Inclusive Growth Rural Sector

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CHAPTER I

INTRODUCTION

The earliest co-operatives were set-up among the weavers, in other words workers

in cottage industries, who were the first and the hardest hit by the development of

the mercantile economy and the industrial revolution.

So the weavers, in order to gain access to the market in the tools of their trade or

to the market in foodstuffs set up the first co-operative in Scotland (Fenwick,

1761; Govan, 1777 ; Darvel, 1840 ), in France (Lyons, 1835 ), in England

(Rochdale, 1844 ) and in Germany ( Chemnitz, 1845 ).

Though co-operation and mutual enterprise has been an essence of human-society

ever since it evolved, the real co-operative movement can be credited to the

Rochdale Pioneers who established a co-operative consumer store in North

England. This store can be called as the first in the co-operative consumer

movement.

The "Rochdale Pioneers", made their first aim to establish co-operatives where

the members would not only be their own merchants but also their own producers

and their own employers.

Around this time the co-operative movement was more at an utilitarian level. The

concept though old, was just being implemented and was growing slowly. Many

great thinkers, far-sighted men and visionaries were applying their minds to find

practical solutions to the new problems and to work out better systems of social

organization.

In Great Britain Robert Owen (1771-1858) conceived and set up self-contained

semi-agricultural, semi-industrial communities.

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Dr. William King (1758-1865) helped to spread Owens doctrine; his ideas were

more reasonable than Owens and achieved more results.

In France Charles Fourier (1722-1837), a commercial clerk, published in 1822 his

main work, a Treatise on Domestic Agricultural Association. This could be one of

the first works on co-operation.

Though all these visionaries had articulated the philosophy of co-operation it was

not until the World-War II that an Authoritative Commission was appointed by

the International Co-operative Alliance.

This Commission formulated or rather formalized the principles of co-operation.

They are

Voluntary and open membership

Democratic Management

Limited interest on capital

Patronage dividend in proportion of members transactions

Education and Training and

Co-operation among co-operatives

1.1 Introduction to Banking Industry

While walking in the streets of any town or city you might have seen some

signboards on buildings with names-Canara Bank, Punjab National Bank, State

Bank of India, United Commercial Bank, etc. What do these names stand for? Did

you ever try to know about them? If you enter any such building you will find

some kind of a business office. You will see some employees sitting behindcounters dealing with visitors standing in front of them. You will find that some

are depositing money at one counter while some are receiving money at another

counter. Behind the counters in the office you will see tables and chairs occupied

by officers. On one side of the office you will also see a chamber (small

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partitioned room) where the manager is sitting with papers on his table. This is the

office of a Bank.

Bank, as we know people earn money to meet their day-to-day expenses on food,

clothing, education of children, housing, etc. They also need money to meet future

expenses on marriage, higher education of children, house building and other

social functions. These are heavy expenses, which can be met if some money is

saved out of the present income. Saving of money is also necessary for old age

and ill health when it may not be possible for people to work and earn their living.

The necessity of saving money was felt by people even in olden days. They used

to hoard money in their homes. With this practice, savings were available for use

whenever needed, but it also involved the risk of loss by theft, robbery and otheraccidents. Thus, people were in need of a place where money could be saved

safely and would be available when required. Banks are such places where people

can deposit their savings with the assurance that they will be able to withdraw

money from the deposits whenever required. People who wish to borrow money

for business and other purposes can also get loans from the banks at reasonable

rate of interest.

Bank is a lawful organization, which accepts deposits that can be withdrawn on

demand. It also lends money to individuals and business houses that need it.

Banks also render many other useful services like collection of bills, payment of

foreign bills,

safe-keeping of jewellery and other valuable items, certifying the credit-

worthiness of business, and so on.

Banks accept deposits from the general public as well as from the business

community. Any one who saves money for future can deposit his savings in a

bank. Businessmen have income from sales out of which they have to make

payment for expenses. They can keep their earnings from sales safely deposited in

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banks to meet their expenses from time to time. Banks give two assurances to the

depositors

a.Safety of deposit, and

b. Withdrawal of deposit, whenever needed

On deposits, banks give interest, which adds to the original amount of deposit. It

is a great incentive to the depositor. It promotes saving habits among the public.

On the basis of deposits banks also grant loans and advances to farmers, traders

and businessmen for productive purposes. Thereby banks contribute to the

economic development of the country and well being of the people in general.

Banks also charge interest on loans. The rate of interest is generally higher than

the rate of interest allowed on deposits. Banks also charge fees for the various

other services, which they render to the business community and public in

general. Interest received on loan sand fees charged for services which exceed the

interest allowed on deposits are the main sources of income for banks from which

they meet their administrative expenses. The activities carried on by banks are

called banking activity. Banking as an activity involves acceptance of deposits

and lending or investment of money. It facilitates business activities by providing

money and certain services that help in exchange of goods and services.

Therefore, banking is an important auxiliary to trade. It not only provides money

for the production of goods and services but also facilitates their exchange

between the buyer and seller.

As we may be aware that there are laws which regulate the banking activities in

our country. Depositing money in banks and borrowing from banks are legal

transactions. Banks are also under the control of government. Hence they enjoy

the trust and confidence of people. Also banks depend a great deal on public

confidence. Without public confidence banks cannot survive.

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1.2 History of Banking

Banking industry in India originated in the last decades of the 18th century. Theoldest bank in existence in India is the State Bank of India, a government-owned

bank that traces its origins back to June 1806 and that is the largest commercial

bank in the country. Central banking is the responsibility of the Reserve Bank of

India, which in 1935 formally took over these responsibilities from the then

Imperial Bank of India, relegating it to commercial banking functions. After

India's independence in 1947, the Reserve Bank was nationalized and given

broader powers. In 1969 the government nationalized the 14 largest commercial

banks; the government nationalized the six next largest in 1980.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II

and III

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of Bengal

(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent unitsand called it Presidency Banks. These three banks were amalgamated in 1920 and

Imperial Bank of India was established which started as private shareholders

banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,

Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.

Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,

Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of

India came in 1935.

During the first phase the growth was very slow and banks also experienced

periodic failures between 1913 and 1948. There were approximately 1100 banks,

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mostly small. To streamline the functioning and activities of commercial banks,

the Government of India came up with The Banking Companies Act, 1949 which

was later changed to Banking Regulation Act 1949 as per amending Act of 1965

(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers

for the supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath

deposit mobilization was slow. Abreast of it the savings bank facility provided by

the Postal department was comparatively safer. Moreover, funds were largely

given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive

banking facilities on a large scale especially in rural and semi-urban areas. It

formed State Bank of India to act as the principal agent of RBI and to handle

banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960

on 19th July, 1969, major process of nationalizations was carried out. It was theeffort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major

commercial banks in the country was nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in

India under Government ownership.

The following are the steps taken by the Government of India to Regulate

Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

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1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India

rose to approximately 800% in deposits and advances took a huge jump by

11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith

and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector

in its reforms measure. In 1991, under the chairmanship of M Narasimham, a

committee was set up by his name which worked for the liberalisation of banking

practices.

The country is flooded with foreign banks and their ATM stations. Efforts are

being put to give a satisfactory service to customers. Phone banking and net is

introduced. The entire system became more convenient and swift. Time is given

more importance than money.

Currently, India has 88 scheduled commercial banks - 27 public sector banks (that

is with the Government of India holding a stake), 31 private banks (these do not

have government stake; they may be publicly listed and traded on stock

exchanges) and 38 foreign banks. They have a combined network of over 53,000

branches and 17,000 ATMs. According to a report by ICRA Limited, a rating

agency, the public sector banks hold over 75 percent of total assets of the banking

industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

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banking, mortgages and investment services are expected to be strong. One may

also expect M & As, takeovers, and asset sales.

The growth in the Indian Banking Industry has been more qualitative than

quantitative and it is expected to remain the same in the coming years. Based on

the projections made in the "India Vision 2020" prepared by the Planning

Commission and the Draft 10th Plan, the report forecasts that the pace of

expansion in the balance-sheets of banks is likely to decelerate. The total assets of

all scheduled commercial banks by end-March 2010 is estimated at Rs 40, 90,

000/- crores. That will comprise about 65 per cent of GDP at current market

prices as compared to 67 per cent in 2002-03.

Bank assets are expected to grow at an annual composite rate of 13.4 per cent

during the rest of the decade as against the growth rate of 16.7 per cent that

existed between 1994-95 and 2002-03. It is expected that there will be large

additions to the capital base and reserves on the liability side.

1.3 Banking Institution

Functioning of a Bank

Functioning of a Bank is among the more complicated of corporate operations.

Since Banking involves dealing directly with money, governments in most

countries regulate this sector rather stringently. In India, the regulation

traditionally has been very strict and in the opinion of certain quarters, responsible

for the present condition of banks, where NPAs are of a very high order. The

process of financial reforms, which started in 1991 has cleared the cobwebs

somewhat but a lot remains to be done. The multiplicity of policy and regulations

that a Bank has to work with, makes its operations even more complicated,

sometimes bordering on illogical. This section, which is also intended for banking

professional, attempts to give an overview of the functions in as simple manner as

possible.

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Banking Regulation Act of India, 1949 defines Banking as "accepting, for the

purpose of lending or investment of deposits of money from the public, repayable

on demand or otherwise and withdrawal by cheques, draft, order or otherwise."

Deriving from this definition and viewed solely from the point of view of the

customers, Banks essentially perform the following functions:

1. Accepting Deposits from public/others (Deposits)

2. Lending money to public (Loans)

3. Transferring money from one place to another(Remittances)

4. Acting as trustees

5. Keeping valuables in safe custody

6. Government business

Banks are organized in a linear structure to performed these activities at the

base of which lies a Branch. The corporate office of a bank is normally called

Head Office.

Accepting deposits is one of the two major activities of the Banks

Banks are also called custodians of public money. Basically, the money is

accepted as deposit for safe keeping. But since the Banks use this money to earn

interest from people who need money, Banks share a part of this interest with the

depositors. However, accepting deposits and keeping track of the money involves

a lot of book-keeping and other operations. Let us see what the Banks must

maintain to provide this service

An effective branch network to reach the targeted customer base

A system of Intra branch accounting with separate account(s) for each

customer

A system of reconciliation at the end of the day

Availability of adequate funds at each branch

Trained staff for effective customer service

Infrastructural inputs like space, stationery, comfortable environment etc.

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Lending money to the public

Lending money is one of the two major activities of any Bank. In a way, the Bank

acts as an intermediary between the people who have the money to lend and those

who have the need for money to carry out business transactions.

This activity places its own requirements on the resources of the Bank. For

effective functioning of this, a bank must possess:

Sufficient deposits.Skills to appraise the potential borrowers and the activity.

Legal skills for documentation.

Legal skills for recovery of its dues through the courts.

Skills to follow up and monitor the end-use of money lent by it.

An effective credit delivery system.

Review of credit portfolio.

Remittance

Apart from accepting deposits and lending money, Banks also carry out, on behalf

of their customers the act of transfer of money - both domestic and foreign.- from

one place to another. This activity is known as "remittance business" . Banks

issue Demand Drafts, Banker's Cheques, Money Orders etc. for transferring the

money. Banks also have the facility of quick transfer of money also know as

Telegraphic Transfer or Tele Cash Orders.

To deliver this service, a Bank must have:

An effective branch network or correspondent relationships.

A system of Inter branch reconciliation

A system of reconciliation with the correspondents

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Availability of funds at all the centers

Trustee Business

Banks also act as trustees for various purposes. For example, whenever acompany wishes to issue secured debentures, it has to appoint a financial

intermediary as trustee who takes charge of the security for the debenture and

looks after the interests of the debenture holders. Such entity necessarily have to

have expertise in financial matters and also be of sufficient standing in the

market/society to generate confidence in the minds of potential subscribers to the

debenture. While Banks are the natural choice for the customers, Banks must

possess the following to be effective and retain that:

A track record of sufficient length.

Facilities for safe keeping.

Legal skills to take necessary steps for the trusteeship

Safe Keeping

Bankers are in the business of providing security to the money and valuables of

the general public. While security of money is taken care of through offering

various type of deposit schemes, security of valuables is provided through making

secured space available to general public for keeping these valuables. These

spaces are available in the shape of LOCKERS. The latter are small

compartments with dual locking facility built into strong cupboards. These are

stored in the Bank's Strong Room and are fully secure. Lockers can neither be

opened by the hirer or the Bank individually. Both must come together and use

their respective keys to open the locker. To make this facility available to its

customers, the Bank must provide:

Physical structures to house the lockers

Locker cabinets

Security arrangements

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Record of access to lockers

Government Business

Earlier Government business used to be exclusively carried out by GovernmentTreasuries where all type of transactions took place. However, now Banks act on

behalf of the Government to accept its tax and non tax receipts. Most of the

Government disbursements like pension payments and tax refunds also take place

through banks. While the Banks carry out this business for a fee to be paid by the

Government, providing this service requires a lot of effort and organisation. The

Banks must provide:

Interface with the public

Liaison with local government departments and government treasury

Arrangement for reconciliation with the Government Accounts Department

Necessary infrastructure, stationery etc. to cater to the numbers

1.4 Role of Banking

Banks provide funds for business as well as personal needs of individuals. They

play a significant role in the economy of a nation. Let us know about the role of

banking.

It encourages savings habit amongst people and thereby makes funds

available for productive use.

It acts as an intermediary between people having surplus money and those

requiring money for various business activities.

It facilitates business transactions through receipts and payments by cheques

instead of currency.

It provides loans and advances to businessmen for short term and long-term

purposes.

It also facilitates import export transactions.

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It helps in national development by providing credit to farmers, small-scale

industries and self-employed people as well as to large business houses which

lead to balanced economic development in the country.

It helps in raising the standard of living of people in general by providing

loans for purchase of consumer durable goods, houses, automobiles, etc.

Introduction to Cooperative Banks

Co-operative banks are small-sized units organised in the co-operative sector

which operate both in urban and non-urban centers. In India, co-operative banks

finance small borrowers in industrial and trade sectors, besides professional and

salary classes. Co-operative banks perform the main banking functions of deposit

mobilisation, supply of credit and provision of remittance facilities. They provide

limited banking products and are specialists in agriculture-related products. Co-

operative banks are regulated by the Reserve Bank of India and governed by the

Banking Regulations Act, 1949, and Banking Laws (Co-operative Societies) Act,

1965. Rural co-operative banks are regulated by state registrar of co-operatives.

The sources of funds for co-operative banks are: central and state government,

Reserve Bank of India and NABARD, other co-operative institutions, ownership

funds and deposits or debenture issues. Intra-sect oral flows of funds are much

greater in co-operative banking than in commercial banking. Inter-bank deposits,

borrowings and credit also form a significant part of assets and liabilities of co-

operative banks

Features of Cooperative Banks

Co-operative Banks are organised and managed on the principal of co-

operation, self-help, and mutual help. They function with the rule of "one

member, one vote". function on "no profit, no loss" basis. Co-operative banks,

as a principle, do not pursue the goal of profit maximisation.

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Co-operative bank performs all the main banking functions of deposit

mobilization, supply of credit and provision of remittance facilities.

Co-operative Banks provide limited banking products and are functionally

specialists in agriculture related products. However, co-operative banks now

provide housing loans also.

UCBs provide working capital loans and term loan as well

The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and

Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs

1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh

for housing purposes. The UCBs can provide advances against shares and

debentures also.

Co-operative bank do banking business mainly in the agriculture and rural

sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and

metropolitan areas also. The urban and non-agricultural business of these banks

has grown over the years. The co-operative banks demonstrate a shift from rural

to urban, while the commercial banks, from urban to rural.

Co-operative banks are perhaps the first government sponsored,

government-supported, and government-subsidized financial agency in India.

They get financial and other help from the Reserve Bank of India NABARD,

central government and state governments. They constitute the "most favored"

banking sector with risk of nationalization. For commercial banks, the Reserve

Bank of India is lender of last

ICICI bank, HDFC bank, GTB, IndusInd, BOP and UTI Bank have come out with IPOs as

per licensing requirement. Their technological edge and product innovation has seen them

gaining market share from the slower, less efficient older banks. These banks have targeted

non-fund based income as major source of revenue, with their level of contingent liabilities

being much higher then their other counterparts viz. PSU and old private sector banks. The

new private banks have been consistently gaining market shares from the public sector

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banks. The major beneficiary of this has been corporate clients who are most sought after

now.

The new generation private sector banks have made a strong presence in the most lucrative

business areas in the country because of technology upgradation. While, their operating

expenses have been falling as compared to the PSU banks, their efficiency ratios

(employees productivity and profitability ratios) have also improved significantly.

The new private sector banks have performed very well in the FY2000. Most of these

banks have registered an increase in net profits of over 50%. They have been able to make

significant inroads in the retail market of the public sector and the old private sector banks.

During the year, the two leading banks in this sector had set a new trend in the Indian

banking sector. HDFC Bank, as a part of its expansion plans had taken over Times Bank.

ICICI Bank became the first bank in the country to list its shares on NYSE.

The Reserve Bank of India had advised the promoters of these banks to bring

their stake to 40% over a time period. As a result, most of these banks had a

foreign capital infusion and some of the other banks have already initiated

talks about a strategic alliance with a foreign partner.

The main problems concerning the nationalized / state sector banks are as follows:

A. Large number of unprofitable branches

B. Excess staffing of serious magnitude

C. Non Performing Assets on account of politically directed lending and industrial

recession in last few years

D. Lack of computerization leading to low service delivery levels, non-reconciliation

of accounts, inability to control, misuse and fraud etc

E. Inability to introduce profitable new consumer oriented products like credit cards,

ATMs etc

Technology- The private banks have used technology to provide quality service

through lower cost delivery mechanisms. The implementation of new technology has

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been going on at very rapid pace in the private sector, while PSU banks are lagging

behind in the race.

Declining interest rates- in the present scenario of declining interest rates,

some of the new private banks are better able to manage the maturity mix. PSU Banks

by and large take relatively long-term deposits at fixed rates to lend for working

capital purposes at variable rates. It therefore is negatively affected when interest

rates decline as it takes time to reduce interest rates on deposits when lending has to

be done at lower interest rates due to competitive pressures.

NPAs- The new banks are growing faster, are more profitable and have cleaner

loans. Reforms among public sector banks are slow, as politicians are reluctant to

surrender their grip over the deployment of huge amounts of public money.

Convergence- The new private banks are able to provide a range of financial

services under one roof, thus increasing their fee based revenues.

Since 1950s, the cooperatives in India have made remarkable progress in the

various segments of Indian economy. During the last century, the cooperative

movement has entered several sectors like credit, banking, production,

processing, distribution/marketing, housing, warehousing, irrigation, transport,

textiles and even industries. In fact, dairy and sugar cooperatives have made

India a major nation in the world with regard to milk and sugar production.

Today, India can claim to have the largest network of cooperatives in the world

numbering more than half a million, with a membership of more than 200

million. Of the primary (village) level cooperatives, around 28 percent with 137million memberships are agricultural cooperatives, dealing directly or indirectly

with agricultural sector.

The cooperative network in the country is rather strong covering all the

villages in the country and more than 67 percent of the households have

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been brought under the cooperative hold. Cooperatives supply about 46 percent

of the total rural credit (including agricultural credit), account for 36 percent of

the total distribution of fertilizers, produce about 55 percent of the total sugar

and constitute for 28 percent of the rural fair shops (distributing consumer

articles). Though cooperative movement has made remarkable progress in

several areas, certain glaring defects have also developed in the movement, which

have been, in a way, defeating the very objectives of these institutions. The

following are the unique features of Indian cooperative movement:-

1. Historically, Governments and policy makers have paid more attention to

agricultural cooperatives and thus, the growth and development of the

Indian cooperative movement is heavily tilted in favour agriculturalcooperatives in general and in particular, credit cooperatives. In some areas

like dairy, urban banking and sugar, the cooperatives have achieved success

to an extent but there are larger areas where they have not been so successful.

2. The cooperative credit movement in modern India, curiously, is a state initiated

movement. The state partnership is, perhaps, the unique feature of the Indian

cooperative movement. As of today, Government contribution to the share

capital of primary agricultural cooperatives accounts for about 7.5 percent of the

total .

3. Paradoxically, the state partnership which was conceived as a measure

for strengthening the cooperative institutions had paved the way for ever-

increasing state control over cooperatives, their increasing officialization and

politicization culminating in virtually depriving the cooperatives of their vitality

as well as their democratic and autonomous character.

4. Dormant membership, lack of active participation of the members in the

management, lack of professionalism (and absence of corporate governance),

undue political and bureaucratic intervention, have made majority of the

cooperatives at the primary level almost moribund. Understandably, this

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has resulted in weakening of the cooperative edifice. The upwardly transmission

of the weaknesses of the primary societies have affected the capabilities of the

higher level cooperative federations in so far as their usefulness to the former is

concerned.

5. With regard to agricultural cooperative credit structure, although the

quantitative expansion has been somewhat satisfactory, the movement

continues to suffer from structural defects and operational deficiencies.

The acknowledged operational deficiencies of the cooperative credit structure

have been (I) weak recycling of credit, (ii) poor resource mobilization, (iii)

ineffective lending and (iv) poor recovery.

6. The agricultural credit cooperative system in general has become rather over

dependent on external support in terms of participation in share capital by

Government and refinance from Government owned Financial Institutions.

Figure 1: Indian Banks: trends in return on equity

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Cooperative Banking in India

Credit cooperatives are the oldest and most numerous of all the types of

cooperatives in India. The cooperative credit institutions in the country may be

broadly classified into urban credit cooperatives and rural credit cooperatives.

There are about 2090 urban credit cooperatives and these societies together

constitute for about 10 percent of the aggregate banking business and therefore

regarded as an important segment of the banking system. The urban credit

cooperatives are also popularly known as Urban Cooperative Banks.

The rural credit cooperatives may be further divided into short-term credit

cooperatives and long-term credit cooperatives. With regard to short-term credit

cooperatives, at the grass-root level there are around 92,000 Primary

Agricultural Credit Societies (PACS) dealing directly with the individual

borrowers. At the central level (district level) District Central Cooperative Banks

(DCCB) function as a link between primary societies and State Cooperative Apex

Banks (SCB). It may be mentioned that DCCB and SCB are the federal

cooperatives and thus the objective is to serve the member cooperatives.

As against three-tier structure of short-term credit cooperatives, the long-termcooperative credit structure has two tiers in many states with Primary

Cooperative Agriculture and Rural Development Banks (PCARDB) at the

primary level and State Cooperative Agriculture and Rural Development Bank

at the state level.

However, some states in the country have unitary structure with state level

cooperative operating with through their own branches and in one state an

integrated structure prevails. The organizational structure of the credit

cooperatives in India is illustrated in chart I. Interestingly, under the Banking

Regulation Act 1949, only State Cooperative Apex Banks, District Central

Cooperative Banks and select Urban Credit Cooperatives are qualified to be

called as banks in the cooperative sector. In other words, only these banks

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Financial Sector Reforms and Credit Cooperatives:

The process of economic and financial sector reforms were initiated in 1991, as astep

towards a broader process of international economic integration and

globalization of financial markets. The objectives of the reform program

have been to remove the structural constraints in the factor and product

markets, allowing market forces to improve efficiency and ensuring outward

orientation to the economy for bringing about a higher degree of integration of the

Indian economy with the rest of the world. It may be mentioned that the

structural reforms in the trade regime and industrial and financial policies

have been given utmost priority in order to ensure macro-economic stability. A

healthy financial system being the principal pre-requisite for the globalization

process, the banking sector being an important component thereof came into

sharper focus.

The financial system in India has built up a vast network of financial institutions

and markets over time, and the sector is dominated by the banking sector which

accounts for about two-thirds of the assets of the organized financial sector. The

first phase of the current reform of the financial sector was initiated in 1992

based on the recommendations of the Committee on Financial System (CFS,

1992). The progress that has been made in a substantial, yet non-disruptive

manner has given the confidence to launch what has been described as the

second generation or second phase of reforms especially for the banking

sector.

The report of the Committee on Banking Sector Reforms (CBSR, 1998)

provides a framework for the second phase of reforms in the banking system.

The broad features of the on going banking reforms have been; gradual

removal of pre-emptions (reduction in CRR and SLR), deregulation of interest

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rates, tightening of prudential standards, competition and transparency,

improving the quality of supervision, partial removal of selective credit controls,

assistance to banks in debt recovery and reforms in money and forex

markets. This apart, needless to mention, the succinct objective of the banking

sector reforms has been to improve the efficiency in the system by introducing an

element of competition.

The extension of reforms, particularly prudential standards to cooperative

banking institutions, an important component of the banking system was a

natural corollary as the weaknesses in cooperative segment could pose systemic

risks. Though cooperative banks operate at the district and state level, the

urgency and importance for extension of the reforms need hardly be emphasizedkeeping in view of their reach and scale of operations. Therefore, the banking

sector reforms could be treated as complete only if it encompasses the cooperative

segment, enabling the latter to function on sound lines at par with other banking

institutions. Accordingly, prudential standards covering capital adequacy,

income recognition, asset classification and provisioning norms were made

applicable to cooperative banks in a phased manner. However, cooperative

reforms encompassing legal and administrative aspects have not taken place in

India. This is on account of multiplicity of controls (administrative aspects

including registration are under State Cooperative Acts whereas financial

supervision and regulation is with the Central Bank of the country). The impact

of the extension of prudential standards to cooperative banks has resulted in an

increased intervention by the regulator and the Government in the name of the

financial regulation/supervision.

Thematic Framework for Analysis:

The literature relating to the economic reforms, impact of reforms on cooperative

sector, banking reforms and its impact on credit cooperatives and so on are rather

opulent. In so far as the impact of reforms on the cooperative character of

the cooperatives is concerned, be it in credit or non-credit segment, one

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may safely say that neither the policy makers nor the researchers have shown

any serious interest. And this is particularly true in India. It seems the

cooperative researchers, particularly doctoral students are more concerned with

the assessment and measurement of the impact of reforms on the performance

of cooperatives using a definite and quantifiable parameters. While the

difficulties in examining the impact of reforms on the cooperative character of

cooperatives are quite understandable, it does not mean the same can not be

attempted meaningfully. What is required perhaps is a normative analytical

framework, which is different from the one usually used for capturing the

impact of reforms on cooperatives. Using this normative analytical framework,

Ramesha (1996) in his empirical study points out that Self Help Groups (SHGs)

which are not registered as cooperatives are, in practice, much more closer to

cooperative principles than cooperatives themselves.

Given the diversity that prevails today in the cooperative sector and the levels of

reforms thereof, a general discussion on the impact of reforms (economic or

banking sector) on cooperative character would be almost impossible. For the

sake of research, even if one attempts, the conclusions could be abstruse. Thus, in

the present paper an attempt is made to evolve a conceptual framework for

further research concerning Urban Cooperative Banks (UCBs) in India

against the backdrop of banking sector reforms.

However, all through the discussion, it is attempted to maintain a special thrust on

the cooperative character of UCBs. The analytical framework for the

aforesaid purpose rests on three basic assumptions;

a) Banking sector reforms essentially refers to the guidelines/directions from the

regulator (central bank of the country) and the Government during the last ten

years.

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CHAPTER 2

CREDIT STRUCTURE OF INDIAN BANKS

The PACSs

The Primary Agricultural Credit Societies (PACS) constitute the `hubof the

Indian co-op movement. Every fourth co-operative in India is a primary credit

society. The main objectives of a PACS are:

To raise capital for the purpose of giving loans and supporting the essential

activities of the members.

To collect deposits from members with the objective of improving their

savings habit.

To supply agricultural inputs and services to members at remunerative

prices.

Table 2.1 The Primary Agricultural Co-operative Societies

Indicators Value

Village covered by PACS 99.5%

Total Number of PACS 100000

Membership per PACS

(Average)

10,00,00,000

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The DCCBs

The PACS are affiliated to the District Central Co-operative Banks (DCCBs) who

perform the following functions.

o Serve as balancing centre in the district central financing agencies

o Organize credit to primaries

o Carry out banking business

Table 2.2 District Central Co-operative Banks

Indicators Value

No. of Banks 361

Total membership (Million) 1.579

Total loans advanced Rs.326,995Million

The SCBs

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The DCCBs in turn are affiliated to State Co-operative Banks (SCBs), which

perform the following functions.

o Serve as balancing centre in the States

o Organize provision of credit for credit worthy farmers

o Carry out banking business

o Leader of the Co-operatives in the States

Indicators Value

No. of Banks 28

No. of branches 742

Total membership 139,676

2.1 OBJECTIVES OF CO-OPERATIVE BANKS

1) To understand the structural features of the credit delivery system in a village,

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2) To assess the operational dynamics of financial services rendered by formal

credit institutions especially the co-operative,

3) To analyze the profile of borrowers of Service C6operative Bank, their

economic empowerment and perception level regarding loan repayment, and

4) To identify reasons for non-viability of rural credit institutions and suggest

measures.

5) The rural financial system in the country calls for a strong and efficient credit

delivery system, capable of taking care of the expanding and diverse credit needs

of agriculture and rural development. More than 50% of the rural credit is

disbursed by the Co-operative Banks and Regional Rural Banks. In this direction

NABARD has been taking various initiatives in association with Government of

India and RBI to improve the health of Co-operative banks

6) To provide cheap and liberal credit facilities to small and marginal farmers,

agriculture laborers, artisans, small entrepreneurs and other weaker section.

7) To save the rural poor from the money lenders.

8) To act as a catalyst element and thereby accelerate the economic growth in the

particular region.

9) To cultivate the banking habits among the rural people and mobilized savings

for the economic development of rural areas.

2.2 CO-OPERATIVE BANKS-A PROFILE

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In the early 20th century, the availability of credit in India, more particularly in

rural areas was non existent. There was no organized institutional credit for

agricultural and related activities. People in the rural areas largely depended on

money lenders who lent money at very high rates of interest. Thus, there was need

to create an institution which would cater to the needs of ordinary people and was

based on the principles of co-operative organization and management. In 1904,

the first legislation on cooperatives was passed. In 1914, the Maclagen committee

suggested a three tire structure for cooperative banking i.e. Primary agricultural

credit societies at the grass root level, Central cooperative banks at the district

level and State cooperative banks at the state level. Cooperative banks were

expected to serve as substitutes for money lenders, and provide both short term

and long term institutional credit at reasonable rates of interest.

Features of cooperative banks

1) Cooperative banks are organized and managed on the principal of co-

operation, self help, and mutual help. They function with the rule of one

member, one vote. Function on no profit, no loss basis. Co-operative banks, as

a principle, do not pursue the goal o profit maximization.

2) Co-operative banks perform all the main banking functions of deposit

mobilization, supply of credit and provision of remittance facilities.

3) Co-operative banks provide limited banking products and are functionally

specialist in agriculture related products. However, co-operative banks now

provide housing loans also.

4) Primary Agricultural credit societies provide short term and medium term

loans

5) Co-operative banks do banking business mainly in the agriculture rural

sector. However, UCBs, SCBs, CCBs operate in semi urban, urban and

metropolitan areas also.

6) The SCBs, CCBs and UCBs can normally extend housing loans upto Rs. 1

lakh to an individual.

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CATEGORIES:

There are two categories of the co-operative banks.

a. Short term lending oriented co-operative banks within this category there

are three sub categories of banks viz. State co-operative Banks, DCBs, PACs.

b. Long term lending oriented co-operative banks within the second category

there are land development banks at three levels state level, district level and

village level.

The co-operative banking structure in India is divided into following main 5

categories

1) Primary Urban Co-operative banks

2) Primary Agricultural Credit Societies

3) District Central Co-operative banks

4) State Co-operative Banks

5) Land Development Banks

DIFFERENCE BETWEEN RURAL CO-OPERATIVE BANKS & RRBs

RRBs are by nature co-operative banks but are different from the co-operative

banks

1) Aim: RRBs have been established to supplement the resources of the co-

operative banks and not to complete with them. The principle of co-operation is

all for each and each for all. Its aim is to provide an institutional framework to

organized self help among persons of small means. Its basis is self-help through

mutual help. It combines economic, social and political objectives. It aims at

bringing about socio-economic changes in the country. The RRBs aim at

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providing credit and other facilities especially to the small and marginal farmers,

agricultural laborers, artisans and small entrepreneurs in the rural areas.

2) Act applicable: The RRBs are governed by the regional rural banks Act

1976, RBI Act, NABARD Act, whereas the co-operative banks are governed by

co-operative societies Act 1965.

3) Status: The co-operative banks do not become scheduled banks

automatically, whereas RRBs are scheduled commercial banks. The scheduled

status given automatically.

4) Area of operation: Area of operation of the co-operative banks is restricted

to only one district only. But the area of operation of a RRBs is extending upto

one or more districts of a state.

5) Coverage of population: the co-operative banks are voluntary organization

for masses. But the beneficiaries of the RRBs are specially class of rural area. It

includes small and marginal farmers, agricultural laborers, artisans and small

entrepreneurs in the rural areas.

6) Organization: the organizational set up of the co-operative banks is

pyramidal. At the apex level, state co-operative banks functions as apex body, at

district level Central co-operative banks and village level Primary agricultural

credit societies. It has federal set up and each unit is partially autonomous

managed by depositors and borrowers on the basis of one men one vote. The

RRBs are bureaucratic institutions whereas co-operatives are democratic

institutions

7) Beneficiaries: the Beneficiaries of the co-operative banks are mainly rural

masses. Whereas the Beneficiaries of the RRBs includes special class of people

i.e., the weaker section of societies

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8) Resources: The RRBs have owned funds which include share capital and

reserve funds as well as procured funds which include deposits and borrowings/

refinance. But the co-operative banks depend on the RBI and deposits from

members.

9) Lending operations: the Co-operative banks lend mainly to the farmers.

10) Monitoring and control: the RRBs are controlled by the Central

Government, RBI, State Government and Sponsor Banks, whereas the co-

operative banks are controlled by RBI and Registrar of cooperatives.

11) Staff: the co-operative banks get talented staff. Whereas RRBs attract less

talented staff

FUNCTION OF CO-OPERATIVE BANK

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NABARD being an Apex Development Bank promotes agriculture and rural

development through refinance support to all banks for investment credit and to

Co-operative and RRBs for production credit. The objective of providing

refinance to eligible institutions is to supplement their resources for delivering

credit for agriculture, cottage and village industries, SSIs, rural artisans, etc. thus

influencing the quantum of lending in consonance with the policy of the

government of India. It directs the policy, planning and operational aspects in the

field of credit for agriculture and integrated rural development.

Besides the refinancing activity it discharges the developmental functions which

are as under:

1) It co-ordinates the operation of rural credit institutions

2) It ensures institution building to improve absorptive capacity of credit

delivery system.

3) It develops expertise to deal with agriculture and rural problems

4) It assists Govt., RBI and other institutions in rural development.

5) It provides facilities for training, research and dissemination of information

in rural banking.

6) It assists the State Government to enable them to contribute to the share

capital of eligible institutions

7) Under Rural Infrastructure Development Fund, NABARD extends financial

assistance to State Govt. for completion of various incomplete rural projects such

as Irrigation, Rural Bridges, and Roads and new projects also.

8) It undertakes inspection of Co-operative Banks and RRBs as a part of

Regulatory function.

The function of District Development office

The basic function of district development office is planning, monitoring and co-

ordination.

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1) The Potential Linked Credit Plan (PLP) prepared by district development

office has been used as reference by the credit planning agency.

2) The monitoring of service area approach was assigned o NABARD by RBI

as it was considered advantageous to have a single rural agency to plan, co-

ordinate and monitor the credit programme of banks. They also monitoring RIDF

projects sanctioned to various NGOs, SHF formation and linkages.

3) The district office of NABARD will be the principal agency for

coordinating agriculture and rural development activities of various credit

agencies as also liaisoning with the development departments of State Govt.

4) Member of various district level standing committees and other committees

related to agriculture and rural development

5) Associated with the inspections of Co-operative banks and RRBs in the

districts

THE SCHEMES OF RURAL CO-OPERATIVE BANK & ITs PROGRESS

The Government while understanding the importance of co-operatives has

introduced several schemes for promoting the spirit of co-operation. Both theIndian Government as well as the Government of the State of Maharashtra has

introduced several schemes for the co-operatives. A few of them are listed here.

Take benefit of them.

Scheme 1: Share Capital Contribution to Credit Institutions under LTO Fund

(State Level Scheme)

The Government sanctions share capital contribution to District Central Co-

operative Banks. This contribution is given out of the LTO Fund of the

NABARD. The provision is made every year to repay this loan.

Scheme 2: Loans to Co-operative Credit Institutions for conversion of short term

loans into medium term loans

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Scheme 3: National Agricultural Credit Stabilization Fund (Centrally Sponsored

Scheme) In

drought conditions the members of Agricultural Credit Societies may not be able

to repay the crop loans. This scheme helps to convert their short-term loans into

medium term loans and fresh crop loans are made available to the members.

Scheme 4: Crop Production Incentive to Agriculturists (Dr.Punjabrao Deshmukh

Crop Production Incentive Scheme)

this scheme is applicable for Kharif and Rabbi Crops taken from 1.4.90 onwards.

The farmers borrowing loans of RS.25, 000 or less and who repay their loans fully

before the due date are eligible for 4 % of the principal amount as an incentive.

Scheme 5: In the industrial co-operative societies of weaker sections of the

societies, the Government has several schemes.

1. The Government sanctions share capital in the ratio 1:3, to enable the societies

to borrow funds from the financial institutions.

2. Financial Assistance for Tools and Equipment's

3. Interest Subsidy for Working capital:

The government gives an interest subsidy up to 3.5% to 4.5% on the amountborrowed by the co-operative. This scheme helps to reduce the burden of interest

on the co-operative society which is to be paid to financial agencies.

Scheme 6: Central Sector Scheme for Development of Women Co-operatives

Under this scheme financial assistance would be provided by the Central

Government on 100 % basis to the newly formed co-operative societies by the

women as well as existing womens co-operatives. The financial assistance is as

under

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No. Item Share Capital Working Capital Subsidy Total

1. New Societies 40,000 40,000 20,000 1, 00,000

2. District Federation 80,000 80,000 40,000 2, 00,000

3. State Federation 2, 00,000 2, 00,000 1, 00,000 5, 00,000

Scheme 8: Co-operative Godowns: The Warehousing Corporation 90% assistance

for the construction of Godown out of which 50% is loan and 40% is Government

share capital.

2.3 Urban Cooperative Banks in India

Inspired by the success of urban cooperative movement in Germany and

Italy, in the early part of the last century, urban cooperative credit societies

were organized on community basis and their lending operations were confined

to meeting the consumption oriented credit needs of their members. Many

urban cooperative banks, which were organized initially, were essentially credit

societies but later converted themselves into urban cooperative banks.

Interestingly, many urban cooperative credit societies, which were not engaged inany banking functions, also used the word .bank.

There was no well-defined concept of urban cooperative bank till 1996, when

banking laws (provisions of section 5(CCV) of Banking Regulation Act 1949)

were made applicable to cooperative banks. Accordingly, an urban cooperative

bank was defined as a Primary Cooperative Bank other than a primary agricultural

credit society; (i) the primary object of which is the transaction of banking

business, (ii) the paid up share capital and reserves of which are not less than Rs.1

lakh (0.1 Mn) and (iii) the by-laws of which do not permit admission of any other

cooperative society as a member. The word .primary. is used to denote that the

urban cooperative banks perform the role of a primary unit in a 3-tier

cooperative credit structure. Over a century old urban co-operative credit

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movement today, has a network of 2,084 urban co-operative banks with 7,368

branch outlets spread all over the country.

The deposits and advances of urban cooperative banks constitute for about 9 and

8 percents of the aggregate deposits and advances of the banking system

respectively. In so far as the growth and performance are concerned, it may

be mentioned that the urban cooperative banks were a shade better than the

scheduled commercial banks and public sector banks till 1999 (Ramesha K,

2001). However, it has to be recognized that the prudential standards and

regulatory system prescribed for urban cooperative banks were relatively soft in

comparison with those of commercial banks. This is partly on account of

historical reasons and partly due to the preferential treatment of cooperativestructure in general. If one benchmarks the growth and performance of urban

cooperative banks with that of the banking industry (which is dominated by public

sector banks) after 2000 and onwards, then the scenario undergoes a complete

change. For instance, between 2001 and 2002, although owned fund, deposits

and advances of urban cooperative banks increased somewhat impressively,

i.e., by 27, 15 and 14 percents respectively, the gross Non Performing Assets

(NPAs % to total advances) during the same period went up from 16 to 22

percent (3). The percentage of the profit making urban cooperative banks to

the total stood at 87 percent as at the end of March 31, 2002. On the whole, the

performance of the urban cooperative banks particularly after 2000 has been on

the decline, and a host of factors may be responsible for this which may include

increasing competition, tightening prudential standards and supervision and

regulatory standards, multiple control, etc. Following are the features of urban

cooperative credit banks in India.

1) Urban cooperative banks are registered under Cooperative Societies Act of the

respective state Governments. The Reserve Bank of India (Central Bank of the

country) is the regulatory and supervisory authority for UCBs for their banking

related operations. Managerial/Administrative aspects of UCBs continue to

remain with the state Governments. The Union Government regulates the UCBs

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having multi-state presence and such banks are registered under Multi-state

Cooperative Societies Act. Controlling of UCBs by state Government and the

Central Bank of the country is generally known as .duality of control..

2) The discernible characteristic feature of UCB structure is its

heterogeneity. Nearly 50 percent of the banks are unitary in nature (with single

branch banking). Heterogeneity in their size is another facet of the UCB

structure. The larger UCBs (scheduled UCBs) numbering just 51 accounts for

more than 40 percent of the business from UCB sector as against 800 UCBs

accounting for just 6 percent.

3) UCB structure is exemplified by its pronounced focus on the needs of small

men and micro credit sector. The average size of the loan also works out

to be relatively low and an overwhelming segment of UCBs have been able to

comply with the priority sector lending targets (directive from central bank

to lend to certain sectors like small enterprises, trade & business, housing etc) set

by the central bank of the country.

4) Urban cooperative credit movement in general, and the number of UCBs

in particular is concentrated in few states. Five states account for 80 percent ofthe total UCBs in the country and one of them accounts for as high as 32 percent

of the total UCBs.

5) A noticeable feature of urban banking sector is its financial

independence. Unlike the agricultural cooperative credit structure, the urban

cooperative banks are not surviving on external assistance such as refinance

support. In fact, UCBs have been supporting federal units (District Central

Cooperative Banks and State Cooperative Banks) by keeping their surplus

resources in the form of deposits.

Banking Sector Reforms and Urban Cooperative Banks:

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The reform measures as applicable to UCB sector may be classified into

three broad categories. First, while recognizing the differences between

commercial and urban cooperative banks, a majority of the prudential norms

introduced for commercial banks are being extended to UCBs, albeit in a phased

manner. Second, policy initiatives have been introduced (through Monetary &

Credit Policies) to contain the systemic risk emanating from cooperative

sector, in particular from UCB sector. Lastly, duality/multiplicity of

control has been recognized as an irritant to their effective regulation and

supervision. Although, the focal point of the reforms has been prudential norms,

steps are also being initiated to professionalize the management and manpower of

UCBs. The influence of the reforms on the functioning as well as the

cooperative character of UCBs is discussed below.

Prudential Standards:

To begin with, in 1993, RBI introduced Income Recognition and Asset

Classification Norms to UCBs. In 1995, the prudential exposure norms to

single/group borrowers were also made applicable to them. Subsequently, in a

phased time frame, the capital adequacy norms (capital to risk weighted asset

ratio) were also made applicable to UCBs. While the promotion of prudent

financial practices has become a sine quo non in the highly competitive

globalize environment (for safeguarding the financial health of the system,

in particular of the UCB sector), it should not be forgotten that such

standards were contrived essentially for commercial banks. Although, the notion

of a code of good practices is intuitively appealing, the temptation to

prescribe universally valid model codes which do not allow for differences

in institutional development, legislative frame work and more broadly,

different stages of development must be avoided. To put it differently, while

there is no dispute that UCBs should be subjected to prudential standards

(capital adequacy, asset classification, income recognition and provisioning

norms), it is not yet clear, whether the prudential standards prescribed for

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commercial banks would work without distorting the cooperative character of

UCBs.

For instance, capital is widely regarded as a measure of the risk taking ability

of a financial intermediary and therefore, prescription of a minimum capital

the urban cooperative bank (to conduct banking business) may seem to be

justified from the viewpoint of ensuring stability in the financial system. If one

looks at a cooperative credit society/bank, as a typical cooperative created on

the basis self help and mutual help, then possibly the members (generally with

limited means) may not be able to raise the required capital. If capital base is to be

strengthened, as it is happening in India, these banks will have to start dealing

with non-members (or nominal members) on a large scale and perhaps may haveto shift from .surplus. to .profit..

The need to increase the deposit base as also to gainfully employ the funds

generated have made it necessary to have a large number of customers who are

not the members. It is worth mentioning that in India, urban cooperative banks

though on par with commercial banks with regard to prudential standards, like the

latter, are not permitted to boost their capital base through sub-ordinate debts.

Further, there are ceilings on the value individual share holdings have not been

revised since long.

Secondly, in order to ensure the adherence to the prudential standards by

cooperative credit societies/banks, the regulators frequency (as also scope)

of intervention increases thereby affecting the cooperative character. In this

regard, in India regulators intervention has indirectly infringed upon the

functional autonomy covering areas like share-linkage, credit, investment,

deposit and so on. Thirdly, in the name of protecting the interests of the

depositors (majority of whom are not the members of cooperative banks), not

only prudential standards are extended but even the professional content in the

management committee of the urban cooperative credit societies/banks is

also stipulated in India by the regulator/Government. While one can not remain

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ignorant of the role of the Government in the promotion of and development of

cooperation in India, prescribing the number and qualification of the nominee

directors would no doubt impair the cooperative character. Fourthly, the strict

entry norms in terms of minimum capital, membership prescription as it

prevails in India, prevents the birth of new credit cooperatives and

constrain the existing societies in so far as the expansion is concerned.

Fifthly, with the introduction of same prudential standards the difference

between urban credit cooperatives/banks and commercial banks get blurred

and possibly, the former may have to progressively imbibe the character of the

latter (identity crisis?). There could be several such dimensions as discussed

above. Nonetheless, it appears that the benefits of the prudential standards tourban credit cooperatives/banks come at a cost. The cost, needless to

mention, is the dilution in the cooperative character (in terms of adherence to

the principles).

Professional Management and Governance:

Good corporate governance is critical to efficient functioning of an entity and

more so for a banking entity. Thus the need for professional management andhealthy governance practices in urban credit cooperative societies/banks in

the present competitive environment needs no emphasis. Thus, for managing a

financial intermediary, whether a

cooperative or a commercial bank (irrespective of its size), the human

resource comprising of paid staff and elected management has to be highly

competent. The framework for good governance and professional

management in cooperative sector should essentially emanate from the guiding

principles and the given legal framework in different countries/states.

However, in India it is not uncommon that the cooperative banks are

superseded and Government officials are posted to head or nominated on the

board and unfortunately this trend is increasing in the post reform period.

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Quite often the reason quoted is that there is lack of qualified and

competent directors and the protection of depositors. interests (majority of them

are not the members) in the case of urban cooperative banks. While this is to some

extent true, the solution to this problem certainly is not Government

intervention as it would seriously impair the cooperative character. It is

disheartening to note that the elected management of 41 % of State

Cooperative Banks, 37 % of State Cooperative Agricultural and Rural

Development Banks, 21 % of the District Central Cooperative Banks and 8% of

Primary Cooperative Agricultural and Rural Development Banks stood

superseded as on March 2000. More than 200 urban cooperative banks are

identified as weak/sick banks by the regulator as at the end of March 2002.

As per the prevailing act (and according to the cooperative philosophy/principles)

any individual member can get himself/herself elected to the management

committee of a cooperative bank. It is this management committee which

is entrusted with the responsibilities like risk management - policy/strategy,

credit and NPA management, investment management, marketing plan/strategy,

Asset-Liability Management and so on. It should also be noted that the very

concept of banking (financial inter-mediation) is undergoing change in the

present competitive environment and the conventional framework for

management with which cooperative banks are comfortable may not be

sufficient. Given this, it is doubtful whether the elected management (as per the

existing

provisions of cooperative act and principles the individuals without

sufficient knowledge/experience in financial markets or management can be at the

helm of affairs of a cooperative bank) would be able to take on the emerging

challenges. Perhaps, the need of the hour is to ensure that in cooperative

organizations, the system of governance including the size and composition

of the board of directors (or elected management) is driven by the purpose and

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objectives of the business. In this regard, the following issues/areas may be of

some interest to the cooperative researchers.

Supervision and Regulation:

At present in India, urban credit cooperatives/banks are subjected to duality of

control, meaning that the administration related aspects are being supervised and

regulated by State Government and the banking operations are supervised

and regulated by the central bank of the country. This has, understandably

resulted in overlapping jurisdiction of the state Government and the central

bank of the country. Moreover, a clear-cut demarcation of the financial and

administrative areas for regulation is almost impossible and even if it is possible it

surely acts as an impediment in effective supervision. While the central bank of

the country has the wherewithal under the Banking Regulation Act for dealing

with crucial aspects of functioning of commercial banks, in the case of co-

operative banks it requires the intervention of the Registrar of Cooperative

Societies (state Government). Given the number of urban credit

cooperatives/banks, the central bank of the country is not in a position to

effectively supervising them. Thus, the duality of control not only affects the

quality of supervision and regulations, but also the functioning of the urban

cooperative banking sector. Needless to mention, under this regime of

duality of control the urban cooperative banks may turn out to be neither

cooperative nor commercial banks. There are some areas of concern, some

of them may be good for research as well.

While the progress of the cooperative movement in India in general, and the

cooperative banking in particular has been rather appreciable, the movement can

not be termed as a vibrant one in regard to cooperative values and philosophy as

enunciated in cooperative principles. With regard to the extension of reforms to

cooperative banking segment, it is yet not clear as to whether the same would

ensure soundness and stability in the cooperative banking segment. Although the

promotion of prudent financial practices in urban cooperative banks has

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become a sine quo non in the present competitive environment, one can not

afford to ignore that such practices were contrived essentially for commercial

banks. It must not be forgotten that the notion of a code of good

practices though intuitively appealing, the temptation to prescribe universally

valid model codes which do not allow for differences in institutional

development, legislative framework and more broadly, different stages of

development must be avoided. It seems the extension of reforms/prudential

standards to urban cooperative banking has provided substantial scope for the

external intervention and in the process, affecting the cooperative character in

terms of adherence to the cooperative principles. Logically, if the prudential

standards, and supervision and regulation for cooperative banks were same

as that of commercial banks, then there would not be any difference worth

mentioning between these entities. There are several areas that need the

intervention of researchers and perhaps, more important amongst them are

prudential standards, professional management & governance and supervision &

regulation. The framework for such research should essentially be within the

guiding principles of cooperation.

However, in the long run, if cooperative character of credit cooperatives is

to be preserved, the prudent practices, system of governance and supervision &

regulation all should emanate from the guiding principles of cooperation.

CHAPTER 3

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IMPLEMENTATION OF DEVELOPMENT ACTION PLAN

In order to strengthen Cooperative Credit Institutions both in Short-Term

and Long-Term Structures as viable units on a sustainable basis, NABARD had

introduced a mechanism of DAP/MoU aiming at institution specific measures in

1994-95. The cooperative banks, throughout the country had prepared the base

DAPs and executed the base level MoUs for 5 years terminating March 2000. The

second round of DAPs, and MoUs covered the period 2000-01 to 2002-03 which

was extended by one more year i.e.upto March 2004. Since then the base-level

DAP/MoU covered a larger period of 3 to 5 years. The first phase of DAP/MoU

(1994-2000) concluded in March 2000 and thereafter second phase was started to

cover 3 years (i.e. 2001-03) Annual MoU for 2002-03 and was entered for the

year 2003-04. The third phase of DAP/MoU started from the year 2004-05 for a

period of 3 years. During the third phase of DAP/MoU covering the period 2004-

05 - 2006-07 for the first time PACS have been introduced to planning process.

They are required to prepare DAP and enter into an understanding with the branch

of DCCB.

The mechanism of DAP/MoU has helped in building appreciation and awareness

for strategic planning facilitating, in turn, sustainable viability at all levels. The

feedback received indicates that there was positive impact on the performance of

banks as a result of introduction of DAP/MoU through reduction of CoM and cost

of resources. The DAP planning process, as an internal strategy for corporate

planning, had facilitated in creating an awareness in the cooperative banking

structure and RRBs about the need for strategic planning for corporate success.

The process of preparation of Bank-specific Development Action Plans (DAPs)

introduced for RRBs during the year 1994-95 has been continued during the year

2004-05 for improving the performance of RRBs in a specified time frame.

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RBIS POLICIES IN RELATION TO CO-OPERATIVE CREDIT

The RBI since its inception has been concerned with the problems of agriculture

credit. It has been conducting studies to identify the problems of agricultural

credit. It was found in the studies conducted in 1930s that almost entire finance

required by agriculturists in India was supplied by money lenders the part played

by co-operative and other agencies being negligible. In 1951, the RBI appointed

an All-India Rural credit survey committee to conduct a comprehensive rural

credit survey. It was found that only 3.1 per cent (of Rs.750 crores worth of

borrowings of the cultivators) was owed to cooperative societies.

It was found that co-operative credit fell short of the right quantity was not of the

right type ,did not serve the right purpose and often Failed to go to the right

people . The committee concluded that thought co-operation has failed but it must

succeed. It was realized that only the co-operative credit system can play the

prime role in the provision of rural finance. This was rightly thought so since

there is the existence of vast network of village level primary credit societies

throughout the country. further , these societies have intimate knowledge of

local problems .A require structure was already available for an effective credit

delivery system for rural areas, therefore, RBI has made all possible efforts to

strengthen and improve the co-operative credit structure.

The RBI was assigned a crucial role on three main items:

The development of co-operative credit,

Expansion of co-operative economic activity and

Training of co-operative personnel.

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The RBIs role in the building of the co-operative credit structure was that of an

active collaborator in drawing up schemes of development with the government

of India and the State Governments, and the provider of finance, first to the State

Governments for contribution to the share capital of co-operative credit

institutions at various levels, and secondly, to the co-operative credit structure it

self to meet its requirements of short- term, and long-term, finance. The details

are given as below:

3.1 PROVISION OF FINANCE

The RBI extends finance under two

a) Agriculture finance: the RBI extends finance to agriculturists indirectly through

co-operative sector. The credit extended is of three types i.e. short term, medium

term and long term.

To meet its aforementioned financial obligation, the RBI had established in 1956

two national funds

1) The national a Agriculture credit fund (long term operations)

2) The national Agriculture credit (Stabilization) fund, the first und is used for:

a. Advancing to state co-operative banks- medium term loans for agriculture and

allied purposes,

b. Making loans to state land development banks etc,

c. Purchasing the debentures of state land development banks, and

d. Making loans and advances to NABARD, started with an initial contribution

of Rs. 10 crores in 1956, the total outstanding under this fund had grown to Rs.

3,315 crores by the and of June 1990 through annual subscription from the profits

of the RBI. The second fund, viz. NAC (stabilization) fund, is used for converting

the RBIs short term loans and advances to state co-operative banks into medium

term loans whenever they are enable to pay their dues in time owing to drought.

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Famine or other natural calamities. This fund was set up in 1956 with an initial

contribution o Rs. 1 crore. The total outstanding under this fund stood at Rs. 660

crore at June end 1990.

b) Non Agricultural finance: the RBI also provides short- term finance for

a. The production marketing activity of cottage and small-scale industries, and

b. The purchase and distribution of fertilizers, these loans are generally provided

through state co-operative bank against guarantees of the state governments.

However, all such finances have constituted a small property (less than %) of the

total RBI short-term finance to co-operatives. The bulk of it goes to agricultural

co-operatives

3.2 INDIAN BANKING - Present Scenario

Households availing banking Services

Rural penetration of banking and Insurance is very low

Excess Dependence on Private Financiers at very high interest rate

Rural People

Distancing themselves due to lack of awareness

Difficulty in fulfilling Bank formalities

Number of Rural Branches was maximum in 1993

Thereafter number of Rural Branches has been declining

Reason for Reduction of Rural Branches

Closure

Reclassification of the Area due to population growth

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Rural Sector Reforms started in 1991

As the focus on the profitability has been increasing the rural Branches are

being closed.

In earlier decades, In spite of re-classification, number of Rural Branches

increased

Rural Branches Growth and Decline

Population and Bank Branch Coverage

Level of Urbanization has increased during the decade

The share of urban and Metro population increased due to

Up gradation of certain Semi Urban areas into Urban areas

Migration from Rural / Semi Urban to Urban / Metros

In Urban and Metros Population per Branch has decreased whereas in Rural and

Semi Urban population per branch has increased during the last decade

The shift will be more towards Urban / Metro if we consider the ATMs and

other delivery channels available in Metros which are equivalent to part of a

branch but not added to the number of branched

Strategies for successful Rural Banking

Co-operative bank are Rural oriented and their operating expenses are less

They have to play a lead role in Rural financing and expanding the Rural

customer base

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Commercial Bank can select the route of financing through agencies

Micro Credit Institutions

NBFCs

Encourage linkage of more Self help Groups

Solutions of problem of co-op bank in rural area

Training Needs

Bank to take up entrepreneurial skill development programmes

Training to develop Business Skills

Training on Leadership Skills

Training on Proper Accounting practices

Training to create Quality awareness

Training and Knowledge dissemination on Industrial and Tertiary Sector

Opportunities

Provision of Know How Technologies Activities and Success Stories of other SHGs should be shown under video

coverage

Technology implementation for Prosperity of Rural Poor

Technology Implementation in Bank in Rural

To bring down the transaction cost

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Packaging and delivering Rural Credit

Technology can handle large number of transactions at less cost

Can facilitate

Document management

People identification

3.3 Technology in Rural India Key Issues

Improving Networking and Communication facilities through wireless

technology and last mile connectivity

Processor & other Hardware should be made cost effective with multiple

Inclusive Growth Rural Sector

Documents

Transcript of Inclusive Growth Rural Sector