Devlopment in Co-operative Banking

8/7/2019 Devlopment in Co-operative Banking

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Developments in Co-operative Banking

Chapte r IV

I n t r o d u c t i o n

4 .1 Co -o per a tive b a nk in g in In d ia h as m a d e

s u b s t a n t i a l p r o g r e s s i n d i s s e m i n a t io n o f

b a n k i n g s e r v i c es b a s e d o n c o - o p e r a t i ve

p r i n c i p l e s . I n v i e w o f t h e s p e c i a l t h r u s t o n

f in an c i a l i n c lu s io n , co -o p era t iv e b an k in g h as

a c q u i r e d r e n e w e d s i g n i f i c a n c e i n t h e I n d i a n

finan cial sys tem . The focus o f the recen t po l icy

measu res , t h e re fo re , h as o n ce ag a in sh i f t ed t o

th e s t r en g th en in g o f co -o p era t iv e b an k in g inInd ia . The rev iew of the p rob lems of ru ral co-

oper at ives by the Tas k Force (200 4) const i tu ted

b y t h e G o v e r n m e n t o f I n d i a a n d t h e V i s i o n

Do cu m en t o n u r b an co -op era t ive b an k s (UCBs)

re l eased in March 2 0 0 5 b y th e Reserv e Ban k ,

h av e p ro v id ed a f r esh fr am ewo rk with p rac t i ca l

an d im p lemen tab le a r r a n g em en t s t o r e ju v en a te

th e In d ian co -o p era t ive b an k in g s t ru c tu r e . Th e

emp h as i s o f t h e r ecen t i n i t i a t i v es h as b een to

rev i ta l i se these ins t i tu t ions fo r re ins ta t ing the

c o n f i d e n c e o f t h e p u b l i c i n t h e c o - o p e r a t i v e

ban king sys tem. Whi le des ign ing the r egu lator yan d su p ervi so ry fr am ework , ca re i s b e in g t ak en

t o p r e s e r v e t h e i r c o - o p e r a t i v e c h a r a c t e r a n d

ins t i tu t ional speci f ics .

4 .2 T he co -op er a tive ba n k in g s tr u ct ur e in

I n d i a c o m p r i s e s t w o m a i n c o m p o n e n t s , v i z . ,

u rb an co-operat ive bank s a nd rur al co-operat ive

c r e d i t i n s t i t u t i o n s . W h i l e u r b a n c o - o p e r a t i v e

b a n k s h a v e a s i n g l e t i e r s t r u c t u r e , r u r a l c o -

operat ives have a complex s t ructure . Rural co-

operat ive cred i t ins t i tu t ions have two d is t inct

s t r u c t u r e s , v i z . , t h e s h o r t - t e r m c o - o p e r a t i v e

cred i t s t ructure (STCCS) and the long- term co-operat ive credit structure (LTCCS). Within the

S T C C S , p r i m a r y a g r i c u l t u r a l c r e d i t s o c i e t i e s

(PACS) at th e village level for m th e ba se level,

while distr ict centr al co-operat ive ban ks (DCCBs)

ar e placed at the interm ediate level , and the State

co-operat ive ban ks (StCBs) at th e ap ex level . The

STCCS most ly p rov ide crop and o ther work ing

c a p i t a l l o a n s p r i m a r i l y f o r a s h o r t p e r i o d t o

f a r m e r s a n d r u r a l a r t i s a n s . T h e l o n g - t e r m

structure of rural co-operat ives comprises State

co-operat ive agr icu l tu re and rural development

ban ks (SCARDBs) at the S tate level, and pr imar y

co-operat ive agr icu l tu re and rural development

ban ks (PCARDBs) at th e decentr al ised distr ict or

block level . These inst i tut ions focus on p roviding

typical ly medium to long-tem loans for making

investments in agr icu l tu re , r u ra l indust r ies , and

lately housing. The s tru cture of ru ra l co-oper at ive

b an k s i s n o t u n i fo rm ac ro ss t h e S t a t es o f t h e

coun tr y, and var ies significantly from on e State

to ano ther. Some States have a un i tary s t ructure

with th e State level bank s oper at ing thr ough their

o w n b r a n c h e s , w h i l e o t h e r s h a v e a m i x e d

st ructur e incorpor at ing bo th un i tary and federal

system s (Char t IV.1).

4 . 3 G ive n t h e s ign ific a nt r ole p la ye d b y u r b a n

co-operat ive ban ks in pr oviding banking ser vices

t o t h e m i d d l e a n d l o w e r i n c o m e p e o p l e , t h e

Reserv e Ban k co n t in u ed to t ak e i n i t i a t i v es t o

s t r en g th en th ese b an k s . In J u n e 2 0 0 4 , it was

decided n ot to issue fresh l icenses for s et t ing up

new banks or for opening new branches, unti l a

suitable fram ework for regulat ion and sup ervision

was put in place for the existing UCBs. In March

2005, the Reserve Bank prepared a draft Vision

document for UCBs which, in ter a l ia , discussed

the prob lems of the sector and h igh l igh ted the

i s s u e o f d u a l r e g u l a t o r y m e c h a n i s m w h i c h

res t r i c t ed t h e ab i l i t y o f t h e Reserv e Ban k in

han dling the weakn esses of enti t ies in the s ector.

In o rd er to add ress the p rob lem of dual con t ro l ,

V i s i o n d o c u m e n t p r o p o s e d t h e a d o p t i o n o f a

consu ltat ive app roach for d eciding the futur e set

up of weak and s ick ba nks in each S tate . In term s

o f t h e V i s i o n d o c u m e n t , t h e R e s e r v e B a n k

approached the S tate Governments fo r s ign ing

MOU to ensure greater convergence of approachof the two agencies entru sted with th e regulat ion

and supervision of UCBs. As part of the MOU, it

was decided to set up State level Task Force for

Co-opera tive Urb an Ban ks (TAFCUBs) comp rising

r e p r e s e n t a t i v e s o f t h e R e s e r v e B a n k , S t a t e

Govern m ent an d federa t ion/associat ion of UCBs.

T h e T A F C U B w a s e n t r u s t e d t o i d e n t i f y t h e

poten tially viable and non viable UCBs in th e State

and provide a revival path for the former and a

n o n -d i s ru p t iv e ex i t ro u t e fo r t h e l a t t e r se t o f

b a n k s . T h e e x i t r o u t e c o u l d i n c l u d e m e r g e r /

amalgamat ion wi th s t ronger banks , convers ion


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i n t o s o c i e t i e s o r u l t i m a t e l y a s a l a s t r e s o r t ,

through l iquidation. Til l date MOUs have been

signed wi th 13 S tate Governments and Cent ra l

Govern m ent (in res pect of mu lti-State UCBs), which

encompass 1,511 UCBs, i. e . , 83 per cent of thebank s r epresen ting 92 p er cent of deposi ts of the

sector. The impact of the initiatives in the recent

p as t i s p e rcep t ib l e as t h e re i s en h an cemen t o f

public confidence in the sector which is reflected

in the increase of deposi ts during 2006-07 and

200 5-06, revers ing the d eclining trend of 200 4-05.

4 .4 Ta k in g in t o a c c o u n t th e c om fo r t o f

coordinated supervision/regulat ion in the States

that have s igned MOU wi th the Reserve Bank ,

certain bus iness opp ortunit ies h ave been extended

to the eligible bank s in su ch States as a lso to the

m ult i-State UCBs. It was a nnou nced in th e Annu alP o l i c y s t a t e m e n t f o r t h e y e a r 2 0 0 6 - 0 7 t h a t

financial ly soun d ba nk s in such S tates would also

b e p e rmi t t ed t o o p en n ew b ran ch es , a f ac i l i t y

which was not a vailable to UCBs from 200 4. The

f o c u s f o r t h e s e c t o r n o w i s , i n t e r a l i a , o n

d e v e l o p m e n t o f H u m a n R e s o u r c e s ( H R ) a n d

Inform ation Technology (IT) infras tru ctur e as also

o n s e v e r a l a s p e c t s o f g o v e r n a n c e . A l s o , t h e

conso l idat ion of UCBs th rough the p rocess o f

merger of weak enti t ies with stronger ones has

b een se t i n mo t io n p ro v id in g t r an sp aren t an d

objective guidelines for granting no objection to

m erger prop osals. As on October 30, 200 7, a total

of 33 m ergers ha d been effected upon th e iss ue of

statutory orders by the Central Registrar of Co-

o p era t iv e So c i e t i e s /Reg i s t r a r o f Co -o p era t iv e

Societies (CRCS/RCS) concerned. In addition tothe exist ing 1,813 UCBs at end -March 20 07, 25 9

UCBs were under various stages of l iquidation.

Desp i te the reduct ion in the number o f UCBs,

their b us iness operat ions expanded a t a m oderate

ra te. The ass et qua lity of the UCBs a lso imp roved

significantly.

4 .5 T he recom m e n da tion s of th e Ta s k For ce

(Cha irm an: Pr of. A.Vaidyanath an ) appointed by

the Government of India in 2004 to propose an

action plan for reviving the short- term rural co-

operat ive credit structure have been accepted in

p r i n c i p l e . T h e G o v e r n m e n t o f I n d i a , i nco n su l t a t i o n wi th t h e S t a t e Go v ern men t s , h as

app roved a revival pack age for the S TCCS which

was comm unicated to the S tate Governm ents in

J anu ar y 200 6. NABARD has been des ignated th e

Imp lemen ting Agency for imp lemen ting the Revival

P a c k a g e i n a l l t h e S t a t e s . T h e p r o c e s s o f

implement ing the rev ival package in any S tate

begins with the s igning of the MoU am ong the GoI,

the p ar t icipat ing State Governm ent a nd NABARD.

A special audit of all PACS, DCCBs and StCB in

every part icipat ing State would be un der taken to

ar r ive a t a t rue and fa i r assess m ent o f the amoun t

Chart IV.1: Stru ctur e of Co-opera t ive Credit Inst i tut ions in Ind ia

SCARDBs: State Co-operative Agriculture and Rural Developm ent Ban ks.

PCARDBs: Primary Co-operative Agriculture and Rural Developm ent Ban ks.

Note : Figures in parenth eses indicate the nu mb er of institutions at end-March 2007 for UCBs and at end-March 2 006 for r ural co-operative credit institutions.

Co-operative Credit Inst i tut ions

Urban Co-operative Banks

(1,813)

Scheduled UCBs

(53)

Long-Term

(716)

Short-Term

(1,06,781)

Primary

Agricultural

Credit Societies

(1,06,384)

District Central

Co-operative

Banks (369)

State Co-operative

Banks (31)

Non-Scheduled UCBs

(1,760)

PCARDBs

(696)

SCARDBs

(20)

Rural Co-operative Credit

Institutions (1,07,497)

Multi State

(25)

Single State

(28)

Multi State

(13)Single State

(1747)

Multi District

(491)

Single District

(1,256)

Unit UCB

(894)

Non-Unit UCB

(362)

Deve lopments in Co-opera t ive Banking

119


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Report on Trend and Progress of Banking in India , 2006-07

of accumulated losses as on March 31 , 2004 as

a l so a f a i r an d accep tab l e p ro p o r t i o n o f su ch

losses on the basis of the origin of such losses,

i . e . , l o s s e s d u e t o c r e d i t b u s i n e s s , p u b l i cd i s t r i b u t i o n ( P D S ) b u s i n e s s , o r o t h e r t r a d i n g

b u s in ess . Every par t ic ipat ing S tate would a lso

pr omu lgate an Ord inance as per par a 9 of the MoU

to am end the S tate Co-operat ive Societ ies Act to

give effect to the institutional and legal reforms

envisaged in the revival package or would enact

the necessary legislat ion. Implementat ion of the

packa ge has b egun in thir teen States, v iz . , Andh ra

Prades h, Aru nacha l Prad esh, Bihar, Chha tt isgarh,

Gujarat , Haryana, Madhya Pradesh , Mahar ash t ra ,

Or is sa , Ra jas th an , Ut t a rak h an d , Ut t a r P rad esh

an d West Ben gal, which h ave executed the MoUs

with the Government of India and NABARD with

c o n d u c t o f s p e c i a l a u d i t s o f P A C S a n d H R D

init iat ives. Thes e States have also ini t iated steps

for br inging in necessar y legal am endm ents to the

respective Co-operative Societies Acts.

4 . 6 Ba la n ce s h ee ts of a ll s egm e n ts of t h e r u r a l

c o - o p e r a t i v e b a n k i n g s e c t o r , e x c e p t P A C S ,

expan ded du ring 20 05 -06 (App end ix Table IV.1).

However, their f inancial performance worsened

d u r i n g t h e y e a r . W i d e v a r i a t i o n s w e r e a l s o

obser ved in th e financial per form an ce of different

s e g m e n t s o f t h e r u r a l c o - o p e r a t i v e b a n k i n g

sector. While the upper t ier of both short- term

a n d l o n g - t e r m r u r a l c o - o p e r a t i v e c r e d i t

i n s t i t u t i o n s mad e p ro f i t s d u r in g 2 0 0 5 -0 6 , t h e

l o w e r t i e r (v i z . , P A C S a n d P C A R D B s ) m a d e

overa l l loss es. Ass et q ua lity of al l types of ru ral

co-operat ive banks deter io rated , excep t PACS,

which im pr oved thei r recovery perform ance. The

recovery performance of DCCBs and PCARDBs

also worsened dur ing the year .

4 .7 T his ch a p te r c over s th e d evelo pm e n ts in

the co-operat ive banking sector, both rural and

urban , as wel l as deals wi th the micro-f inance

initiatives of NABARD. The Chapter is organisedinto six sections. Section 2 deals with the policy

measures as wel l as the business operat ions o f

ur ban co-operative bank s, while Section 3 focuss es

on the policy developments and performance of

ru ral co-operat ive bank s. The developments in the

area o f micro cred i t , which has emerged as an

important purveyor of credit in remote and rural

a r e a s , a r e d i s c u s s e d i n S e c t i o n 4 . S e c t i o n 5

delineates the r ole played by NABARD in sh ap ing

the developm ents in the r ur al co-operat ive sector

dur ing the year. Section 6 deals with th e m easur es

in i t i a t ed fo r r ev iv a l o f t h e ru ra l co -o p era t iv e

ban king sector in th e l ight of the Vaidyana tha n

Comm ittees recomm endat ions in th is ar ea .

2. Urban Co-opera t ive Banks

Pol icy Developments

4 .8 In o r d e r t o d e ve lo p a c on s u lt a t ive

m e c h a n i s m f o r r e g u l a t i o n a n d s u p e r v i s i o n o f

UCBs, the process of signing of MoUs with the

Reserve Bank pr ogres sed s at isfactori ly du ring the

year. The Reserve Bank form ulated less s tr ingent

prudential norms for smaller UCBs with deposi t

b a s e o f l e s s t h a n R s . 1 0 0 c r o r e a n d h a v i n g

branches l imited to a single distr ict , i .e. , Tier I

banks, in l ine with the proposals in the Vision

Document for UCBs. Besides, the Reserve Bank

issued a nu m ber of guidelines r elat ing to interest

ra tes , p rud ent ia l norms , d isclosur e and exposure

norm s an d r isk m anagement. In view of the special

dispen sation of UCBs with r espect to ur ban poor,

the guidelines on cr edit delivery, custom er s ervice

and financial inclusion were further fine-tuned.

St ru c tu ra l In i t i a t i v es

Vision Docum ent

4 . 9 T h e Vis io n Do cu m e n t fo r UCBs h igh ligh t ed

the prob lems of the sector a nd ou t lined the b road

m e a s u r e s t o b e a d o p t e d t o e n a b l e t h e U C B s

emerge as a soun d an d healthy network of bank ing

inst i tut ions pr oviding need ba sed q uali ty ban king

se rv i ces , e s sen t i a l l y t o t h e mid d le an d lo wer

middle classes and marginalised sect ions of the

society. In line with the proposals of the Vision

Document , the Reserve Bank cont inued to take

several initiatives during the year.

Two-t ier Regulatory Structure

4 .1 0 Th e Vis io n Do cu men t se ts o u t th e ob ject ive

of ra t ional i s ing the regu latory and superv isory

fram ework for UCBs to enable the s m aller UCBs

gain in s tren gth. In ord er to a chieve this objective,bank s were class ified as Tier I bank s, i .e. , b an k s

h a v i n g b r a n c h / s w i t h i n a s i n g l e d i s t r i c t a n d

deposits below Rs.100 crore and Tier II banks,

i. e . , al l o ther UCBs. Prudential norms for Tier I

and Tier II banks were also revised. While Tier II

banks are under the 90-days del inquency norm

as applicable to commercial banks, the 180-day

loan d elinqu ency norm for Tier I ban ks h as b een

extended u p to March 31, 20 08. This is intended

to provide a measure of relief to the small UCBs

as lower p rovisioning is requ ired, which, in tu rn ,

would translate into higher profi ts that could be


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used to shore up the capital base of these banks.

These banks are, however, required to build up

adequate provisions in the intervening period to

enable them to m igrate to 90-day norm s in futur e.

4 .1 1 Fu r t h e r , t h e fo ll ow in g d i ffe r e n t ia l a s s e t

classification and provisioning norms have been

enun ciated for Tier I ban ks : (i) the 12-m onth p eriod

for classification of a su b-stand ard asset in doubtful

category will be effective from April 1, 2008; (ii)

these banks would be required to pr ovide 100 per

cen t on the secured por t ion of D-I I I advances

(doubt fu l fo r more than 3 years) c lass i f ied as

doubtful more than 3 years on or after Apri l 1 ,

2 0 1 0 ; ( i i i ) Fo r t h e o u t s t an d in g s to ck o f D- I I I

advances as on March 31 , 2010 , banks wi l l be

required to provide as under : (a) 50 per cent as onMarch 31, 2010; (b) 60 per cent as on March 31,

2011; (c) 75 per cent as on March 31, 2012; an d

(d) 100 p er cent as on March 31 , 2013 . For Tier II

banks, (i) 100 per cent provisioning for advances

classified as D-III will apply to those classified as

such on or after April 1, 2007 instead of those so

classif ied on or after Apri l 1 , 2006; ( i i ) for the

outstanding stock of D-III assets as on March 31,

2007, ban ks are r equired to provide as: (a) 50 per

cent up to March 31, 2007; (b) 60 per cent as on

March 3 1, 2008; (c) 75 p er cent as on March 3 1,

2009; and (d) 100 per cent as on March 31, 2010.

4 .1 2 In or d e r to en s u r e th a t a s s e t q u a lit y is

main t a in ed d esp i t e h ig h c red i t g ro wth , i t was

decided in r espect of Tier II ban ks to increase th e

g en era l p ro v i s io n in g r eq u i r emen t o n s t an d ard

advances in s pecific sectors, i .e. , personal loans ,

loans and advances qualifying as capital market

exposur es and comm ercial real es ta te loans from

the existin g level of 1.0 per cen t to 2.0 per cen t.

4 .1 3 An o th er r e laxa t io n ext en d ed to T ie r I b an k s

p e r t a i n s t o i n v e s t m e n t s m a d e i n G o v e r n m e n t

securi t ies. In view of m ark et r isk s a ssociated with

such investments, Tier I UCBs have been given

exemption from maintaining SLR in governmentsecur ities (up to 15 per cent of NDTL) to the extent

of fund s p laced in interest bear ing deposi ts with

State Bank of India and i ts subsidiary banks and

t h e p u b l i c s e c t o r b a n k s i n c l u d i n g I n d u s t r i a l

Developm ent Ban k of Ind ia Ltd. Tier II ban ks ha ve

also been subjected to the str icter provisioning

norm s on stan dar d advances which can be 2

per cent for cer tain type of exposur es. As a pa rt of

ra t ional i sa t ion of superv is ion , whi le the larger

U C B s a r e p l a c e d u n d e r a c o m p o s i t e o f f - s i t e

sur veillance (OSS) report ing system comp rising a

se t o f e ig h t p ru d en t i a l su p erv i so ry r e tu rn s , a

s impl i f ied repor t ing sys tem consis t ing of f ive

returns has b een in t roduced for the sm al ler bank s

having deposi ts between Rs.50 crore and Rs.100

crore and whose branches are l imited to a singledistr ict . The sim plified OSS r eport ing fram ework

would be extended to banks with deposi ts below

Rs.50 crore in the near future.

A lternat ive Mechan ism to Add ress the Problem s

of Dual Control

4 .1 4 S t at es h a vin g a la r ge n u m b e r o f UC Bs

were app roa ched by the Reserve Bank for signing

Mem oran du m of Under stan ding (MoU) to develop

a c o n s u l t a t i v e m e c h a n i s m f o r r e g u l a t i o n a n d

superv is ion of UCBs. So far , MoUs have been

s i g n e d w i t h 1 3 S t a t e s , v i z . , G u j a r a t , A n d h r aP r a d e s h , K a r n a t a k a , M a d h y a P r a d e s h ,

U t t a r a k h a n d , R a j a s t h a n , C h h a t t i s g a r h , G o a ,

Maharastra, Haryana, National Capital Terri tory

of Delhi, West Ben gal and Assa m which together

account fo r 1 ,511 ou t o f 1 ,813 ba nks as a t end -

March 2007 , i .e. , 81 .5 per cen t o f to ta l number

of UCBs and 67 per cent of total deposi ts of the

sector. In addition, an MOU has also been signed

b e t w e e n t h e R e s e r v e B a n k a n d t h e C e n t r a l

Government in respect of Mult i-State UCBs that

account for 25 .5 per cent of depos i ts of the sector.

As s uch, a total of 83 p er cent of UCBs a ccounting

for over 92 p er cent of total deposi ts ar e coveredunder the MoU arrangements and the p rob lems

of a l l such banks are being addressed th rough

consultat ion with other significant stakeholders

s u c h a s S t a t e /C en t r a l G o ve r n m e n t a n d

Federation/Association of UCBs.

4 .1 5 As p a r t of t h e a r r a n ge m en t s u n de r MoU,

the Reser ve Bank is comm itted to constituting State

level Task Force fo r Cooperat ive Urban Banks

( T A F C U B ) c o m p r i s i n g r e p r e s e n t a t i v e s o f t h e

Reserve Bank , S ta te Government and the UCB

sector. Accordin gly, TAFCUBs h ave been cons tituted

in all States with which MoUs have been signed. ACentral TAFCUB has been const i tu ted fo r the

M u l t i - S t a t e U C B s . T h e T A F C U B s i d e n t i f y

potentially viable and non -viable UCBs in the S tate

and suggest revival path for the viable and non-

disru ptive exit r oute for th e non -viable ones.

4 .1 6 T h e exit of n o n -via b le b a n k s c ou ld b e

t h r o u g h m e r g e r / a m a l g a m a t i o n w i t h s t r o n g e r

bank s, conversion into s ociet ies or ul t im ately as

a last res ort, thr ough liquidation. This institutional

arr angement for add ress ing issues of sup ervisory

concern is not available for banks in States that

ar e yet to sign MoU with the Reserve Bank .


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4 .1 7 Fu r t h er, a r is in g o u t of t h e co m fo r t of

coordinated su pervision/regulat ion in States that

have signed MoU with the Reserve Bank, certain

a d d i t i o n a l b u s i n e s s o p p o r t u n i t i e s h a v e b e e nextended to the el igible banks in such States as

also to the Multi State UCBs. These facilities

include perm iss ion to s e t up curr ency ches ts , se l l

m utua l fun d pr oducts , grant of Author ised Dealer

category I and II licens e, perm ission to open new

ATMs, relaxed norm s for cond ucting insu ra nce

b u s i n e s s o n n o n - r i s k p a r t i c i p a t i o n b a s i s a n d

conversion of extension counters into branches.

I t w a s a l s o a n n o u n c e d i n t h e A n n u a l P o l i c y

2 0 0 6 -0 7 th a t f i n an c i a l l y so u n d b an k s i n su ch

States would also be considered for being given

licences to open new branches, a faci l i ty whichwas n ot available to the UCBs s ince 2004 .

Merger /Am algam ation an d Ex it of Unviable Entities.

4 .1 8 Th e p ro cess o f merger s amo n g UCBs was

p r o v i d e d a f r e s h i m p e t u s w i t h t h e i s s u e o f

tra ns pa ren t guidelines for gra nt of no ob jection to

m erger p rop osa ls by the Reser ve Bank (Box IV.1).

T h e c o n s o l i d a t i o n o f t h e s e c t o r t h r o u g h t h e p r o c e s s o f merger of weak ent i t ies with s t ronger ones has been set in

motion by providing t ransparent and object ive guidel ines

for gran t ing no-object ion to mer ger prop osals . The Reserve

B a n k , w h i l e co n s i d e r i n g p r o p o s a l s f o r m e r g e r /

am algam ation, confines i ts ap pr oval to the f inan cial asp ects

of the merger t ak ing in to cons ide ra t ion the in te res t s of

depos i tors a nd f inan cial s tabi l ity. Almost invariably it i s a

volunta ry dec is ion of the banks tha t app roach th e Rese rve

Bank for obtaining no object ion for their merger proposal .

The guide l ines on mergers a re in t ended to fac i l i t a t e the

proces s by de l inea t ing the pre - requi s i t e s and s t eps to be

taken for merger be tween ban ks .

Pursu ant to th e issue of guidel ines on mer ger of UCBs, the

Reserve Bank received 60 proposals for merger in respect

of 52 banks . The Rese rve Bank has i s sued no objec t ioncertificate (NOC) in 37 cases. Of these, 20 mergers became

effect ive upon th e issuance of s ta tutory ord ers b y the Central

Registrar of Co-operative Societies (CRCS)/Registrar of Co-

operative Societies (RCS) concerned. Fourteen proposals for

merger were re j ec ted by the Rese rve Bank, whi l e three

proposals were withdrawn by the banks . The remaining s ix

are u nder considerat ion (Table 1 and 2) . Most of the target

bank s were loss-mak ing UCBs. In a few cases , mergers were

p e r m i t t e d e v e n o f p r o f i t m a k i n g b a n k s w i t h t h e a i m o f

consol idat ion and in some cases merger were permit ted in

respect of such banks , as they were not considered viable

on a s tand-alone bas is in the long run.

Box IV.1: Merger an d Am algam ation of UCBs

The process of merger and amalgamation is e laborate . Themerger proposal has to be su bmit ted by the acquirer ban k to

RCS/CRCS and a cop y of the pr oposa l is also sim ultaneous ly

forwarded to the Reserve Bank along with certain specified

information. The Reserve Bank examines the proposals and

places the same before an Expert Group for screening and

recommendations. On evaluation, if the proposal is found to

be su itable, the Reserve Bank issues NOC to the RCS/CRCS

and the bank s concerned. RCS/ CRCS then issues the order

of amalgamation of the target UCB in compliance with the

pr ovisions of the Co-op erative Societies Act un der which the

bank is regis tered.

Table 1: State -wise Break up of Acqu irer Banks

(as on May 21, 2007)

Sr. Act Un der No. o f No. of No . of No. of No. of Pr op os als

No . Wh ic h Acq u ir er Pr op os als NOC Pr op os als Pr op os als Un d er

R egi s te r ed B a nk s S u b m it te d I s s u ed R ej ec te d Wi th d r a wn P r oc es s in g

1 2 3 4 5 6 7 8

1. Multi-State 7 20 15 4 1 Nil

2. Mahar ashtr a 11 18 8 6 Nil 4

3. Gujarat 8 11 9 1 1 Nil

4 . Andhra Pradesh 3 3 2 1 Nil Nil

5. Karnataka 3 3 2 1 Nil Nil

6 . Rajas than 1 1 Nil 1 Nil Nil

7 . Pun jab 1 1 1 Nil Nil Nil

8 . Uttar akhand 3 3 Nil Nil 1 2

Total (1 to 8 ) 3 7 6 0 3 7 1 4 3 6

Table 2: State-wise Break up of Acquired Banks

(as on May 21, 2007)

S r. Act Un der Wh ich Register ed No. of Acq uir ed No. of Pr op os als No. of NOC No. of Mer ged No. of Pr op os als Pr op os als Un der

No. Banks Subm itted Issued Banks Withd rawn Rejected process

1 2 3 4 5 6 7 8 9

1. Multi-State 1 2 1 1 Nil 1 Nil

2 . Maharashtr a 17 21 11 5 1 6 3

3. Gujar at 14 15 13 6 1 1 Nil

4 . Andhra Pradesh 7 7 6 5 Nil 1 Nil

5 . Karnataka 3 5 3 1 Nil 2 Nil

6 . Goa 1 1 1 1 Nil Nil Nil

7 . Rajas than 1 1 Nil Nil Nil 1 Nil

8 . Delh i 1 1 Nil Nil Nil 1 Nil

9 . Pun jab 1 1 1 1 Nil Nil Nil

10. Madhya Pradesh 3 3 1 Nil Nil 1 1

11. Uttarakhand 3 3 Nil Nil 1 Nil 2

Total (1 to 1 1 ) 5 2 6 0 3 7 2 0 3 1 4 6


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In t e res t Ra tes / Main t en an c e o f CRR

Interes t Rate s on Non-Residen t Deposi t s

4 . 1 9 Ur b a n c o-o p er a t ive b an k s we r e p r o h ib it edfrom gra nting fres h loans in excess of Rs.20 lakh

ag a in s t NRE an d FCNR(B) d ep o s i t s , e i t h e r t o

deposi to rs o r to th i rd par t ies . Banks were a l so

a d v i s e d n o t t o u n d e r t a k e s l i c i n g o f t h e l o a n

am ount to circum vent the cei l ing.

4 .2 0 In k e ep in g wit h th e an n ou n cem e n t m a d e

in the Review of Ann ua l Policy Sta tem ent 2 00 6-07,

UCBs, which are au thor ised dealers in fo reign

exchange, were advised that in respect of FCNR

(B) deposits of all maturities contracted effective

from the c lose o f business in Ind ia as on J anua ry

31, 20 07, interes t sha l l be pa id within the cei lingrate o f LIBOR/ SWAP rates fo r the respect ive

c u r r e n c y/c o r r e s p o n d i n g m a t u r i t ie s m i n u s 2 5

basis points. From close of business as on Apri l

24, 2007, the rates on FCNR (B) deposi ts were

fur ther revised to th e ceiling r ate of LIBOR/SWAP

rates fo r the respect ive currency /corresponding

m atur i t ies m inus 75 b asis points. On float ing ra te

deposits , interest can be paid within the cei l ing

of SWAP ra tes for the r esp ective cur ren cy/m atur ity

minus 25 basis points. For f loat ing rate deposi ts

interest can be reset once in every six months.

Th e in t e res t r a t es were fu r th e r r ev i sed to t h e

ceiling of SWAP r ates for the res pective curr ency/

ma tur i ty m inus 75 bas is po in ts .

Interes t Ra tes on Non-Reside nt (External ) Rupee

(NRE) Deposits

4 .2 1 UCBs were ad vised th a t with effect fro m

the close of bus iness in India as on Apr i l 24, 20 07,

the interest r ates on fresh Non-Resident (External)

R u p e e t e r m d e p o s i t s f o r o n e t o t h r e e y e a r s

matu r i t y sh o u ld n o t ex ceed th e L IBOR/SWAP

ra tes, as on the las t working day of the pr evious

m onth, for US dollar of corr espon ding matu ri t ies

Policy on CRR/SLR

4 .2 2 Th e cash r ese rve r a tio (CRR) fo r sch ed u led

p r i m a r y ( u r b a n ) c o - o p e r a t i ve b a n k s a s a

p ercen tag e o f n e t d eman d an d t ime l i ab i l i t i e s

(NDTL) was incr eased from 5 per cent to 7 .0 per

cen t in s even s tages (Tab le IV.1).

4 .2 3 T he Re se r ve Ba n k a ls o exe m p te d th o se

bank s f rom p aym ent o f penal in teres t which had

br eached th e statutor y m inimum CRR level of 3 .0

per cen t dur ing the per iod from J une 22 , 2006 to

March 2, 2007. The Government of India in the

Extraordinary Gazette notif icat ion dated March

9, 20 07 notified Section 3 of the Reserve Bank of

India (Amendment) Act , 2006 and fixed Apri l 1 ,

2007 as the date on which the related provisions

would com e into force. Pending notification, it was

also decided th at the Reser ve Bank wil l also pa y

i n t e r e s t t o a l l s c h e d u l e d p r i m a r y ( u r b a n ) c o -

operat ive banks on the e l ig ib le CRR balances

maintained with the Reserve Bank at the rate of

(a) 3 .50 per cent per annum from the fortnight

beginn ing J une 24 , 200 6 to December 8 , 2006;

(b) 2.00 per cent from the fortnight b eginning fromDecem ber 9 , 2006 to Febr uar y 16, 20 07; (c) 1 .00

p e r c e n t f r o m t h e f o r t n i g h t b e g i n n i n g f r o m

February 17, 2007. I t was also decided that with

effect from the fortn ight b eginn ing Apr il 14 , 200 7,

al l sched uled UCBs would be paid interest at th e

rate of 0 .50 per cent per annum on el igible cash

b a l a n c e s m a i n t a i n e d w i t h t h e R e s e r v e B a n k

(instead of 1 per cent as hi therto) .

4 .2 4 T h e E xt r a o r d i n a r y G a z et t e n o t ific a t io n

dated J anua ry 9, 2007 of the Governm ent of India,

however, notified J anu ar y 9, 2007 as th e date on

which all the provisions, except Section 3, of theReserve Bank of India (Amendment) Act , 2006

would come into force. Section 3 of the Reserve

Bank of India (Amendment) Act , 2006 provided

for th e rem oval of the ceiling an d floor on th e CRR

to be prescr ibed by the Reserve Bank a s a l so the

provisions for interest payment on el igible CRR

ba lances . Pend ing the n otifications of the r elevan t

prov is ions , the f loor and cei l ing on CRR were

res to red and the Reserve Bank decided to pay

interest on el igible CRR balances but consistent

with the m onetary po licy s tance and m easures a t

r e l ev an t p e r io d s o f t ime . Co n s i s t en t wi th t h e

Table IV.1: Ch an ges in CRR

Effective date* CRR on NDTL

(per cent)

1 2

1. 23-Dec-06 5.25

2. 6-J an-07 5.50

3. 17-Feb -07 5.75

4. 3-Mar-07 6.00

5. 14-Apr-07 6.25

6. 28-Apr-07 6.50

7. 4-Aug-07 7.00

* : From the fortnight beginning.


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am endm ent, i t was decided th at with effect from

t h e f o r t n i g h t b e g i n n i n g M a r c h 3 1 , 2 0 0 7 , t h e

Reserve Bank will not be paying any interest on

t h e C R R b a l a n c e s m a i n t a i n e d b y s c h e d u l e dpr ima ry (urban) co-operat ive ban ks .

Regulatory In i t ia t ives

R isk M anagem ent

4 .2 5 T ie r II b a n k s a r e r e q u ir e d to in c r ea s e t h e

g en era l p ro v i s io n in g r eq u i r emen t o n s t an d ard

advances in s pecific sectors, i .e. , personal loans ,

loans and advances qualifying as capital market

exposur es and comm ercial real es ta te loans f rom

the existing level of one per cent to two per cent.

Risk weight on exposu re to comm ercial real estatewas increased from 100 per cen t to 150 p er cen t .

4 .2 6 UC Bs w er e a d vi s e d t h a t t h e b i l l s

pur chased/discounted/negotiated und er LC (where

the pa ym ent to the b eneficiar y is not m ad e und er

res erve) shou ld be treated as a n exposur e on the

LC issu ing ban k an d n ot on the bor rower. All clean

negotiat ions as indicated above are required to

b e a s s i g n e d t h e r i s k w e i g h t , a s i s n o r m a l l y

appl icab le to in ter -bank exposures , fo r cap i ta l

ad equa cy pu rp ose. In the cas e of negotiations un der

reser ve, the exposu re sh ould be treated a s on th e

borr ower and risk weight a ssigned accord ingly.

4 .2 7 In t h e b a ck d r o p of a b o o m in g s t oc k

m a r k e t , U C B s w e r e a d v i s e d t o m o n i t o r o n a

cont inuous bas is , the end use o f fund s s anct ioned

by them. Banks were fu r ther adv ised to submit

t h e r e p o r t s o f t h e f i n d i n g s o f t h e a u d i t

ex amin a t io n s fo r d i scu ss io n b e fo re t h e Au d i t

Com m ittee o f the Board and with thei r comm ents

pu t up the repor t to the board of d i rectors .

4 .2 8 Th e is su e of cor rec t an d r ea lis t ic va lu a t io n

of fixed as sets owned b y ban ks and those accepted

by them as collatera l for a s izable portion of their

advances portfolio assumes significance in view of

its im plications for corr ect measu rem ent of capital

adequacy position. Accordingly, guidelines were

issued to banks, which they should follow while

formulat ing a policy on valuat ion of propert ies

and appoin tm ent o f valuers for the p ur pose.

4 . 2 9 T h e G ove r n m e n t o f In d i a a n d t h e Na t io n a l

S e c u r i t y C o u n c i l h a s t a k e n a v i e w t h a t

d i s b u r s e m e n t o f f o r g e d n o t e s t h r o u g h A T M s

would be treated as an a t temp t to circulate forged

n o t e s . A c c o r d i n g l y , U C B s w e r e a d v i s e d t o

establish a Forged Note Vigilance Cell at their

H e a d O f f i c e t o p e r f o r m t h e f u n c t i o n o f ( i )

d isseminat ion of Reserve Bank ins t ruct ions on

forged no tes to thei r b ranches; ( i i ) moni to r ing

i t s imp lem entat ion ; and ( ii i) comp i la t ion of dataon d etect ion of forged n otes a nd fol low up of such

cases fi led with police.

4 . 3 0 B a s ed o n d ir e ct io n s of D elh i High C ou r t ,

UCBs were adv ised to en sur e that h ousing loans

are sa nct ioned on ly fo r au thor ised s t r uctures a nd

th e b an k s h ave to o b t a in an u n d er t ak in g o n an

a f f i d a v i t f r o m t h e l o a n a p p l i c a n t s t h a t t h e

bui ld ing/s wi ll be const r ucted a s p er s anct ioned

p l a n s , w h i c h a r e t o b e a t t a c h e d w it h t h e

u n d er t ak in g .

KY C N or m s /A ML S t a n d a r d s /C o m b a t i n g o f Fina ncing of Terrorism

4 .3 1 UCB s we r e a d vis e d to en s u r e th a t th e y a r e

f u l l y c o m p l i a n t w i t h a n t i m o n e y l a u n d e r i n g

standards . Chief Execut ive Off icers (CEOs) o f

UCBs were requ i red to personal ly moni to r the

pr ogress in im plem enting the KYC guid elines a nd

AML procedures in let ter and spir i t and put in

place a system of fixing responsibility for breach

of instruct ions issued. They were also required

to fur nish a com pliance cert ificate in this r egar d.

4 .3 2 As wir e tr a n s fe r is a n in s t an t an e ou s a n dmost preferred route for t ransfer of funds across

the globe, there is a need for preventing terrorists

and other crim inals from having unfet tered access

to wire transfers for moving their funds and for

detecting any misuse when it occurs. UCBs were,

therefore , adv ised to invar iab ly ensure cer ta in

information about al l wire t ransfers. All cross-

border wire t ransfers must be accompanied by

accurate and meaningfu l in format ion about the

originator, i.e., nam e and add ress of the originator,

deta ils of the existing account or u niqu e referen ce

n u m b er as p rev a len t i n t h e co u n t ry. Co mp le t e

o r i gi n a t o r i n fo r m a t i o n , i . e . , n a m e , a d d r e s s ,account num ber, e tc. , must be accompan ied /made

available to the beneficiary bank for all domestic

wire tr ans fers of Rs.50,000 and above. If a bank

h a s r e a s o n t o b e l i e v e t h a t a c u s t o m e r i s

intentionally structuring wire transfers to below

Rs.50,00 0 to s evera l beneficiar ies in ord er to a void

report ing or monitoring, the bank must insist on

complete customer identification before effecting

the tra nsfer. In case of non-co-opera t ion from the

custom er, efforts s hould b e ma de to establish his

identi ty and suspicious transaction report (STR)

should be made to Financial Intel l igence Unit


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i n t e res t d u e o n wo rk in g cap i t a l l o an s as a l so

ins ta lments and in teres t on term loans fa l len du e

for payments on or after February 1, 2006 were

to be converted into term loans which should ber e c o v e r e d i n i n s t a l m e n t s b a s e d o n p r o j e c t e d

future inflows over a period of three years with

an ini t ial m orator ium of up to one year. The rel ief

was extended to al l poultry accoun ts class ified as

s tandar d as on March 31 , 200 6 . Ins t ru ct ions were

issued to UCBs about the scope and manner o f

c a l c u l a t i o n a n d d i s b u r s e m e n t o f i n t e r e s t

su bvention to p oultry ind us try.

P a c k a g e o f R e l i e f M e a s u r e s t o t h e V i d a r b h a

Region in Maha rashtra

4 .4 0 In o r d er t o m i tiga t e d is t r es s o f fa r m e r s inthe debt-r idden d istr icts of Vidarb ha, ba nk s were

advised to implement the rehabil i tat ion package

in respect of agricultural credit as announced by

t h e H o n b l e P r i m e M i n i s t e r . T h e p a c k a g e i s

app licable to the distr icts of Am ar avati, War dh a,

Yeotm al, Akola, Was him an d Buld ha na . The entire

in teres t on overdue loans to farm ers as on J u ly

1, 2006 is required to be waived for farmers in

the above m entioned six distr icts and th ey sh ould

have no pas t in teres t bur den as on that date . The

overdu e loans as on J u ly 1 , 2006 ar e requ i red to

be r eschedu led over a period of 3-5 years with a

o n e - y e a r m o r a t o r i u m . A f t e r r e s c h e d u l i n g a s

above, f resh need based cred i t faci l i ty can be

extended to the farm ers .

Rel ie f to be Extend ed b y Ba nk s in Areas Af fected

by Natura l Calam i ti es

4 . 41 In t h e co n te xt o f t h e r ec en t flo od s t h a t

have affected var ious par t s o f the count r y, ban ks

were adv ised to ensu re a ccess ib i li ty to cus tom ers

t o t h e ir b a n k a c c o u n t s w i th a l t e r n a t e

ar rangements l ike operat ing the b ranches f rom

tempor ary pr emises , ex tens ion counters , sa te l li te

offices a nd res tora t ion of fun ctioning of ATMs.

4 .4 2 To fac ili ta t e o p en in g o f n ew acco u n t s b y

pers ons affected by natur al calamit ies, especially

for availing var ious r eliefs given b y Govern m ent /

o t h e r a g e n c i e s , b a n k s w e r e a d v i s e d t o o p e n

a c c o u n t s w it h a l t er n a t ive a r r a n ge m e n t s fo r

e n s u r i n g KYC p r o c e d u r e s , i n c a s e w h e r e t h e

balance in the account does n ot exceed Rs.50,000,

or the amount of rel ief granted ( if higher) than

Rs.50,00 0 and the total credit in the account d oes

not exceed Rs.1,00,000, or the amount of rel ief ,

( if higher th an Rs.1,00 ,000) in a year.

4 .4 3 To en su re co n t in u i ty in c lea r in g se rvice,

ban ks were ad vised for on-city back-up centres

in 20 large cities a nd effective low-cost s ettlemen t

so lu t ions fo r the remain ing c i t ies . Banks werea d v i s e d t o c o n s i d e r d i s c o u n t i n g c h e q u e s f o r

h igher am ounts to m eet cus tom ers requ i rement

of funds. They could also consider waiver of fees

for EFT, ECS or mail services so as to facilitate

inward transfer of funds to accounts of persons

affected by a natural calamity.

4 .4 4 UCB s we r e ad vis e d th a t th e p r es e nt lim i t

f o r s a n c t i o n o f c o n s u m p t i o n l o a n s m a y b e

enhanced to Rs.5,000 without any collateral and

such loans may be provided even if no r isk fund

has been const i tuted by the State Governments.

While restructuring existing loans, the principala m o u n t o u t s t a n d i n g i n t h e c r o p l o a n s a n d

agricultural term loans as well as accrued interest

thereon may be converted into term loans. The

restructured period for repayment may be 3 to 5

years. Where the da m age is very severe, bank s m ay

extend the rep aym ent period up to 7 years a nd in

extreme hardship cases may be prolonged up to

10 years without additional collateral security.

Rel ie f for S tressed Farm ers in Andh ra Prade sh,

Karnatak a a nd Kera la

4 .4 5 T h e Un io n G ove r n m en t h a d a pp r o ve d ap a c k a g e o f r e l i e f m e a s u r e s f o r d e b t s t r e s s e d

farmers from 25 specif ied distr icts in the States

o f A n d h r a P r a d e s h , K a r n a t a k a a n d K e r a l a .

Accord ingly, all UCBs in thes e Stat es an d m ulti-

state co-operat ive banks were advised to ensure

that al l the far m ers loan-accounts in the s pecified

d is t r ict s , which ar e overdue a s on J u ly 1 , 2006

ar e resch eduled over a per iod of 3-5 years with a

one-year m orator ium and the in teres t thereon (as

on J uly 1, 2006 ) is ful ly waived. Fresh finance

could a lso be extended to su ch farm ers .

Rel ie f Meas ures to Ass is t Dis tressed Farm ers

4 .4 6 As p er a n n ou n ce m en t m a d e in th e Mid -

term Review of Annual Policy Statement for the

year 2 006 -07, it was d ecided to extend the ben efits

of one t ime set t lement (OTS) schemes to such

d i s t r es sed f a rmers wh o se acco u n t s h ad ea r l i e r

been resch eduled/converted on account of natu ra l

calamit ies as also such farm ers default ing on their

loans due to c ircum stances beyond their con t ro l.

A l l m u l t i - s t a t e U C B s w e r e a d v i s e d t o f r a m e

transparent OTS policies for such farmers, with

the approval of their boards.


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4 .4 7 UCB s we r e a d vis e d to en s u r e th a t fu ll

a d d r e s s / t e l e p h o n e n u m b e r s o f t h e b r a n c h i s

invariably mentioned in the pass book/statement

of accounts i ssued to account ho lders in o rder toi m p r o v e t h e q u a l i t y o f s e r v i c e a v a i l a b l e t o

customers in b ranches .

Cus tomer Serv i ces

4 .4 8 To e n a b le b a n k s t o p r o vid e b et t e r

custom er ser vice, UCBs were allowed to und ertak e

fo l lowing l imi ted t ransact ions a t the ex tension

counter s: ( i ) depos i t /withdr awal t ra ns actions; ( ii )

Is s u e a n d e n c a s h m e n t o f d r a ft s a n d m a i l

tran sfers; ( ii i) iss ue an d enca shm ent of t ravellers

cheques; ( iv ) co l lect ion of b i l l s ; (v ) advances

agains t f ixed depos i ts of their cus tomer s (withinthe sanctioning power of the concerned official at

the Extension Counter); and (vi) disbu rs emen t of

other loans (only for individuals) sanctioned by

the head off ice/ base b ranch up to the l imi t o f

Rs.10 lakh only.

4 .4 9 UCB s we r e a d vis e d to im p l em e n t th e

r e c o m m e n d a t i o n s o f t h e Wo r k i n g G r o u p o n

Fo r m u l a t in g a S c h e m e fo r E n s u r i n g

Reasonab leness of Bank Ch ar ges as a ccepted by

th e Reserv e Ban k . Th ey were a l so ad v i sed to

e n s u r e t h a t c u s t o m e r s a r e m a d e a w a r e o f t h e

service char ges upfront an d ar e im plemented on lywith the prior notice to the customer.

4 .5 0 In t er m s o f t h e exis t in g in s t r u ct io n s , t h e

decision to pr escribe s ervice char ges is left to the

d i sc re t i o n o f t h e b o ard s o f i n d iv id u a l b an k s .

Banks are normal ly expected , whi le f ix ing the

s e r v i c e c h a r g e s , t o e n s u r e t h a t c h a r g e s a r e

reas onab le, consistent with the cost of providing

these serv ices and that the cus tomers wi th low

value/volume of t ransactions are not penalised.

All UCBs ha ve been ad vised to d isplay and u pd ate

in their offices/ bran ches, as also on th eir website,

t h e d e t a i l s o f v a r i o u s s e r v i c e c h a r g e s i n t h epr escribed form at. This is also to be displayed in

the local languages.

4 .5 1 S c he d u le d UCB s h ave a ls o b ee n a d vis e d

to display and update on the homepage of their

websites the d etails of certa in service char ges an d

fees at a pr om inent p lace und er th e title of Ser vice

Char ges a nd Fees so a s to facilitate easy access to

the bank customers. They were also advised to

provide on the homepage itself a complaint form

alo n g wi th t h e n ame o f t h e n o d a l o f f i ce r fo r

complaint redress al . The form should indicate that

the f irst point for redressal of complaint is the

bank i tself and that the comp lainant m ay approach

Banking Om bud sm an on ly if the comp laint is not

resolved at the bank within a month.

4 . 52 UCBs a r e r eq u ir e d to en s u r e th a t d up lic at e

DDs are issu ed within a fortnight from th e receipt

of su ch req uests . For delays beyond th is stipulated

p er io d , UCBs were ad v i sed to p ay in t e res t t o

comp ensa te the custom ers for su ch delay.

4 .5 3 In view o f t h e co mp la in t s r ece ived b y th e

Reserve Bank /Bank ing Omb ud sm en, UCBs were

advised no t to compel thei r cus tomers to d rop

cheques in drop boxes and to invariably display

on the cheq ue dr op box itself tha t : Custom ers

can a lso tender the cheques a t the counter and

obtain a cknowledgem ent on the p ay-in-sl ip .

4 .5 4 U CB s we r e a d vis e d t o i n va r i a b ly o ffe r

pas sbook faci li ty to al l their savings ban k a ccount

holders (ind ividua ls), as it is mor e convenient than

statemen t of account for s m all custom ers. Further,

they should not r ecover th e cost of providing such

passbooks f rom the cus tomers .

4 . 55 UCBs w er e a d vis e d to en s u r e th a t ch e qu es /

drafts issued by cl ients containing fract ion of a

rupee are no t re jected or d ishonoured by them.

B a n k s w e r e a l s o a d v i s e d t o e n s u r e t h a t t h e

c o n c e r n e d s t a f f s a r e w e l l v e r s e d w i t h t h e s e

instru ct ions so tha t general pu blic does n ot suffer.

They should a lso ensu re tha t app ropr ia te act ion

is taken a gainst m emb ers of their s taff who refuse

to accept ch eques/dr afts containing fra ct ion of a

r u p e e . B a n k s w e r e a l s o a d v i s e d t o n o t e t h a t

violat ion of aforesa id instr uct ions would be l iable

to be penalised under the provisions of Banking

Regulation Act, 19 49 [as app licable to co-oper ative

societies (AACS)].

4 .5 6 In k eep in g with a r ecen t Allah ab ad High

Court jud gm ent, UCBs were advised to general ly

ins is t that a person opening a deposi t account

ma kes a nominat ion . The bank should exp lain the

ad van tages of nom ination facility to the dep ositor

and if the pers on st i l l does n ot want to nominate,

the bank should ask him to give a specif ic let ter

t o t h e e f f e c t t h a t h e d o e s n o t w a n t t o m a k e

nomination. In case the person declines to give

such a let ter , the bank should record the fact on

the account opening form and proceed with the

open ing of the a ccoun t, if other wise foun d eligible.

4 .5 7 T h ou gh in t er e s t r a t es c h a r ge d b y UC Bs

were deregulated, rates of interest beyond a cer tain

l e v e l w e r e s e e n t o b e u s u r i o u s a n d w e r e n o t


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conform ing to norm al bank ing pr actice. UCBs were,

therefore, advised to lay down ap pr opriate interna l

p r i n c i p l e s a n d p r o c e d u r e s , s o t h a t u s u r i o u s

interest, including processing and other charges,are not levied by them on loans and advances.

Other Po l icy In i t ia t ives

Distribution of Units of Mutual Funds

4 .5 8 UCB s r e gis t er e d in St a te s wh ic h h a ve

signed MoU and those reg is tered under Mul t i -

S t a t e C o - o p e r a t i v e S o c i e t i e s A c t , 2 0 0 2 w e r e

permi t ted to en ter in to agreement wi th mutual

fun ds for m ar keting their un its , subject to certain

p resc r ib ed n o rm s .

Conduct of Foreign Exchan ge Bu siness b y UCBs

4 . 5 9 UC Bs r e gis t er e d u n d er t h e C o- op e r a t ive

Societies Act of a State, which has signed MoU,

or under the Mult i-State Co-operat ive Societ ies

Act, 2002 , were per m it ted for Author ised Dealer

( A D ) C a t e g o r y I a n d I I l i c e n c e , s u b j e c t t o

comp l iance with cer ta in p r escr ibed norm s. In

ad dition to existing two UCBs ha ving AD category

I licens e, two mor e ban ks were given AD category

I license. Ba nk s h aving AD category II licence a re

permit ted to release/remit foreign exchange for

c e r t a i n s p e c i f i e d n o n - t r a d e c u r r e n t a c c o u n t

transactions. I t was also decided not to give any

fresh authorisat ion to UCBs to function as Full

Fledged Money Changers (FFMCs).

Ins tal lat ion of Autom ate d Teller Machine s (ATMs)

4 .6 0 S o u n d s ch ed u le d a n d n on -s ch e d u le d

UCBs were permitted to set up select off-site/ on-

site ATMs, sub ject to pr escr ibed eligibility nor m s.

Bank s per m i t ted to have ATMs can a lso i ssue

AT M -c u m - d e b i t c a r d s . P r i o r a p p r o v a l o f t h e

Reserve Bank for network connect iv i ty and /or

sh aring of the ATMs was also disp ensed with.

C o n v e r s i o n o f E x t e n s i o n C o u n t e r s i n t o F u l l -

F ledged Branches

4 .61 Consequent to the regu latory coord inat ion

brought about by signing of MoU with some of the

State Governments, it was decided that the Reserve

Bank would consider per m itting financially soun d

UCBs registered in States, which have signed MoU

with the Reserve Bank and those registered under

the Multi-State Cooperative Societies Act, 2002 to

convert existing extension counters into full-fledged

bran ches, sub ject to certain conditions.

Insurance Business

4 .6 2 As a n n o u n c ed i n th e An n u a l Po li c y

Statem ent for th e year 2 007 -08, UCBs registeredin S tates that have en tered in to MoU wi th the

Reserve Bank or those reg is tered under Mul t i -

S t a t e C o - o p e r a t i v e S o c i e t i e s A c t , 2 0 0 2 w e r e

allowed to undertake insurance agency business

as corporate agen ts wi thout r i sk par t ic ipat ion ,

subject to compliance with the following eligibility

norm s: (a) UCB should ha ve a m inim um net worth

of Rs.10 crore; and (b) It should not have been

clas sif ied as Gr ad e III or IV. In cas e of UCBs

registered in S tates wh ich have not signed MoUs with

the Reserve Bank , the exist ing norm s continu e.

Norm s for m ainta ining NRE/NRO accoun ts

4 .6 3 B an k s r e gis t er e d in S ta t es th a t h a ve

e n t e r e d i n t o M e m o r a n d u m o f U n d e r s t a n d i n g

(MoU) with the Reserve Bank for supervisory and

reg u la to ry co -o rd in a t io n an d th o se r eg i s t e red

under the Multi State Co-operative Societies Act,

2002 were perm it ted to open NRE account su bject

to com pliance with the cer tain el igibil ity norm s.

In t e rms o f ex t an t i n s t ru c t io n s , UCBs a re n o t

perm it ted to accept NRO deposits . They were also

required to close these accounts, within a given

t imeframe. I t has now been decided that banksmay maintain NRO accounts, arising from their

re-des ignat ion s uch as upon the account ho lders

becoming non-res iden t . Opening of f resh NRO

a c c o u n t s i s n o t p e r m i t t e d . F u r t h e r , n o f r e s h

credits , barring periodical credit of interest , are

a l l o w e d i n t h e s e a c c o u n t s . H o w e v e r , t h e s e

restr ict ions are not applicable to UCBs holding

AD Category - I licence.

G u id e l in e s o n O n e - t i m e S e t t l e m e n t ( OT S )

Sche m e for S ME Accounts

4 .6 4 Gu id e lin es fo r se t tlemen t o f ch ro n ic NPAsin smal l an d med iu m en te rp r i ses sec to r , were

f o r w a r d e d t o t h e S t a t e G o v e r n m e n t s w i t h a

request to notify the scheme to the UCBs under

t h e i r j u r i s d i c t i o n , k e e p i n g i n v i e w t h e l e g a l

p o s i t i o n o b t a i n i n g i n t h e S t a t e C o - o p e r a t i v e

Societ ies Acts / Rules o f the respect ive S tates .

Similar guidelines were also forward ed to Mult i-

State UCBs. These guidelines do not cover loans

availed of/guar an teed by dir ectors / their r elatives/

f i r m s o r c o m p a n i e s i n w h i c h d i r e c t o r s a r e

interested a nd cases of wilful defaults , fraud s an d

malfeasance.


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Grant of Loans for Acquis i t ion of Kisan Vikas

Patras

4 .6 5 Gran t o f lo an s fo r in ves t in g in KVPs d oes

not promote fresh savings. I t rather channelises

the exist ing savings in the form of ban k d eposits

to smal l sav ing ins t ruments and thereby defeat

the very purpose of such schemes. Banks were ,

t h e r e f o r e , a d v i s e d n o t t o s a n c t i o n l o a n s f o r

a c q u i s i t i o n o f / i n v e s t i n g i n s m a l l s a v i n g s

instru m ents, includ ing KVPs.

Augm ent ing Capi tal of UCBs

4 .6 6 S h a r e c a p it a l a n d r e t a in e d e a r n in gs

c o n s t i t u t e t h e o w n e d f u n d s o f

c o - o p e r a t i v e b a n k s . S h a r e c a p i t a l c a n b e

withdr awn by member s af ter the m in im um lock-

in per iod and does no t have the permanence of

equity . Co-operat ive banks are also not al lowed

to issue s har es a t a p r emium . In o rd er to exp lore

various options for raising regulatory capital , i t

was p ro p o sed to co n s t i t u t e a Wo rk in g Gro u p

comprising representat ives of the Reserve Bank,

State Governm ents an d the UCB sector to examine

t h e i s s u e s i n v o l v e d a n d i d e n t i f y a l t e r n a t e

ins t rum ents /avenues fo r augment ing the cap i ta l

fun ds of ur ba n co -oper ative ba nk s (Box IV.2).

Bank and Branch L icens ing

4 .6 7 Co n s eq u e n t u p o n ea s in g o f t h e lic en s in g

n o r m s in Ma y 1 9 9 3 , m o r e t h a n 8 0 0 b a n k i n g

l icenses were issu ed , up to J une 200 1 . It was ,

however, observed that close to on e third of these

newly l icensed UCBs became f inancial ly weak

with in a sh or t per iod . There was , thus , a need to

m o d e r a t e t h e p a c e o f g r o w t h o f t h i s s e c t o r .

Accordingly, i t was decided to stop fur ther ban k

and branch l icensing unti l a sui table framework

for regulat ion and supervision was put in place

for the existing large number of UCBs. As at the

end of March 2 007 , ou t o f 1 , 813 bank s , 925 wereun it bank s, which were functioning as Head Office-

cum-Branch. In the States that have signed MoU

with th e Reserve Bank , i t was d ecided to consider

ap p l i ca t i o n fo r g ran t o f b ran ch l i cen ses f ro m

eligible licens ed ba nk s, whose n et worth was not

less than Rs.10 crore and average networ th per

bank , includ ing the p roposed ones was no t less

th an Rs. 2 cr or e in A an d B cat egory centr es a nd

Rs.1 crore in C and D category centres. The

eligibil ity of the b ank s is decided on the b asis of

their au dited ba lance sh eet for th e financial year

ended March 2007 .

UCBs under Directions

4 .6 8 D ir e ct io n s a r e is s u e d to UCB s b a s ed on

th e f r amewo rk o f Grad ed Su p erv i so ry Ac t io n

(GSA) or due to sudden developments l ike run

on ban k , am ong others . These include res t r ic t ion

on acceptan ce/withd ra wal of depos i ts , restr iction

o r b a n o n e x p a n s i o n o f l o a n s , i n c u r r i n g o f

expendi tu re o ther than min imum es tab l i shment

expenses required for day to day running of the

b a n k . T h e b a n k s p l a c e d u n d e r d i r e c t i o n s a r e

monitored and decision on removing restr ict ions

depends upon the abil i ty of banks to rect ify i ts

i n ad eq u ac i es . Du r in g 2 0 0 6 -0 7 , 2 3 UCBs were

p laced u nder d i rections as agains t 7 UCBs dur ing

th e p rev io u s y ear . Th e to t a l n u mb er o f UCBs

placed u nder d i rect ions a t end-March , 20 07 waslower a t 73 , compared wi th that o f 75 a t end-

March 2 00 6 (App end ix Table IV.2).

UCBs under L iquidat ion

4 .6 9 As a t e n d -Ma r c h 2 0 0 7 , 2 5 4 UC Bs we r e

und er various s tages of liquidation com par ed with

226 banks at end-March 2006 (Appendix Table

IV.3) . As a r esu l t o f the con su l ta t ive p r oces s

adop ted in States that h ave signed MoUs with the

Reserve Bank , the p rocess fo r l iqu idat ion has

becom e sm ooth and q u icker, as the d ecis ions are

based on the recommendations of the TAFCUBs.Earl ier , the requisi t ion for l iquidation of a bank

was pr o tes ted b y the ban k , the sector an d often

r e s u l t e d i n d e l a y i n i m p l e m e n t a t i o n o f t h e

requisi t ion by the State Governments.

Off-si te Surveil lance

4 .7 0 An o ff s i te su rv eillan ce (OSS) so ftware h as

b e e n d e v e l o p e d f o r U C B s t o f a c i l i t a t e t h e

prepa rat ion and sub m ission of al l sup ervisory and

regulatory (includ ing OSS) r etur ns to the Reser ve

Bank electronical ly . The returns are e-mailed by

UCBs to th e r esp ective Regiona l Offices (ROs) oft h e R e s e r v e B a n k , w h i c h a r e a u t o m a t i c a l l y

uploaded to the RO database, and the same are

tran sm itted to Central Office server at n ight over

INFINET. As part of efforts towards continuous

supervision, data are subjected to analysis using

business intelligence software. Analysis is done,

inter a l ia , with the objective of track ing incipien t

ind icators o f s t ress faced by banks as a l so fo r

identifying outlier banks, i .e. , banks that do no t

f a l l w i t h i n r e a s o n a b l e l i m i t s i n r e s p e c t o f

impor tan t p aram eters such as cap i ta l adequacy,

qu ality of as sets , liqu idity, ear nings, etc. Th e OSS


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T h e u r b a n c o o p e r a t i v e b a n k i n g s e c t o r h a s w i t n e s s e d

phenomenal growth during the las t one and a half decades .Certain infirmities have, however, manifested in the sector

resu lting in eros ion of pu blic confidence and cau sing concern

to the regulators as also to the well-functioning units in the

sector. One of th e factors significantly affecting the finan cial

heal th of the urban co-operat ive banks (UCBs) was their

inabi l i ty to a t t rac t equi ty /quas i equi ty inves tment s . A t

present , UCBs have l imited avenues for ra is ing such fund s

and even their s har e capi ta l can be withdrawn. Agains t this

backd rop, an annou ncement was m ade in the Annu al Pol icy

Statemen t for the year 200 6-07 to constitute a Work ing Grou p

to examine the issue of share capital of UCBs and identify

al ternate ins t ruments / avenues for augmenting the capi ta l

funds of UCBs. Accordingly, a Working Group (Chairman:

N.S. Vishwanathan) was constituted.

The major recommenda t ions of the Group a re as und er :

Where UCBs with low capit a l or nega tive ne t wor th a re

able to identify potential investors, the monetary ceiling

pr escribed in the Acts on individu al shar e holding comes

in the way of shoring up the share capi ta l through this

route . In such cases , the State Governm ents be requ es ted

to exempt the UCBs from the existing monetary ceiling

on individual sh areholding ei ther thr ough a not i ficat ion

or th rough am endm ent to the Act , where n ecessar y.

To p r o vi d e i n s tr u m e n t s a n d a ve n u es fo r r a i s in g s ta b le

a n d l o n g - t e r m f u n d s h a v i n g e q u i t y o r q u a s i e q u i t y

characteris t ics :

i) UC Bs m a y b e p e r m i t te d t o i ss u e u n s e cu r e d ,

s u b o r d i n a t e d ( t o t h e c l a i m s o f d e p o s i t o r s ) , n o n -convert ible , redeemab le debentur es /bond s , which can

b e s u b s c r i b e d t o b y t h o s e w i t h i n t h e i r a r e a o f

operat ions and outs ide. Fund s raised throu gh such

ins trum ents m ay be t reated as Tier II capi ta l , subject

to the ins t ruments conforming to certa in prescribed

f e a t u r e s . T h e s e b o n d s c o u l d b e t r a n s f e r a b l e b y

endor sement and del ivery.

i i) UCBs be al lowed to issu e special shares on sp ecif ic

terms and condi t ions . Banks can also be al lowed to

i s sue these sha res a t a premium, which could be

appr oved by the r espect ive RCS, in consul ta t ion with

the Reserve Bank. The special shares wil l be non-

vot ing, perpetual and t ransferable by endorsement

and de l ive ry. They would r ank senior to on ly the

ordinary shares and be t reated as Tier I capi ta l .

i ii ) The Reserve Bank m ay make an except ion with regard

to rat ing requirement to enable the commercial banks

to invest in the special shar es and Tier II bonds iss ued

by UCBs within the ceiling prescribed for investment

in unl is ted securi t ies . UCBs may also be permit ted

to invest in Tier II bon ds of other UCBs. The Reserve

Bank may prescribe an appropriate l imit l inked to

the inves t ing bank s an d recipient b ank s n et owned

Box IV.2: Rep ort of th e Workin g Group on Iss ue s Conce rn ing Raising of Cap ital by UCBs

funds .

iv) UCBs be a l lowed to is su e redeemab le cumu la t ive

preference shares on specif ic terms and condi t ions

wi th the pr ior pe rmis s ion of the respec t ive RCS,

granted in consu l ta t ion with the Reserve Bank . They

ma y be treated a s Tier II capital sub ject to conformin g

to certain prescribed features .

v) There is a need to amend the Mult i-State Co-operat ive

societies Act to remove the lim it prescr ibed on r aising

of fund s by way of non-convert ible debentu res /bonds .

Wherever such l imits are prescribed in other State

Acts , necessary amendments may be made.

vi) UCBs be perm it ted to r aise deposi ts of over 15 year

matu ri ty and s uch dep osi ts can be considered as Tier

II capital, subject to their meeting certain conditions,

w h i c h , i n t e r a l i a , i n c l u d e t h a t t h e y s h a l l b e

s u b o r d i n a t e t o o t h e r d e p o s i t s a n d i n e l i g i b l e f o r

DICGC cover.

vii) Wher e ban ks with negative net worth ra ise Tier II

capi ta l by way of bonds , p reference sh ares a nd long

matur i ty depos i t s , t h rough convers ion of ex i s t ing

deposi ts , the Reserve Bank ma y, as an except ion to

the genera l ru le , t rea t these as pa r t o f regula tory

capital even though Tier I capital is negative.

As re t a ined ea rn ings form the only source of owned funds ,

the Reserve Bank could sugges t to the Government of

India to defer the application of income tax on UCBs for

a period of three years by which t ime the al ternat ive

ins truments may also take concrete shape.

Since UCBs are brought under the regime of l inking capita l

adequacy in terms of a ratio to risk assets, prescribing a

share to loan r at io on a borr ower-to-borrower b as is may

not be necessary and hence the extant ins t ruct ions on

share linking to loans may be dispensed with.

As fo r In t e r n a t i o n a l Ac c ou n t i n g S t a n d a r d B o a r d s

p r o p o s e d s t a n d a r d r e q u i r i n g s h a r e c a p i t a l o f c o -

oper atives to be treated as outs ide liabilities, the Work ing

Group recommended that i t may cont inue to be t reated

as equi ty and reckoned as Tier I capi ta l for regulatory

pur poses in view of the r es t r ic t ions p laced on withdr awal

of capital in the Co-operative Societies Acts and taking

into account the empirical evidence of share capi ta l of

UCBs being by and large stable.

T h e Wo r k i n g G r o u p h a s o b s er v ed t h a t a fe d e r a te d

stru ctur e can b e a lasting solution for the sector. However,

i t wil l not only require am endm ents to the Co-operat ive

Societies Acts, but also entail changes to the supervisory

a n d r e g u l a t o r y p r a c t i c e s . T h e G r o u p h a s , t h e r e f o r e ,

r e c o m m e n d e d t h a t t h e e n t i r e i s s u e o f c r e a t i n g a n

app rop riate legislative and sup ervisory framework for the

pur pose b e separa tely examined taking into considerat ion

the internat ional experiences and sys tems.

also acts as a decis ion suppor t sys tem, as data

a r e p r e s e n t e d i n a n a n a l y s e d f o r m , w h i c h

faci l i ta tes in formed decis ion making . Fur ther ,

analy t ical ou tpu t fo r s t reng then ing the MIS of

UCBs has also been p rovided in recently enhan ced

OSS software.


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4 . 7 1 S c he d u le d UC Bs we r e a d vis e d to s u b m i t

the stru ctura l l iquidi ty statem ent and interest r ate

sensi t iv i ty s ta tement th rough the ALM Module

provided in the OSS software. The statement of s t ructur al l iqu id i ty is r equ i red to be p r epared a t

f o r t n i g h t l y i n t e r v a l s b e g i n n i n g w i t h t h e l a s t

repor t ing Friday of J une 20 07, i .e. , J u n e 2 2 , 2 0 0 7

and that of interest rate sensi t ivi ty on a monthly

basis as on las t repor t ing Fr iday of the month

s tar t ing with the month of J une 200 7 .

4 .7 2 As t h er e is gr e a te r c on ve r ge n ce in t h e

s u p e r v i s o r y p r o c e s s b e t w e e n t h e c o m m e r c i a l

ban ks and UCBs, the rat ing mod el for UCBs was

revised to al ign i t with the revised rat ing model

for com m ercial banks . The new rat ing m odels for

Tier I and Tier II UCBs have been approved bythe Board for Finan cial Sup ervision to be ad opted

with the inspection cycle beginning March 2008

(Bo x IV.3 ).

Op era t io n s an d F in an c i a l Pe r fo rma n ce o f Urb an

Co -o p era t iv e Ban k s

A Profile of UCBs

4 .7 3 T h e ur b a n c o -o p er a t ive b a n k in g s e ct or

comp rises a n um ber of inst i tut ions which var y in

terms of their size, nature of business and their

geograp hic spr ead. Prim ar y (Urban ) co-opera t ive

banks (UCBs) account for about 4 .4 per cent of

d ep o s i t s an d 3 .9 p e r cen t o f ad v an ces o f t h ebanking system, and have 7.1 mil l ion borrowers

and over 50 mil l ion deposi tors.

4 .7 4 T h e t ot al nu m b er o f G r a de I a n d II b a n ks

increased consistently du ring the last thr ee years ,

whi le those in Grade I I I and IV decl ined . The

n u m b e r o f U C B s i n G r a d e I I I a n d G r a d e I V

declined to 563 (31 per cent of the total number

of UCBs) at end-March 2007, from 677 (37 per

cent of the tota l) at en d-March 20 06 (Tab les IV.2

and IV.3) . The imp rovement in the posi t ion of

ban ks signified by an incr ease in the Gra de I and

II banks and a decl ine in Gr ade III and IV ban ks ,was witness ed in m ost of the centres . The genera l

improvement in the Grade I and II banks largely

reflects the sa lubr ious imp act of the cons ultat ive

process under TAFCUBs.

4 .7 5 Th e imp r o vemen t in p u b lic con fid en ce in

this sector is r eflected in the r ise in dep osi t base

of the UCBs. The total dep osits of UCBs increa sed

b y 6 .1 p e r cen t d u r in g 2 0 0 6 -0 7 , o n to p o f an

increase of 8 .6 per cent dur ing 2005 -06. Besides

a few large ban ks, m ost of the UCBs a re of sm all

At present, a supervisory rating model based on CAMELS

(s imilar to comm ercial banks) and a s imp lified rat ing model

b a s e d o n CAE L a r e i n v o gu e f o r s c h e d u l e d a n d n o n -

scheduled UCBs , re spec t ive ly . A sys tem of superv i sory

grading of UCBs in to grades I to IV based on f inanc ia l

pa ramete rs , viz ., CRAR, Net NPA, Net Profit and compliance

with CRR/SLR is a lso in place for b oth sch eduled an d non-

scheduled UCBs. While the supervisory ratings of UCBs are

disclosed to the Board level functionaries only, the grades

are ad vised to the ba nks concerned an d the RCS (except in

case of banks classified as Gr ade I, where grade is n ot advised

to the b ank /RCS).

I n o r d e r t o b r i n g a b o u t s u p e r v i s o r y a n d r e g u l a t o r y

convergence between co-operat ive and commercial banks ,

wi thout mis s ing out on the governance s t ruc ture and the

level of MIS and r isk ma nagement sys tems obtaining in th e

UCBs, the rating models for UCBs have been revised. The

revised ra ting model for UCBs is on the lines of revised r ating

mod el for comm ercial bank s with su i table adap tat ion in the

param eters r a t ed so as not to und uly ra i s e the ba r in respec t

of UCBs vis--vis commercial banks keeping in view their

overall finan cial health, the level of MIS an d r isk m anagemen t

sys tems prevai l ing. These apart , the diss imilari t ies in the

s tru cture of ma nagement , the s ize of the regulated ent i t ies ,

the regulations presently applicable to them, the level of use

of ban king technology, amon g other s, have also been tak en

into account while adap ting the mod el. Suitable modifications

have been mad e considering the fact that UCBs, as compar ed

Box IV.3: Revise d CAMELS Ra tin g Model for UCBs

to comm ercial banks , have larger average gross and net NPAs,

par t icularly hard core NPAs a nd larger cos t-income r at ios .

Under the Management head, sui table adaptat ion has been

mad e keeping in view the elect ion on d emocrat ic pr inciple

and corpora te governance aspec t s obta in ing in the UCB

sector . Sui table modificat ions have also been made under

t h e h e a d M a n a g e m e n t f o r U C B s w o r k i n g u n d e r

Adm inis t rators , where the board s have been superceded . (A

s i g n i f i c a n t n u m b e r o f U C B s a r e f u n c t i o n i n g u n d e r

Adminis t rators , their boards having been superceded due

to various reasons) .

Keeping in view the existing twin-track regulatory regime,

the r evised CAMELS m odel, which is mor e akin to the r evised

mod el adopted for comm ercial bank s , would be ad opted for

UCBs wi th depos i t s of Rs .100 c rore and above and the

revised simp lified version th ereof would b e adop ted for UCBs

wi th depos i t s of l e s s than Rs .100 c rore . As aga ins t the

present sys tem of rat ing of UCBs in four scales un der A to

D, UCBs would b e rated in ten scales und er A+ to D, us ing

both pos i t ive and nega t ive connota t ions to the pr inc ipa l

rat ing. For instan ce, A+ , A, A-. All UCBs with dep osits o f

Rs . 1 0 0 c r o r e a n d a b o v e w o u l d b e b r o u g h t u n d e r A L M

discipline. The revised rating model will be made applicable

to UCBs from the inspection cycle beginning from the year

Apri l 200 8, i .e., with reference to their financial position as

on March 31, 2008 and the exis t ing grading sys tem would

be dispensed with.


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Table IV.2: Cent re -wise Grad ation of Urba n Co-oper ative Ban ks

Centre Grade I Grade II Grade III Grade IV Total

2006 2007 2006 2007 2006 2007 2006 2007 2 0 0 6 2 0 0 7

1 2 3 4 5 6 7 8 9 1 0 1 1

Ahm edabad 136 114 50 88 67 42 43 40 2 9 6 2 8 4

Bangalor e 90 99 76 92 85 55 46 42 2 9 7 2 8 8

Bhopal 16 12 28 24 17 15 14 9 7 5 6 0

Bhubaneswar 1 2 6 4 3 4 4 4 1 4 1 4

Chand igarh 10 9 1 3 1 4 4 1 6 1 6

Chennai 54 69 32 34 39 22 7 6 1 3 2 1 3 1

Dehr adun 4 1 2 7

Guwahati 6 6 4 6 4 4 4 1 1 8 1 7

Hyd er abad 48 65 43 33 18 7 15 11 1 2 4 1 1 6

J aipur 25 24 10 13 3 1 1 1 3 9 3 9

J am m u 2 3 2 1 4 4Kolkata 30 31 11 10 3 1 7 9 5 1 5 1

Luck now 47 44 13 17 9 4 8 5 7 7 7 0

Mum bai 173 117 128 178 84 76 71 80 4 5 6 4 5 1

Nagpur 53 17 45 76 43 39 33 39 1 7 4 1 7 1

New Delh i 12 12 1 1 2 2 1 5 1 5

Patna 3 5 1 1 5 5

Raipur 5 5 4 1 4

Thir uvananthapuram 10 14 11 14 28 23 11 9 6 0 6 0

Total 7 1 6 6 5 2 4 6 0 5 9 8 4 0 7 2 9 5 2 7 0 2 6 8 1 ,8 5 3 1 ,8 1 3

: Nil.

Note : As at end-March 2006, data for Bhopal include Raipur and data for Lucknow include Dehradun.

to m ediu m size (Tab le IV.4). As a t end -Mar ch 2 00 7,

of the total 1,813 UCBs, 34.5 per cent of UCBs

had d eposits less than Rs.10 crore. However, they

accounted for only 3.1 p er cent of total deposi ts .

At the other end of the spectrum, 77 banks with

deposits of Rs.250 crore an d ab ove accounted for

half of the total deposits. Of these, 15 banks with

deposits Rs.1,000 crore an d ab ove accounted for

27.1 per cent of total deposi ts of UCBs at end-

March 2007 . In a l l , 95 .8 per cen t banks had a

d e p o s i t b a s e o f l e s s t h a n R s . 2 5 0 c r o r e a n d

accounted for 50 per cent of deposi ts , while 4 .2

per cent ban ks with a deposi t base of Rs.250 cror e

and above accounted for r ema ining 50 per cent of

the deposits of the UCB sector, reflecting highly

skewed d istr ibution of deposi ts acr oss UCBs.

4 .7 6 F ift y-t h r e e U CB s , w h ic h w er e a c co r d e d

sched uled statu s const i tuted a s izeable sect ion of

the UCB sector in terms of their share in assets/

deposi t s /inves tm ents / loans and advances which

was a l i t t le over 40 per cent . On the other hand,

1 ,7 6 0 n o n - sch ed u led UCBs acco u n ted fo r t h e

rem aining sh ar e (Tab le IV.5).

Table IV.3: S um m ary of Grad e-wise Position of UCBs

En d - No. of Grad e I Grad e II Grad e III Grad e IV Grad e Grad e Grad e Grad e

March UCBs I+ II III+ IV (I+ II) III+ IV

as a (as a

p ercen t p ercen t

to Total to Total)

1 2 3 4 5 6 7 8 9 10

2005 1,872 807 340 497 228 1,147 725 61 39

2006 1,853 716 460 407 270 1,176 677 63 37

2007 1,813 652 598 295 268 1,250 563 67 31


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Op era t io n s , F in an c i a l Pe r fo rman ce an d Asse t

Qual i ty o f Urban Co-operat ive Banks

Operations of UCBs

4 .7 7 T h e b u s in e s s op e r a t i o n s o f U C B s

expanded at a much lower ra te o f 5 .9 per cen t

dur ing 2006 -07 , comp ar ed with a g rowth of 24 .8

per cen t by schedu led comm ercial ban ks (SCBs)

du rin g the sam e per iod (Table IV.6). As a res ult ,

the r elat ive ass et size of UCBs a t end -March 2 007

decl ined to ar ound 4 .0 per cen t o f ass ets o f SCBsfrom the level of 5 .0 per cent a year ago. Th e

composi t ion of the assets and l iab i l i t ies o f the

UCBs remained broad ly on the l ines o f the las t

year. Deposits , the main i tem on the l iabi l i t ies

s ide , accounted for near ly 75 .7 p er cen t o f tota l

r e s o u r c e s . B or r o w in g s r e g i s t er e d a s h a r p

increa se of 46.1 per cent while other l iab i li t ies

r eg i s t e red a mo d es t r i se (1 .8 p e r cen t ) d u r in g

2 0 0 6 - 0 7 . C a p i t a l a n d r e s e r v e s i n c r e a s e d a t a

h ig h er r a t e o f 1 1 .4 p e r cen t an d 3 .6 p e r cen t

Table IV.5 : A Pro file of UCBs

(End-March 2007)(Amount in Rs. crore)

Categor y No. of UCBs Assets Deposits Inves tm ents Loans and Advances

1 2 3 4 5 6

1 . All UCBs 1 ,8 1 3 1 ,5 9 ,8 5 1 1 ,2 0 ,9 8 3 4 7 ,3 1 6 7 8 ,6 6 0

(1 0 0 .0 ) (1 0 0 .0 ) (1 0 0 .0 ) (1 0 0 .0 ) (1 0 0 .0 )

2. Scheduled UCBs 53 71,562 51,173 20,279 32,884

(2 .9) (44.8) (42.3) (42.9) (41 .8)

3 . Non-Scheduled 1,760 88,290 69,810 27,037 45,776

(97 .1) (55.2) (57.7) (57.1) (58 .2)

Note : 1. Figur es in par entheses r epresent percentages to total of all UCBs.

2. Data are provisional.

Tab le IV.4: Dist ribu tion of UCBs by Depo sit-siz e

(End -March 2007)

Sr. Deposit Base No. of UCBs DepositsNo. (Rs . crore) No. Shar e in Am ount Shar e in

Total Total

(p er c en t ) (Rs. cr o r e) (p er ce nt )

1 2 3 4 5

1. > 1,000 15 0.8 32,748 27.1

2 . 500 to < 1,000 17 0.9 11,897 9.8

3 . 250 to < 500 45 2.5 16,152 13.4

4 . 100 to < 250 143 7.9 22,042 18.1

5 . 50 to < 100 206 11.4 14,948 12.4

6 . 25 to < 50 315 17.4 11,283 9.3

7 . 10 to < 25 446 24.6 8,198 6.8

8 . < 10 626 34.5 3,715 3.1

Total 1,813 100.0 1 ,20 ,983 100.0

Tab le IV.6: Liab ilities an d Assets of Urba n

Co-operat ive Ban ks

(Amount in Rs. crore)

Item As at Per centage

en d-Ma rch Va ria tio ns

2 00 6 2 00 7 P 20 06 -0 7

1 2 3 4

Liabilities

1. Capital 3,488 3,884 11.4

(2 .3) (2 .4)

2. Reser ves 10,485 10,867 3.6

(6 .9) (6 .8)

3 . Dep osits 1,14 ,060 1,20 ,983 6.1

(75 .6) (75 .7)

4. Borr owings 1,781 2,602 46.1

(1 .2) (1 .6)5 . Other Liabilities 21,140 21,515 1.8

(14 .0) (13 .5)

Tota l Liab ilit ies /Asset

Devlopment in Co-operative Banking

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