primary societies and State Cooperative Apex
Banks (SCB). It may be mentioned that DCCB and SCB are the federal
cooperatives and thus the objective is to serve the member cooperatives.
As against three-tier structure of short-term credit cooperatives, the long-termcooperative credit structure has two tiers in many states with Primary
Cooperative Agriculture and Rural Development Banks (PCARDB) at the
primary level and State Cooperative Agriculture and Rural Development Bank
at the state level.
However, some states in the country have unitary structure with state level
cooperative operating with through their own branches and in one state an
integrated structure prevails. The organizational structure of the credit
cooperatives in India is illustrated in chart I. Interestingly, under the Banking
Regulation Act 1949, only State Cooperative Apex Banks, District Central
Cooperative Banks and select Urban Credit Cooperatives are qualified to be
called as banks in the cooperative sector. In other words, only these banks
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Financial Sector Reforms and Credit Cooperatives:
The process of economic and financial sector reforms were initiated in 1991, as astep
towards a broader process of international economic integration and
globalization of financial markets. The objectives of the reform program
have been to remove the structural constraints in the factor and product
markets, allowing market forces to improve efficiency and ensuring outward
orientation to the economy for bringing about a higher degree of integration of the
Indian economy with the rest of the world. It may be mentioned that the
structural reforms in the trade regime and industrial and financial policies
have been given utmost priority in order to ensure macro-economic stability. A
healthy financial system being the principal pre-requisite for the globalization
process, the banking sector being an important component thereof came into
sharper focus.
The financial system in India has built up a vast network of financial institutions
and markets over time, and the sector is dominated by the banking sector which
accounts for about two-thirds of the assets of the organized financial sector. The
first phase of the current reform of the financial sector was initiated in 1992
based on the recommendations of the Committee on Financial System (CFS,
1992). The progress that has been made in a substantial, yet non-disruptive
manner has given the confidence to launch what has been described as the
second generation or second phase of reforms especially for the banking
sector.
The report of the Committee on Banking Sector Reforms (CBSR, 1998)
provides a framework for the second phase of reforms in the banking system.
The broad features of the on going banking reforms have been; gradual
removal of pre-emptions (reduction in CRR and SLR), deregulation of interest
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rates, tightening of prudential standards, competition and transparency,
improving the quality of supervision, partial removal of selective credit controls,
assistance to banks in debt recovery and reforms in money and forex
markets. This apart, needless to mention, the succinct objective of the banking
sector reforms has been to improve the efficiency in the system by introducing an
element of competition.
The extension of reforms, particularly prudential standards to cooperative
banking institutions, an important component of the banking system was a
natural corollary as the weaknesses in cooperative segment could pose systemic
risks. Though cooperative banks operate at the district and state level, the
urgency and importance for extension of the reforms need hardly be emphasizedkeeping in view of their reach and scale of operations. Therefore, the banking
sector reforms could be treated as complete only if it encompasses the cooperative
segment, enabling the latter to function on sound lines at par with other banking
institutions. Accordingly, prudential standards covering capital adequacy,
income recognition, asset classification and provisioning norms were made
applicable to cooperative banks in a phased manner. However, cooperative
reforms encompassing legal and administrative aspects have not taken place in
India. This is on account of multiplicity of controls (administrative aspects
including registration are under State Cooperative Acts whereas financial
supervision and regulation is with the Central Bank of the country). The impact
of the extension of prudential standards to cooperative banks has resulted in an
increased intervention by the regulator and the Government in the name of the
financial regulation/supervision.
Thematic Framework for Analysis:
The literature relating to the economic reforms, impact of reforms on cooperative
sector, banking reforms and its impact on credit cooperatives and so on are rather
opulent. In so far as the impact of reforms on the cooperative character of
the cooperatives is concerned, be it in credit or non-credit segment, one
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may safely say that neither the policy makers nor the researchers have shown
any serious interest. And this is particularly true in India. It seems the
cooperative researchers, particularly doctoral students are more concerned with
the assessment and measurement of the impact of reforms on the performance
of cooperatives using a definite and quantifiable parameters. While the
difficulties in examining the impact of reforms on the cooperative character of
cooperatives are quite understandable, it does not mean the same can not be
attempted meaningfully. What is required perhaps is a normative analytical
framework, which is different from the one usually used for capturing the
impact of reforms on cooperatives. Using this normative analytical framework,
Ramesha (1996) in his empirical study points out that Self Help Groups (SHGs)
which are not registered as cooperatives are, in practice, much more closer to
cooperative principles than cooperatives themselves.
Given the diversity that prevails today in the cooperative sector and the levels of
reforms thereof, a general discussion on the impact of reforms (economic or
banking sector) on cooperative character would be almost impossible. For the
sake of research, even if one attempts, the conclusions could be abstruse. Thus, in
the present paper an attempt is made to evolve a conceptual framework for
further research concerning Urban Cooperative Banks (UCBs) in India
against the backdrop of banking sector reforms.
However, all through the discussion, it is attempted to maintain a special thrust on
the cooperative character of UCBs. The analytical framework for the
aforesaid purpose rests on three basic assumptions;
a) Banking sector reforms essentially refers to the guidelines/directions from the
regulator (central bank of the country) and the Government during the last ten
years.
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CHAPTER 2
CREDIT STRUCTURE OF INDIAN BANKS
The PACSs
The Primary Agricultural Credit Societies (PACS) constitute the `hubof the
Indian co-op movement. Every fourth co-operative in India is a primary credit
society. The main objectives of a PACS are:
To raise capital for the purpose of giving loans and supporting the essential
activities of the members.
To collect deposits from members with the objective of improving their
savings habit.
To supply agricultural inputs and services to members at remunerative
prices.
Table 2.1 The Primary Agricultural Co-operative Societies
Indicators Value
Village covered by PACS 99.5%
Total Number of PACS 100000
Membership per PACS
(Average)
10,00,00,000
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The DCCBs
The PACS are affiliated to the District Central Co-operative Banks (DCCBs) who
perform the following functions.
o Serve as balancing centre in the district central financing agencies
o Organize credit to primaries
o Carry out banking business
Table 2.2 District Central Co-operative Banks
Indicators Value
No. of Banks 361
Total membership (Million) 1.579
Total loans advanced Rs.326,995Million
The SCBs
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The DCCBs in turn are affiliated to State Co-operative Banks (SCBs), which
perform the following functions.
o Serve as balancing centre in the States
o Organize provision of credit for credit worthy farmers
o Carry out banking business
o Leader of the Co-operatives in the States
Indicators Value
No. of Banks 28
No. of branches 742
Total membership 139,676
2.1 OBJECTIVES OF CO-OPERATIVE BANKS
1) To understand the structural features of the credit delivery system in a village,
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2) To assess the operational dynamics of financial services rendered by formal
credit institutions especially the co-operative,
3) To analyze the profile of borrowers of Service C6operative Bank, their
economic empowerment and perception level regarding loan repayment, and
4) To identify reasons for non-viability of rural credit institutions and suggest
measures.
5) The rural financial system in the country calls for a strong and efficient credit
delivery system, capable of taking care of the expanding and diverse credit needs
of agriculture and rural development. More than 50% of the rural credit is
disbursed by the Co-operative Banks and Regional Rural Banks. In this direction
NABARD has been taking various initiatives in association with Government of
India and RBI to improve the health of Co-operative banks
6) To provide cheap and liberal credit facilities to small and marginal farmers,
agriculture laborers, artisans, small entrepreneurs and other weaker section.
7) To save the rural poor from the money lenders.
8) To act as a catalyst element and thereby accelerate the economic growth in the
particular region.
9) To cultivate the banking habits among the rural people and mobilized savings
for the economic development of rural areas.
2.2 CO-OPERATIVE BANKS-A PROFILE
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In the early 20th century, the availability of credit in India, more particularly in
rural areas was non existent. There was no organized institutional credit for
agricultural and related activities. People in the rural areas largely depended on
money lenders who lent money at very high rates of interest. Thus, there was need
to create an institution which would cater to the needs of ordinary people and was
based on the principles of co-operative organization and management. In 1904,
the first legislation on cooperatives was passed. In 1914, the Maclagen committee
suggested a three tire structure for cooperative banking i.e. Primary agricultural
credit societies at the grass root level, Central cooperative banks at the district
level and State cooperative banks at the state level. Cooperative banks were
expected to serve as substitutes for money lenders, and provide both short term
and long term institutional credit at reasonable rates of interest.
Features of cooperative banks
1) Cooperative banks are organized and managed on the principal of co-
operation, self help, and mutual help. They function with the rule of one
member, one vote. Function on no profit, no loss basis. Co-operative banks, as
a principle, do not pursue the goal o profit maximization.
2) Co-operative banks perform all the main banking functions of deposit
mobilization, supply of credit and provision of remittance facilities.
3) Co-operative banks provide limited banking products and are functionally
specialist in agriculture related products. However, co-operative banks now
provide housing loans also.
4) Primary Agricultural credit societies provide short term and medium term
loans
5) Co-operative banks do banking business mainly in the agriculture rural
sector. However, UCBs, SCBs, CCBs operate in semi urban, urban and
metropolitan areas also.
6) The SCBs, CCBs and UCBs can normally extend housing loans upto Rs. 1
lakh to an individual.
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CATEGORIES:
There are two categories of the co-operative banks.
a. Short term lending oriented co-operative banks within this category there
are three sub categories of banks viz. State co-operative Banks, DCBs, PACs.
b. Long term lending oriented co-operative banks within the second category
there are land development banks at three levels state level, district level and
village level.
The co-operative banking structure in India is divided into following main 5
categories
1) Primary Urban Co-operative banks
2) Primary Agricultural Credit Societies
3) District Central Co-operative banks
4) State Co-operative Banks
5) Land Development Banks
DIFFERENCE BETWEEN RURAL CO-OPERATIVE BANKS & RRBs
RRBs are by nature co-operative banks but are different from the co-operative
banks
1) Aim: RRBs have been established to supplement the resources of the co-
operative banks and not to complete with them. The principle of co-operation is
all for each and each for all. Its aim is to provide an institutional framework to
organized self help among persons of small means. Its basis is self-help through
mutual help. It combines economic, social and political objectives. It aims at
bringing about socio-economic changes in the country. The RRBs aim at
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providing credit and other facilities especially to the small and marginal farmers,
agricultural laborers, artisans and small entrepreneurs in the rural areas.
2) Act applicable: The RRBs are governed by the regional rural banks Act
1976, RBI Act, NABARD Act, whereas the co-operative banks are governed by
co-operative societies Act 1965.
3) Status: The co-operative banks do not become scheduled banks
automatically, whereas RRBs are scheduled commercial banks. The scheduled
status given automatically.
4) Area of operation: Area of operation of the co-operative banks is restricted
to only one district only. But the area of operation of a RRBs is extending upto
one or more districts of a state.
5) Coverage of population: the co-operative banks are voluntary organization
for masses. But the beneficiaries of the RRBs are specially class of rural area. It
includes small and marginal farmers, agricultural laborers, artisans and small
entrepreneurs in the rural areas.
6) Organization: the organizational set up of the co-operative banks is
pyramidal. At the apex level, state co-operative banks functions as apex body, at
district level Central co-operative banks and village level Primary agricultural
credit societies. It has federal set up and each unit is partially autonomous
managed by depositors and borrowers on the basis of one men one vote. The
RRBs are bureaucratic institutions whereas co-operatives are democratic
institutions
7) Beneficiaries: the Beneficiaries of the co-operative banks are mainly rural
masses. Whereas the Beneficiaries of the RRBs includes special class of people
i.e., the weaker section of societies
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8) Resources: The RRBs have owned funds which include share capital and
reserve funds as well as procured funds which include deposits and borrowings/
refinance. But the co-operative banks depend on the RBI and deposits from
members.
9) Lending operations: the Co-operative banks lend mainly to the farmers.
10) Monitoring and control: the RRBs are controlled by the Central
Government, RBI, State Government and Sponsor Banks, whereas the co-
operative banks are controlled by RBI and Registrar of co- operatives.
11) Staff: the co-operative banks get talented staff. Whereas RRBs attract less
talented staff
FUNCTION OF CO-OPERATIVE BANK
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NABARD being an Apex Development Bank promotes agriculture and rural
development through refinance support to all banks for investment credit and to
Co-operative and RRBs for production credit. The objective of providing
refinance to eligible institutions is to supplement their resources for delivering
credit for agriculture, cottage and village industries, SSIs, rural artisans, etc. thus
influencing the quantum of lending in consonance with the policy of the
government of India. It directs the policy, planning and operational aspects in the
field of credit for agriculture and integrated rural development.
Besides the refinancing activity it discharges the developmental functions which
are as under:
1) It co-ordinates the operation of rural credit institutions
2) It ensures institution building to improve absorptive capacity of credit
delivery system.
3) It develops expertise to deal with agriculture and rural problems
4) It assists Govt., RBI and other institutions in rural development.
5) It provides facilities for training, research and dissemination of information
in rural banking.
6) It assists the State Government to enable them to contribute to the share
capital of eligible institutions
7) Under Rural Infrastructure Development Fund, NABARD extends financial
assistance to State Govt. for completion of various incomplete rural projects such
as Irrigation, Rural Bridges, and Roads and new projects also.
8) It undertakes inspection of Co-operative Banks and RRBs as a part of
Regulatory function.
The function of District Development office
The basic function of district development office is planning, monitoring and co-
ordination.
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1) The Potential Linked Credit Plan (PLP) prepared by district development
office has been used as reference by the credit planning agency.
2) The monitoring of service area approach was assigned o NABARD by RBI
as it was considered advantageous to have a single rural agency to plan, co-
ordinate and monitor the credit programme of banks. They also monitoring RIDF
projects sanctioned to various NGOs, SHF formation and linkages.
3) The district office of NABARD will be the principal agency for
coordinating agriculture and rural development activities of various credit
agencies as also liaisoning with the development departments of State Govt.
4) Member of various district level standing committees and other committees
related to agriculture and rural development
5) Associated with the inspections of Co-operative banks and RRBs in the
districts
THE SCHEMES OF RURAL CO-OPERATIVE BANK & ITs PROGRESS
The Government while understanding the importance of co-operatives has
introduced several schemes for promoting the spirit of co-operation. Both theIndian Government as well as the Government of the State of Maharashtra has
introduced several schemes for the co-operatives. A few of them are listed here.
Take benefit of them.
Scheme 1: Share Capital Contribution to Credit Institutions under LTO Fund
(State Level Scheme)
The Government sanctions share capital contribution to District Central Co-
operative Banks. This contribution is given out of the LTO Fund of the
NABARD. The provision is made every year to repay this loan.
Scheme 2: Loans to Co-operative Credit Institutions for conversion of short term
loans into medium term loans
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Scheme 3: National Agricultural Credit Stabilization Fund (Centrally Sponsored
Scheme) In
drought conditions the members of Agricultural Credit Societies may not be able
to repay the crop loans. This scheme helps to convert their short-term loans into
medium term loans and fresh crop loans are made available to the members.
Scheme 4: Crop Production Incentive to Agriculturists (Dr.Punjabrao Deshmukh
Crop Production Incentive Scheme)
this scheme is applicable for Kharif and Rabbi Crops taken from 1.4.90 onwards.
The farmers borrowing loans of RS.25, 000 or less and who repay their loans fully
before the due date are eligible for 4 % of the principal amount as an incentive.
Scheme 5: In the industrial co-operative societies of weaker sections of the
societies, the Government has several schemes.
1. The Government sanctions share capital in the ratio 1:3, to enable the societies
to borrow funds from the financial institutions.
2. Financial Assistance for Tools and Equipment's
3. Interest Subsidy for Working capital:
The government gives an interest subsidy up to 3.5% to 4.5% on the amountborrowed by the co-operative. This scheme helps to reduce the burden of interest
on the co-operative society which is to be paid to financial agencies.
Scheme 6: Central Sector Scheme for Development of Women Co-operatives
Under this scheme financial assistance would be provided by the Central
Government on 100 % basis to the newly formed co-operative societies by the
women as well as existing womens co-operatives. The financial assistance is as
under
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No. Item Share Capital Working Capital Subsidy Total
1. New Societies 40,000 40,000 20,000 1, 00,000
2. District Federation 80,000 80,000 40,000 2, 00,000
3. State Federation 2, 00,000 2, 00,000 1, 00,000 5, 00,000
Scheme 8: Co-operative Godowns: The Warehousing Corporation 90% assistance
for the construction of Godown out of which 50% is loan and 40% is Government
share capital.
2.3 Urban Cooperative Banks in India
Inspired by the success of urban cooperative movement in Germany and
Italy, in the early part of the last century, urban cooperative credit societies
were organized on community basis and their lending operations were confined
to meeting the consumption oriented credit needs of their members. Many
urban cooperative banks, which were organized initially, were essentially credit
societies but later converted themselves into urban cooperative banks.
Interestingly, many urban cooperative credit societies, which were not engaged inany banking functions, also used the word .bank.
There was no well-defined concept of urban cooperative bank till 1996, when
banking laws (provisions of section 5(CCV) of Banking Regulation Act 1949)
were made applicable to cooperative banks. Accordingly, an urban cooperative
bank was defined as a Primary Cooperative Bank other than a primary agricultural
credit society; (i) the primary object of which is the transaction of banking
business, (ii) the paid up share capital and reserves of which are not less than Rs.1
lakh (0.1 Mn) and (iii) the by-laws of which do not permit admission of any other
cooperative society as a member. The word .primary. is used to denote that the
urban cooperative banks perform the role of a primary unit in a 3-tier
cooperative credit structure. Over a century old urban co-operative credit
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movement today, has a network of 2,084 urban co-operative banks with 7,368
branch outlets spread all over the country.
The deposits and advances of urban cooperative banks constitute for about 9 and
8 percents of the aggregate deposits and advances of the banking system
respectively. In so far as the growth and performance are concerned, it may
be mentioned that the urban cooperative banks were a shade better than the
scheduled commercial banks and public sector banks till 1999 (Ramesha K,
2001). However, it has to be recognized that the prudential standards and
regulatory system prescribed for urban cooperative banks were relatively soft in
comparison with those of commercial banks. This is partly on account of
historical reasons and partly due to the preferential treatment of cooperativestructure in general. If one benchmarks the growth and performance of urban
cooperative banks with that of the banking industry (which is dominated by public
sector banks) after 2000 and onwards, then the scenario undergoes a complete
change. For instance, between 2001 and 2002, although owned fund, deposits
and advances of urban cooperative banks increased somewhat impressively,
i.e., by 27, 15 and 14 percents respectively, the gross Non Performing Assets
(NPAs % to total advances) during the same period went up from 16 to 22
percent (3). The percentage of the profit making urban cooperative banks to
the total stood at 87 percent as at the end of March 31, 2002. On the whole, the
performance of the urban cooperative banks particularly after 2000 has been on
the decline, and a host of factors may be responsible for this which may include
increasing competition, tightening prudential standards and supervision and
regulatory standards, multiple control, etc. Following are the features of urban
cooperative credit banks in India.
1) Urban cooperative banks are registered under Cooperative Societies Act of the
respective state Governments. The Reserve Bank of India (Central Bank of the
country) is the regulatory and supervisory authority for UCBs for their banking
related operations. Managerial/Administrative aspects of UCBs continue to
remain with the state Governments. The Union Government regulates the UCBs
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having multi-state presence and such banks are registered under Multi-state
Cooperative Societies Act. Controlling of UCBs by state Government and the
Central Bank of the country is generally known as .duality of control..
2) The discernible characteristic feature of UCB structure is its
heterogeneity. Nearly 50 percent of the banks are unitary in nature (with single
branch banking). Heterogeneity in their size is another facet of the UCB
structure. The larger UCBs (scheduled UCBs) numbering just 51 accounts for
more than 40 percent of the business from UCB sector as against 800 UCBs
accounting for just 6 percent.
3) UCB structure is exemplified by its pronounced focus on the needs of small
men and micro credit sector. The average size of the loan also works out
to be relatively low and an overwhelming segment of UCBs have been able to
comply with the priority sector lending targets (directive from central bank
to lend to certain sectors like small enterprises, trade & business, housing etc) set
by the central bank of the country.
4) Urban cooperative credit movement in general, and the number of UCBs
in particular is concentrated in few states. Five states account for 80 percent ofthe total UCBs in the country and one of them accounts for as high as 32 percent
of the total UCBs.
5) A noticeable feature of urban banking sector is its financial
independence. Unlike the agricultural cooperative credit structure, the urban
cooperative banks are not surviving on external assistance such as refinance
support. In fact, UCBs have been supporting federal units (District Central
Cooperative Banks and State Cooperative Banks) by keeping their surplus
resources in the form of deposits.
Banking Sector Reforms and Urban Cooperative Banks:
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The reform measures as applicable to UCB sector may be classified into
three broad categories. First, while recognizing the differences between
commercial and urban cooperative banks, a majority of the prudential norms
introduced for commercial banks are being extended to UCBs, albeit in a phased
manner. Second, policy initiatives have been introduced (through Monetary &
Credit Policies) to contain the systemic risk emanating from cooperative
sector, in particular from UCB sector. Lastly, duality/multiplicity of
control has been recognized as an irritant to their effective regulation and
supervision. Although, the focal point of the reforms has been prudential norms,
steps are also being initiated to professionalize the management and manpower of
UCBs. The influence of the reforms on the functioning as well as the
cooperative character of UCBs is discussed below.
Prudential Standards:
To begin with, in 1993, RBI introduced Income Recognition and Asset
Classification Norms to UCBs. In 1995, the prudential exposure norms to
single/group borrowers were also made applicable to them. Subsequently, in a
phased time frame, the capital adequacy norms (capital to risk weighted asset
ratio) were also made applicable to UCBs. While the promotion of prudent
financial practices has become a sine quo non in the highly competitive
globalize environment (for safeguarding the financial health of the system,
in particular of the UCB sector), it should not be forgotten that such
standards were contrived essentially for commercial banks. Although, the notion
of a code of good practices is intuitively appealing, the temptation to
prescribe universally valid model codes which do not allow for differences
in institutional development, legislative frame work and more broadly,
different stages of development must be avoided. To put it differently, while
there is no dispute that UCBs should be subjected to prudential standards
(capital adequacy, asset classification, income recognition and provisioning
norms), it is not yet clear, whether the prudential standards prescribed for
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commercial banks would work without distorting the cooperative character of
UCBs.
For instance, capital is widely regarded as a measure of the risk taking ability
of a financial intermediary and therefore, prescription of a minimum capital
the urban cooperative bank (to conduct banking business) may seem to be
justified from the viewpoint of ensuring stability in the financial system. If one
looks at a cooperative credit society/bank, as a typical cooperative created on
the basis self help and mutual help, then possibly the members (generally with
limited means) may not be able to raise the required capital. If capital base is to be
strengthened, as it is happening in India, these banks will have to start dealing
with non-members (or nominal members) on a large scale and perhaps may haveto shift from .surplus. to .profit..
The need to increase the deposit base as also to gainfully employ the funds
generated have made it necessary to have a large number of customers who are
not the members. It is worth mentioning that in India, urban cooperative banks
though on par with commercial banks with regard to prudential standards, like the
latter, are not permitted to boost their capital base through sub-ordinate debts.
Further, there are ceilings on the value individual share holdings have not been
revised since long.
Secondly, in order to ensure the adherence to the prudential standards by
cooperative credit societies/banks, the regulators frequency (as also scope)
of intervention increases thereby affecting the cooperative character. In this
regard, in India regulators intervention has indirectly infringed upon the
functional autonomy covering areas like share-linkage, credit, investment,
deposit and so on. Thirdly, in the name of protecting the interests of the
depositors (majority of whom are not the members of cooperative banks), not
only prudential standards are extended but even the professional content in the
management committee of the urban cooperative credit societies/banks is
also stipulated in India by the regulator/Government. While one can not remain
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ignorant of the role of the Government in the promotion of and development of
cooperation in India, prescribing the number and qualification of the nominee
directors would no doubt impair the cooperative character. Fourthly, the strict
entry norms in terms of minimum capital, membership prescription as it
prevails in India, prevents the birth of new credit cooperatives and
constrain the existing societies in so far as the expansion is concerned.
Fifthly, with the introduction of same prudential standards the difference
between urban credit cooperatives/banks and commercial banks get blurred
and possibly, the former may have to progressively imbibe the character of the
latter (identity crisis?). There could be several such dimensions as discussed
above. Nonetheless, it appears that the benefits of the prudential standards tourban credit cooperatives/banks come at a cost. The cost, needless to
mention, is the dilution in the cooperative character (in terms of adherence to
the principles).
Professional Management and Governance:
Good corporate governance is critical to efficient functioning of an entity and
more so for a banking entity. Thus the need for professional management andhealthy governance practices in urban credit cooperative societies/banks in
the present competitive environment needs no emphasis. Thus, for managing a
financial intermediary, whether a
cooperative or a commercial bank (irrespective of its size), the human
resource comprising of paid staff and elected management has to be highly
competent. The framework for good governance and professional
management in cooperative sector should essentially emanate from the guiding
principles and the given legal framework in different countries/states.
However, in India it is not uncommon that the cooperative banks are
superseded and Government officials are posted to head or nominated on the
board and unfortunately this trend is increasing in the post reform period.
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Quite often the reason quoted is that there is lack of qualified and
competent directors and the protection of depositors. interests (majority of them
are not the members) in the case of urban cooperative banks. While this is to some
extent true, the solution to this problem certainly is not Government
intervention as it would seriously impair the cooperative character. It is
disheartening to note that the elected management of 41 % of State
Cooperative Banks, 37 % of State Cooperative Agricultural and Rural
Development Banks, 21 % of the District Central Cooperative Banks and 8% of
Primary Cooperative Agricultural and Rural Development Banks stood
superseded as on March 2000. More than 200 urban cooperative banks are
identified as weak/sick banks by the regulator as at the end of March 2002.
As per the prevailing act (and according to the cooperative philosophy/principles)
any individual member can get himself/herself elected to the management
committee of a cooperative bank. It is this management committee which
is entrusted with the responsibilities like risk management - policy/strategy,
credit and NPA management, investment management, marketing plan/strategy,
Asset-Liability Management and so on. It should also be noted that the very
concept of banking (financial inter-mediation) is undergoing change in the
present competitive environment and the conventional framework for
management with which cooperative banks are comfortable may not be
sufficient. Given this, it is doubtful whether the elected management (as per the
existing
provisions of cooperative act and principles the individuals without
sufficient knowledge/experience in financial markets or management can be at the
helm of affairs of a cooperative bank) would be able to take on the emerging
challenges. Perhaps, the need of the hour is to ensure that in cooperative
organizations, the system of governance including the size and composition
of the board of directors (or elected management) is driven by the purpose and
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objectives of the business. In this regard, the following issues/areas may be of
some interest to the cooperative researchers.
Supervision and Regulation:
At present in India, urban credit cooperatives/banks are subjected to duality of
control, meaning that the administration related aspects are being supervised and
regulated by State Government and the banking operations are supervised
and regulated by the central bank of the country. This has, understandably
resulted in overlapping jurisdiction of the state Government and the central
bank of the country. Moreover, a clear-cut demarcation of the financial and
administrative areas for regulation is almost impossible and even if it is possible it
surely acts as an impediment in effective supervision. While the central bank of
the country has the wherewithal under the Banking Regulation Act for dealing
with crucial aspects of functioning of commercial banks, in the case of co-
operative banks it requires the intervention of the Registrar of Cooperative
Societies (state Government). Given the number of urban credit
cooperatives/banks, the central bank of the country is not in a position to
effectively supervising them. Thus, the duality of control not only affects the
quality of supervision and regulations, but also the functioning of the urban
cooperative banking sector. Needless to mention, under this regime of
duality of control the urban cooperative banks may turn out to be neither
cooperative nor commercial banks. There are some areas of concern, some
of them may be good for research as well.
While the progress of the cooperative movement in India in general, and the
cooperative banking in particular has been rather appreciable, the movement can
not be termed as a vibrant one in regard to cooperative values and philosophy as
enunciated in cooperative principles. With regard to the extension of reforms to
cooperative banking segment, it is yet not clear as to whether the same would
ensure soundness and stability in the cooperative banking segment. Although the
promotion of prudent financial practices in urban cooperative banks has
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become a sine quo non in the present competitive environment, one can not
afford to ignore that such practices were contrived essentially for commercial
banks. It must not be forgotten that the notion of a code of good
practices though intuitively appealing, the temptation to prescribe universally
valid model codes which do not allow for differences in institutional
development, legislative framework and more broadly, different stages of
development must be avoided. It seems the extension of reforms/prudential
standards to urban cooperative banking has provided substantial scope for the
external intervention and in the process, affecting the cooperative character in
terms of adherence to the cooperative principles. Logically, if the prudential
standards, and supervision and regulation for cooperative banks were same
as that of commercial banks, then there would not be any difference worth
mentioning between these entities. There are several areas that need the
intervention of researchers and perhaps, more important amongst them are
prudential standards, professional management & governance and supervision &
regulation. The framework for such research should essentially be within the
guiding principles of cooperation.
However, in the long run, if cooperative character of credit cooperatives is
to be preserved, the prudent practices, system of governance and supervision &
regulation all should emanate from the guiding principles of cooperation.
CHAPTER 3
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IMPLEMENTATION OF DEVELOPMENT ACTION PLAN
In order to strengthen Cooperative Credit Institutions both in Short-Term
and Long-Term Structures as viable units on a sustainable basis, NABARD had
introduced a mechanism of DAP/MoU aiming at institution specific measures in
1994-95. The cooperative banks, throughout the country had prepared the base
DAPs and executed the base level MoUs for 5 years terminating March 2000. The
second round of DAPs, and MoUs covered the period 2000-01 to 2002-03 which
was extended by one more year i.e.upto March 2004. Since then the base-level
DAP/MoU covered a larger period of 3 to 5 years. The first phase of DAP/MoU
(1994-2000) concluded in March 2000 and thereafter second phase was started to
cover 3 years (i.e. 2001-03) Annual MoU for 2002-03 and was entered for the
year 2003-04. The third phase of DAP/MoU started from the year 2004-05 for a
period of 3 years. During the third phase of DAP/MoU covering the period 2004-
05 - 2006-07 for the first time PACS have been introduced to planning process.
They are required to prepare DAP and enter into an understanding with the branch
of DCCB.
The mechanism of DAP/MoU has helped in building appreciation and awareness
for strategic planning facilitating, in turn, sustainable viability at all levels. The
feedback received indicates that there was positive impact on the performance of
banks as a result of introduction of DAP/MoU through reduction of CoM and cost
of resources. The DAP planning process, as an internal strategy for corporate
planning, had facilitated in creating an awareness in the cooperative banking
structure and RRBs about the need for strategic planning for corporate success.
The process of preparation of Bank-specific Development Action Plans (DAPs)
introduced for RRBs during the year 1994-95 has been continued during the year
2004-05 for improving the performance of RRBs in a specified time frame.
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RBIS POLICIES IN RELATION TO CO-OPERATIVE CREDIT
The RBI since its inception has been concerned with the problems of agriculture
credit. It has been conducting studies to identify the problems of agricultural
credit. It was found in the studies conducted in 1930s that almost entire finance
required by agriculturists in India was supplied by money lenders the part played
by co-operative and other agencies being negligible. In 1951, the RBI appointed
an All-India Rural credit survey committee to conduct a comprehensive rural
credit survey. It was found that only 3.1 per cent (of Rs.750 crores worth of
borrowings of the cultivators) was owed to co- operative societies.
It was found that co-operative credit fell short of the right quantity was not of the
right type ,did not serve the right purpose and often Failed to go to the right
people . The committee concluded that thought co-operation has failed but it must
succeed. It was realized that only the co-operative credit system can play the
prime role in the provision of rural finance. This was rightly thought so since
there is the existence of vast network of village level primary credit societies
through- out the country. further , these societies have intimate knowledge of
local problems .A require structure was already available for an effective credit
delivery system for rural areas, therefore, RBI has made all possible efforts to
strengthen and improve the co-operative credit structure.
The RBI was assigned a crucial role on three main items:
The development of co-operative credit,
Expansion of co-operative economic activity and
Training of co-operative personnel.
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The RBIs role in the building of the co-operative credit structure was that of an
active collaborator in drawing up schemes of development with the government
of India and the State Governments, and the provider of finance, first to the State
Governments for contribution to the share capital of co-operative credit
institutions at various levels, and secondly, to the co-operative credit structure it
self to meet its requirements of short- term, and long-term, finance. The details
are given as below:
3.1 PROVISION OF FINANCE
The RBI extends finance under two
a) Agriculture finance: the RBI extends finance to agriculturists indirectly through
co-operative sector. The credit extended is of three types i.e. short term, medium
term and long term.
To meet its aforementioned financial obligation, the RBI had established in 1956
two national funds
1) The national a Agriculture credit fund (long term operations)
2) The national Agriculture credit (Stabilization) fund, the first und is used for:
a. Advancing to state co-operative banks- medium term loans for agriculture and
allied purposes,
b. Making loans to state land development banks etc,
c. Purchasing the debentures of state land development banks, and
d. Making loans and advances to NABARD, started with an initial contribution
of Rs. 10 crores in 1956, the total outstanding under this fund had grown to Rs.
3,315 crores by the and of June 1990 through annual subscription from the profits
of the RBI. The second fund, viz. NAC (stabilization) fund, is used for converting
the RBIs short term loans and advances to state co-operative banks into medium
term loans whenever they are enable to pay their dues in time owing to drought.
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Famine or other natural calamities. This fund was set up in 1956 with an initial
contribution o Rs. 1 crore. The total outstanding under this fund stood at Rs. 660
crore at June end 1990.
b) Non Agricultural finance: the RBI also provides short- term finance for
a. The production marketing activity of cottage and small-scale industries, and
b. The purchase and distribution of fertilizers, these loans are generally provided
through state co-operative bank against guarantees of the state governments.
However, all such finances have constituted a small property (less than %) of the
total RBI short-term finance to co-operatives. The bulk of it goes to agricultural
co-operatives
3.2 INDIAN BANKING - Present Scenario
Households availing banking Services
Rural penetration of banking and Insurance is very low
Excess Dependence on Private Financiers at very high interest rate
Rural People
Distancing themselves due to lack of awareness
Difficulty in fulfilling Bank formalities
Number of Rural Branches was maximum in 1993
Thereafter number of Rural Branches has been declining
Reason for Reduction of Rural Branches
Closure
Reclassification of the Area due to population growth
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Rural Sector Reforms started in 1991
As the focus on the profitability has been increasing the rural Branches are
being closed.
In earlier decades, In spite of re-classification, number of Rural Branches
increased
Rural Branches Growth and Decline
Population and Bank Branch Coverage
Level of Urbanization has increased during the decade
The share of urban and Metro population increased due to
Up gradation of certain Semi Urban areas into Urban areas
Migration from Rural / Semi Urban to Urban / Metros
In Urban and Metros Population per Branch has decreased whereas in Rural and
Semi Urban population per branch has increased during the last decade
The shift will be more towards Urban / Metro if we consider the ATMs and
other delivery channels available in Metros which are equivalent to part of a
branch but not added to the number of branched
Strategies for successful Rural Banking
Co-operative bank are Rural oriented and their operating expenses are less
They have to play a lead role in Rural financing and expanding the Rural
customer base
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Commercial Bank can select the route of financing through agencies
Micro Credit Institutions
NBFCs
Encourage linkage of more Self help Groups
Solutions of problem of co-op bank in rural area
Training Needs
Bank to take up entrepreneurial skill development programmes
Training to develop Business Skills
Training on Leadership Skills
Training on Proper Accounting practices
Training to create Quality awareness
Training and Knowledge dissemination on Industrial and Tertiary Sector
Opportunities
Provision of Know How Technologies Activities and Success Stories of other SHGs should be shown under video
coverage
Technology implementation for Prosperity of Rural Poor
Technology Implementation in Bank in Rural
To bring down the transaction cost
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Packaging and delivering Rural Credit
Technology can handle large number of transactions at less cost
Can facilitate
Document management
People identification
3.3 Technology in Rural India Key Issues
Improving Networking and Communication facilities through wireless
technology and last mile connectivity
Processor & other Hardware should be made cost effective with multiple