Cooperative Banks in India

Cooperative Banks in India

Agenda Cooperative Banking Structure

in India Features of Cooperative Banks Plethora of Problems in

Cooperative Banking Sector Possible Solutions to Resolve

Crisis

Cooperative Banking Structure in India

Emergence of Cooperative Banks

Enactment of Cooperative Credit Societies Act of 1904

New Act in 1912 was passed for establishment of Cooperative Central Banks

To meet needs of small and medium income groups not adequately met through public and private sector banks

Cooperative Banks are member driven institutions

Every member has to have stake in the capital and irrespective of a member's shareholding, each member has only one vote. “One Member, One Vote”

Registered with State based Registrar of Cooperative Societies

“No Profit, No Loss” basis

Structure of Cooperative Banks

Rural Cooperative Credit Institutions Short Term Credit

State Cooperative Banks District Central Cooperative Banks Primary Agricultural Cooperative Societies

Long Term Credit State Cooperative Agriculture and Rural

Development Banks (SCARDB) Primary Cooperative Agriculture and Rural

Development Banks (PCARDB)

Urban Cooperative Banks

Structure of Cooperative Banks: 3-Tier Architecture

RBI

NABARD

State Cooperative

Banks

State Land Development Banks


District Central Cooperative Banks

Primary Agricultural

Credit Societies

District Central Land Development Banks

Branches of State Land Development

Banks

Primary Land Development

Bank

Cooperative Credit Institutions: Classified as per Term of Credit

Cooperative Credit Institutions

Rural Cooperative Credit Institutions


Long Term Credit (Land Development

Banks)Short Term Credit

State Cooperative

Banks

Primary Agricultural Cooperative

Societies

DistrictCentral

Cooperative Bank

State Cooperative Agriculture

and Rural Development

Banks (SCARDB)

Primary Cooperative Agriculture

and Rural Development Banks (PCARDB)

Scheduled Banking Structure In India

Scheduled Banks in India

Scheduled Commercial Banks Scheduled Cooperative Banks

Public Sector Banks (27)

Foreign Banks (42)

Private Sector Banks (30)

Regional Rural Banks (196)

Scheduled Urban

Cooperative Banks (51)

Scheduled State

Cooperative Banks (16)

Other Nationalized Banks

(19)

State Bank of India and Associates (8)

Old Private Sector Banks (23)

New Private Sector Banks (7)

Features of Cooperative Banks

Cooperative Banks UCB’s Not permitted to deal in Forex directly

(Only 3 UCB’s allowed to access directly) UCB Exposure to Non-fund business (Letter of

Credit and Bank Guarantees) is limited Restrictions in dealing in above due to small

size and inadequate expertise UCB’s grew at phenomenal rates in 70’s & 90’s 1993 Narasimhan Committee recommended

liberalisation of norms for cooperative banks This led to mushrooming of Cooperative Banks

Cooperative Banks 2090 UCB’s: Majority in Maharashtra (600),

Gujarat (350), Karnataka, Andhra Pradesh and Kerala

52 banks are scheduled UCB’s Cooperative Banks came under the purview of

Banking Regulations Act only in 1966 Previously, RBI regulated Urban Coop Banks &

NABARD regulated the Rural Coop Banks Now, RBI is directly regulating all Coop Banks State Registrars of Cooperative Societies also

regulate certain functions of rural and urban coop banks

Cooperative Banks Multi State Urban Coop Banks

Regulated by Union Government Registered under Multi-State Cooperative

Societies Act RBI is regulatory and supervisory authority Managerial aspects come under respective

State Cooperative Societies Act Coop Banks area of operation mostly

confines to a single or adjoining districts Only Coop Banks with Rs. 50 Crores net

owned funds or above can extend their area of operation to rest of country

Plethora of Problems in Cooperative Banking

Sector

Plethora of Problems General mismanagement Financial impropriety Inadequate loan appraisal and credit

planning Poor risk management Pathetic loan recovery Shocking investment decisions and lack

of skilled manpower and leadership High proclaiming of dividends

Dual Control Co-operative societies are governed by their

respective state governments Powers derived from respective State Co-

operative Societies Acts They are also governed by the Reserve Bank

of India (under the Banking Regulations Act). Dual control necessitate legislative changes

to State and Central Acts Narasimhan Committee II had also

unequivocally recommended for ending dual control regime over Cooperative Banks

Dual Control Many areas which directly relate to supervision

over them have been kept beyond RBI's authority RBI has no authority to deal with delinquent

management in a cooperative bank. This requires intervention of the Registrar of Cooperative Societies

Making investments out of surplus resources within the decision making powers of cooperative banks subject to RBI guidelines but this needs approval of the Registrar

Writing off an unrealizable debt also requires permission of the Registrar

Conflict between State Government and RBI

DICGC not to cover Multi-State Cooperative Banks

According to DICGC Act, 1961, MultiState Cooperatives Society Act needs to be amended for allowing Multi-State Cooperative banks to be eligible for Insurance cover of their deposits up to Rs. 1 Lakh

High Cost of Capital Cooperative Banks not able to provide loans at

cheap interest rates on par with commercial bank

High cost of capital forced borrowers to shift to Commercial Banks

Competition from Commercial Banks (especially from Private Sector Banks)

Sugar and Textiles Cooperatives borrow at higher cost from Coop Banks forcing many companies to go into red

National Cooperative Development Council is providing 20% subsidy on plant and machinery

Possible Solution to Resolve Crisis

Two Solutions

Solution 1: Restructuring and Revival of Cooperative Banking Structure

Solution 2: Delicensing of Cooperative Banks and Encouraging Commercial banks to extend credit at grassroot level

Solution 1: Restructuring and Revival of Cooperative

Banking Structure

3 ways of resolving dual control issues

Option 1: Bringing in the subject of cooperation under concurrent list so as to enable the Union Government to legislate in matters pertaining to cooperative banking. But such a move involves amendments to the Constitution.

Option 2: States enacting progressive legislations Registrars confine their acts only to register and

accept byelaws Option 3: Demarcate the regulatory roles of

state governments and RBI in the State Acts

Four Pronged Approach to Resolve Problems

Aligning co-operative banking sector with the rest of the financial system

Deciding the future of weak entities Improving governance Resolving the issues emanating from

dual control

Supervisory and Regulatory Rigours

In 1993, RBI introduced Income Recognition and Asset Classification Norms to Cooperative Banks

Delay in introduction of Capital Adequacy norms until 2002

Main risk exposure of Cooperative Banks is not the credit risk but interest rates risk

Interest rates particularly on deposits are out of sync with the rest of the banking sector

Observance of Risk and Asset Liability Management guidelines should assume importance

Prescription of disclosure standards: Disclosure of level of owned funds, unimpaired networth,

CRAR. Gross/Net NPAs, operating results, ROA. compliance with reserve requirements, per employee productivity, etc. with balance sheet figures

Strengthening the audit systems Professionalisation of Audit Mandatory concurrent audit for larger

banks Redesigning audit format to ensure

transparency and accountability Many state governments have yet to

respond positively despite persuasion by RBI


Should banks have unrestricted access to inter-bank markets?

Resorting to this avenue is essentially to meet their temporary liquidity mismatches rather than raising short term resources to fund their long term assets

Volatile nature of capital market – restriction of Coop Banks to Capital Markets

Only Cooperative Banks with Rs. 50 Crores owned funds to go beyond their state of jurisdiction.


Whether a system can be evolved whereby “fire-walls” can be erected to avert payment crisis of co-operative banks by way of increased SLR / CRR

Mandatory cash deposits with clearing houses for meeting payment obligations in the event of liquidity crisis

Increased Safety

Future set-up of weak Banks

Many licenses have already been cancelled and the banks have closed down

Registrars should direct the co-operative courts for speedy recovery process of bad loans (substandard and doubtful assets)

Unviable branches should either be relocated or closed down

Avenues should be explored for the bank getting additional capital

Merger with a well-managed bank. But, forcible merger of strong banks with weak banks should be strictly avoided

Improving Governance Mechanism to ensure an effective system of

internal governance Chief Executive should be a person of clean

image and display a professional attitude Board should consist of knowledgeable

persons who are aware of their responsibilities as board members

Findings of audit and inspection teams and ensure compliance

Ensure compliance with various regulatory instructions issued by RBI as also state governments ‘

Large number of Cooperative Banks puts severe strain on the supervising and monitoring system

RBI inspects them usually once in two years RBI has recently mooted the idea of

supervision of Cooperative Banks to be entrusted to a separate apex authority

Separate Supervisory Structure for Cooperative

Banks?

Recent Task force for revival of Cooperative banks

Prof. A Vaidyanathan of the Chennai-based Madras Institute of Development Studies appointed as the chairman of the task force

To prepare an action plan for reviving rural cooperative banks

Assessment of the financial assistance that the cooperative banking institutions will require for revival

To submit its report by October 31, 2004

Other Reform Measures Suggested

Credit Appraisal Norms to be made more stringent

Software for credit rating analysis based on balance sheet figures

Political Non-interference Credit monitoring (post disbursal) and review –

one of the weak points of Indian Banking Industry Credit Recovery Policy to be in place (to curtail

the relief to defaulting borrowers) Provisions under Securitization Act (SARFAESI)

needs to be increased Measures for Corporate Debt Restructuring Exchange of Information about defaulting

borrowers

Solution 2: Delicensing of Cooperative Banks and

Encouraging Commercial banks to extend credit at

grassroot level

Closure of Cooperative Banks Release of over Rs. 100,000 Crores of

liquidity to Commercial Banks and other Financial Institutions

Encourage Commercial banks to establish presence at Grassroot level

Model of MicroFinance can be encouraged in association with NGO’s and Gram Panchayats (Community level). Better reach to priority sector via MicroFinancing

This has to be done in a phased manner This will result in lower cost to borrowers

Control Measures Better Control of flow of funds through

smaller number of PSU Banks and Private Banks

Regulation becomes easier Number of Intermediaries decreases More Private Sector Banks also have

identified that Agricultural lending (by MicroFinance) is comparatively less risky than Industrial lending

Documents

Cooperative Banks in India