Co-operative Banking in India -An Overview

CHAPTER-III

CO-OPERATIVE BANKING IN INDIA - AN OVERVIEW

In the previous chapter, we have reviewed the available

literature on cooperative banking. In continuation of that,

in this chapter, an attempt is made to review the developments

in co-operative banking in India in general and that of Kerala

in particular. This is considered essential for getting a

clear picture of the background in which the DCBs are working

and for their evaluation later.

3.1 Origin

The history of co-operative movement in India is about a

century old. The movement was started in India with a view to

encourage and promote thrift and mutual help for the

development of persons of small means such as agriculturists,

artisans and other segments of the society. It was also aimed

at concentrating the efforts in releasing the exploited

classes out of the clutches of the money lenders. Keeping

this as one of the objectives, credit societies were formed

under Co-operative Societies Act of 1904.

IThe 1904 Act was largely based on the Eng_ish Friendly

Societies Act, 1896 . Under this Act, only primary credit

I

45

societies were permitted to register and non-credit and

federal organisations of primary co-operative credit societies

were left out. This lacuna was bridged by the Co-operative

Societies Act, 1912. This Act paved the way for the

organisation of central co-operative banks throughout the

country. But the provisions of 1912 Act were inadequate to

meet the requirements of those states where co-operative

movement had made considerable progress. Bombay, the pioneers

in this regard passed a new Act, viz., the Bombay Co-operative

Societies Act, 1925 for serving the many sided development of

the state. Later on, Madras, Bihar and Bengal passed their

own Acts in 1932, 1935 and 1940 respectively.

3.2 Structure of Co-operative Banking in India

India's co-operative banking structure consists of two

main segments, viz., agricultural and non-agricultural credit.

There are two separate structures in the case of agricultural

credit - one for short and medium term credit and the other

for long term credit. The co-operative credit structure for

short and medium terms is a three tier one with primary

agricultural credit societies at the base level, the central

co-operative bank at the district level and state co-operative

bank at the apex level. Over and above these institutions,

grain banks are actively functioning as primary societies in

r

46

certain states. Though the organisation of central and state

co-operative banks was mainly for the benefit of the

agricultural credit sector, they serve non-agricultural

societies too.

3.3 Primary Agricultural Credit Societies

Primary Agricultural Credit Societies (PACS) are the

foundation of the co-operative credit structure and form the

largest number of co-operative institutions in India. Most of

these societies have been organised mainly to provide credit

facilities and to inculcate the habit of thrift and economy

among their members.

The share capital of a society is divided into units,

called shares, contributed by the members. The most important

source of finance of PACS is members' deposits. Borrowings

constitute the most important element of their working

capital. The criteria for borrowings differ from state.to

state according to their liability. Punctuality in the

repayment of loans has hardly been observed by the members

with the result that there has been a steep rise in the amount

of overdues all over the country.

47

3.4 Primary Agricultural Credit Societies in India

In India, PACS are passing through an era of crisis.

Increasing incidence of non-viability is one of the major set

backs. PACS have made little progress in attracting deposits.

In majority of the cases, the deposits were collected through

book adjustments by carving certain portion of loan amount.

The repaying capacity of the PACS has been dwindled

considerably, as a result mounted overdues in the loan

outstanding against members. Alongwith the increasing volume

of business the number of PACS running into loss and the

amount of loss have increased considerably over the years.

The important reasons for this situation are, existence of

non-viable and dormant societies, uneven growth of

agricultural credit movement, inadequacy of the quantum of

loan supplied by them, defective loan policies, delay in loan

disbursement, inadequate supervision and defective audit, no

linking of credit with marketing, high overdues, ineffective

management, neglect of small farmers and domination of vested

interests. Salient data of PACS in India from 1975-76 to

1990-91 is given in table 3.1.

48

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49

It is clear from table 3.1 that the number of societies

decreased from 1,34,838 (1975-76) to 88,921 (1990-91) due to

re-organisation and amalgamation of societies since 1975-76. But

membership and share capital considerably increased during the

period. Same is the case with borrowings and reserves also.

Deposits increased from Rs.113.51 crores in 1975-76 to Rs.1361.98

crores in 1990-91 while loans and advances issued increased from

Rs.1023.44 crores to Rs.4777.30 crores during this period.

The average membership per society has increased from 293 in

1975-76 to 954 in 1993-94. Deposits per society has increased

considerably during this period. It has increased from Rs.80000

in 1975-76 to Rs.1530000 in 1993-94 whereas loans issued has

increased from Rs.750000 to Rs.5370000. Even though per society

deposits has increased 19 times, loans issued has increased only

7 times during this period. It is inferred that these PACS were

not utilising the deposits mobilised efficiently.

3.5 Primary Agricultural Credit Societies in Kerala

The comparative performance of PACS in Kerala with respect to

their counterparts in the rest of the country is remarkable.

Kerala had the highest rank (1987-88) with regard to membership,

population coverage, borrowing members, loans and advances,

deposits mobilisation and share capital contribution (Suresh, K.A.

and Vinaikumar, E., 1993. p.43). The rank with regard to

percentage of overdue to demand was lowest during this period.

The progress of PACS in Kerala for the period 1970-71 to 1991-92

is explained in table 3.2.

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51

From Table 3.2, it is observed that the number of

Societies showed a declining trend while the membership kept

on increasing. The number of members increased from 16.59

lakh from 1970-71 to 92.05 lakh by the end of 1991-92.

Another notable feature is the significant decline in the

number of profit making societies. The number of profit

making societies stood at 1052 (55.72 per cent) in 1970-71. In

1993-94, only 764 societies (48.26 per cent) could make

profit, the average profit being Rs.3.39 lakh.

It is further noted that per society paid up share

capital of Kerala has increased from Rs.49730 in 1970-71 to

Rs.851420 by the end of 1993-94. There was considerable

increase in deposits and loans outstanding also. Deposits per

society has increased from Rs.49660 to Rs.1.19 crores and

loans and advances has increased from Rs.1.90 lakh to

Rs .116 .26 crores during this period. While profit per society

has increased from Rs.7320 to Rs.163610, loss increased from

Rs.5820 to Rs.321500.

3.6 District Co-operative Banks in India

District Co-operative Banks (DCBs) occupy the middle

level position in the three tier co-operative credit structure

of the country. In the beginning of the formation of PACSs,

52

they could not function effectively without gaining financial

support from an outside agency. Over and above this, they

were in need of technical guidance and administrative support.

At the same time, there were some societies which have gained

strength and posses surplus funds as well as talents. As a

precondition to get mutual help it became necessary that all

these primary societies form a federation for ensuring

rational use of their funds and provide a common place to meet

for exchange of ideas and co-operative experience. The

formation of DCBs was thus a felt need for mutual help.

The Co-operative Societies Act of 1912 permitted the

registration of DCBs. Even before the enactment of this Act,

some DCBs were established to cater to the needs of primary

societies. In 1906, forerunner of the first DCB was

established as a primary society in Uttar Pradesh. At Ajmer

in Rajasthan the first DCB was established in 1910. But the

first full fledged DCB as per the provisions of the Act of

1912 was started in Jabalpur District of the Central Province.

As recommended by Maclagan Committee (1915) DCBs in India

were classified into, (Nakkiran, S., 1980, p.162).

1. Banks whose membership is confined to individuals - These

are banks wherein membership consists entirely of

individuals or in which societies are admitted as

53

shareholders on exactly the same footings as individuals,

without any special provision for their adequate

representation on the board of management. The Maclagan

Committee was of the opinion that these type of banks

should not be given registration under the Co-operative

Societies Act. Hence, no such banks exist in our country

at present.

2. Banking Unions wherein only primary societies are

allowed to become members under this category. As the

shareholders, lenders and borrowers are the same, the

clash of interest between the shareholders and borrowing

societies can be eliminated.

3. Banks with individuals and societies as members, certain

portion of shares are assigned to societies and also

have separate representation in the board of

directors. This category is considered to be better as

it provides a combination of both rural and urban

population. Majority portion of the DCBs in India are of

this type.

The DCBs are formed mainly with the objective of meeting

the credit requirements of member societies. As an

institution for helping the societies in times of need, they

54

finance agricultural credit societies for production purposes,

marketing societies for marketing operations, industrial

societies for supply operations and other societies for

working expenses. In short, the major objectives of the DCBs

are to provide loans to affiliated societies, to act as a

balancing centre of finance for primary societies, to arrange

for the supervision and control of the affiliated societies,

to raise deposits from members and non-members, to convene

conferences of the member societies and also prescribe uniform

procedure for the working of primary societies, to open

branches of the bank at important places with the permission

of the Registrar of Co-operative Societies and to maintain and

utilise state partnership. Generally, the area of operation of

a DCB is limited to one district. Progress of DCBs in India is

exhibited in table 3.3.

55

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56

It is noted from Table 3.3 that the number of DCBs is

showing a declining trend which came down from 509 in 1970-71

to 357 in 1991-92. But the number of members showed a

different picture. It has increased from 2,31,318 during

1970-71 to 3,96,000 during 1976-77 and to 3,69,434 during

1991-92. Paid up capital and reserves also showed an

increasing trend which has boosted from Rs.49.08 crores to

Rs.829.73 crores and the latter from Rs.43.51 crores to

Rs.716.37 crores during the same period. Deposits and

borrowings also showed considerable increase. There was

increase in working capital too which has shown an increase of

Rs.16706.4 crores during this time span.

It is further pointed out that number of members per DCB

was 454 in 1970-71 and it increased to 1035 in 1991-92. There

was a sharp increase in paid-up capital and reserves also per

DCB. Deposits per DCB shot up from Rs.7.51 lakh in 1970-71 to

Rs.26.15 crores in 1990-91. Position of working capital per

DCB also boosted which increased from Rs.11.81 lakh to

Rs.46.95 crores in 1991-92. It is clear from the above table

that as a whole there were tremendous increase in all

components of funds.

3.7 District Co-operative Banks in Kerala

The DCBs in Kerala have a history of about 80 years.

They were organised separately in the erstwhile states -

57

Travancore and Cochin and in the Malabar district of the

Madras Presidency before the re-organisation of the states on

linguistic basis in 1956. There were separate Co-operative

Societies Act for these regions, viz., the Cochin Co-operative

Societies Act 1913, The Travancore Co-operative Societies Act

1914 and the Madras Co-operative Societies Act 1932

respectively. In 1949, The Travancore-Cochin State was formed

by amalgamating Travancore and Cochin States. For this new

state, The Travancore-Cochin Co-operative Societies Act was

passed in 1952. These legislations were in force in the

Kerala state till the enactment of the Kerala Co-operative

Societies Act 1969.

The Kerala Co-operative Societies Act, 1969 came into

force on 15.5.1969 and the preamble states it as an "Act to

consolidate, amend and unify the law relating to Co-operative

Societies in the State of Kerala" (Government of Kerala,

1969. p.1). The progress of DCBs in Kerala is exhibited in

table 3.4.

58

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0)01 Nm Qm mm ^Q ^NO m H h n N N N w N m

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r -

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59

In Kerala, at present there are 14 DCBs. The number of

branches made substantial progress during the period 1970-71

to 1993-94. For instance, the number of branches which stood

at just 82 in 1970-71 increased to 418 by the end of 1993-94.

Correspondingly membership also increased from 3771 to 7903,

during the same period. The deposits of the DCBs increased

from Rs. 15 .14 crore in 1970-71 to Rs.1073.58 crore in 1993-94.

Similarly, loans advanced increased from Rs.5.58 crore in

1970-71 to Rs.1064.37 crore in 1993-94. All these trends are

well reflected in the behaviour of profit also. In 1970-71,

the district Co-operatives Banks' profit was only Rs.14.91

lakh which increased to Rs.66.52 lakh in 1986-87 and Rs.3.75

crore in 1993-94, the situation improved marginally.

The table further reveals that the average membership per

DCB increased from 377 in 1970-71 to 565 in 1993-94. The

average deposit per DCB rised from Rs.1.51 crore to Rs.76.68

crore during the same period. Similarly average loans

advanced also increased considerably. The average loans

overdue increased from Rs.69.82 lakh in 1970-71 to Rs.7.90

crore in 1993-94. The average profit per DCB increased from

Rs.1.49 lakh in 1970-71 to Rs.26.78 lakh in 1993-94.

Eventhough there was slight increase in profit, it is not

satisfactory when compared to the increase in working capital.

60

3.8 State Co-operative Banks in India

The State Co-operative Banks (SCBs) or the apex banks

occupy a crucial position in the three tier co-operative

credit structure in India. These apex banks or State

Co-operative Banks are formed by federating DCBs in each

state. The apex banks assume a key-position in the

co-operative credit structure because the financial assistance

from RBI and the National Bank for Agriculture and Rural

Development are invariably routed through them. Table 3.5

presents the key statistics relating to SCBs in India for the

period 1975-76 to 1990-91.

61

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62

It is clear from Table 3.5 that the deposits and loans

and advances of SCBs recorded notable progress during 1975-76

to 1990-91. In absolute terms deposits increased from

Rs.723.68 crores in 1975-76 to Rs.6727.88 crores in 1990-91.

Correspondingly loans and advances increased from Rs.893.60

crores to Rs.5378.97 crores. Overdues, one of the important

yardsticks of performance of co-operative institutions

recorded a phenomenal growth from Rs.43.60 crores to Rs.987.31

crores during the reference period. This indicates the

declining efficiency of the SCBs in collecting the loans

disbursed in the appropriate time. As a consequence, the

percentage of overdue to demand which remained at 7 per cent

in 1975-76 increased to 18 per cent in 1990-91.

Average deposits per SCB in India in 1975-76 increased to

Rs.249.18 crore in 1990-91. There was considerable increase

in overdues per SCB during the same period. Overdues has

increased from Rs.1.67 crore to Rs.36.56 crore.

3.9 State Co-operative Bank in Kerala

The Kerala State Co-operative Bank (KSCB) was initially

registered as the Travancore Central Co-operative Bank on 23rd

November 1915. In 1954 the bank was transformed as the

Travancore Cochin State Co-operative Bank and on November 1st,

63

1956 the bank was reorganised as the Kerala State Co-operative

Bank Ltd. It is the first State Co-operative Bank to be

included in the second schedule of the Reserve Bank of India

Act, licenced to carry on the organised business in banking.

The bank has built a highly organised network consisting of 14

DCBs and 1581 PACSs functioning at the village level (on

31.3.92). This wide, network has enabled the District

Co-operative Banks to reach the weaker sections and the common

man in the rural areas in Kerala. Progress of KSCB for the

period 1970-71 to 1991-92 is displayed in Table 3.6.

mn m 0

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65

Table 3.6 shows that the number of members of KSCB is

showing an increasing trend. Membership has increased from

11 in 1970-71 to 15 in 1993-94. Paid up capital and reserves

also increased considerably during this period. There was

sharp increase in case of deposits which increased from

Rs.4.27 crore during 1970-71 to Rs.502.51 crore during

1993-94. Borrowings also showed similar trend. However,

compared to deposits, increase in borrowings was less.

Investments by the Bank increased from Rs.1.65 crore in

1970-71 to Rs.118.98 crore in 1993-94, the average annual

increase being 3.47 per cent. Compared to loans outstanding,

loans overdue have increased considerably. The loans overdue

increased from Rs.13.27 lakh in 1970-71 to Rs.9.95 crore in

1993-94. But the increase in profit was very low. It has

increased from Rs.22.38 lakh in 1970-71 to Rs.84.02 lakh in

1993-94, the average annual increase being 2.24 per cent.

This chapter has examined the origin, growth and trends

in co-operative banking in India and also in Kerala. The

chapter also presented a profile of the co-operative banks

from 1970-71 to 1993-94 which spelt out a clear picture about

the growth of number of members, share capital, reserves,

deposits, borrowings, loans outstanding, working capital and

profit earned or loss incurred by PACS, DCBs and SCBs in India

and also in Kerala.