Co-operative Banking

INTRODUCTION TO CO-OPERATIVE

BANKING
DEFINATION:

A Co-operative bank, as its name indicates is an institution

consisting of a number of individuals who join together to
pool their surplus
savings for the purpose of eliminating the profits of the
bankers or money
lenders with a view to distributing the same amongst the
depositors and
borrowers.
The Co-operative Banks Act, of 2007 (the Act) defines a co-
operative
bank as a co-operative registered as a co-operative bank in
terms of the Act
whose members
1. are of similar occupation or profession or who are
employed by a
common employer or who are employed within the same
business
district; or
2. have common membership in an association or
organisation,
including a business, religious, social, co-operative, labour or
educational
group; or
3. have common membership in an association or
organisation,
including a business, religious, social, co-operative, labour or
educational group; or
4. Reside within the same defined community or
geographical area.
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CO-OPERTIVE BANKING - AN INTRODUCTION:
Co-operative bank, in a nutshell, provides financial
assistance to the
people with small means to protect them from the debt trap
of the
moneylenders. It is a part of vast and powerful structure of
co-operative
institutions which are engaged in tasks of production,
processing, marketing,
distribution, servicing and banking in India. A co-operative
bank is a
financial entity which belongs to its members, who are at the
same time the
owners and the customers of their bank. Co-operative banks
are often
created by persons belonging to the same local or
professional community or
sharing a common interest. These banks generally provide
their members
with a wide range of banking and financial services (loans,
deposits, banking
accounts). Co-operative banks differ from stockholder
banks by their
organization, their goals, their Values and their governance.
The Co-operative Banking System in India is characterized
by a
relatively comprehensive network to the grass root level.
This sector mainly
focuses on the local population and micro- banking among
middle and low
income strata of the society. These banks operate mainly for
the benefit of
rural areas, particularly the agricultural sector.
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OBJECTIVES OF STUDY
The Objective of the study of Co-operative Banking is to
know
the origin of Co-operative Banks in India.
To know the role of Co-operative banks in India.
To know the importance of Co-operative Banks in India.
To know the types of Co-operative Banks.
To know the Development of Co-operative Banks in India.
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CH. 2. ORIGIN AND OPERATION OF
COOPERATIVE
BANKING
ORIGIN OF CO-OPERATIVE BANKING:
The beginning co-operative banking in India dates back to
about
1904, when official efforts were made to create a new type
of institution
based on principles of co-operative organization &
management, which were
considered to be suitable for solving the problems peculiar to
Indian
conditions.
The philosophy of equality, equity and self help gave way to
the
thoughts of self responsibility and self administration which
resulted in
giving birth of co-operative. The origin on co-operative
movement was one
such event-arising out of a situation of crisis, exploitation
and sufferings.
Co-operative banks in India came into existence with the
enactment of
the Agricultural Credit Co-operative Societies Act in 1904.
Co-operative
bank form an integral part of banking system in India. Under
the act of 1904,
a number of co-operative credit societies were started.
Owing to the
increasing demand of co-operative credit, anew act was
passed in 1912,
which was provided for establishment of co-operative central
banks by a
union of primary credit societies and individuals.
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Co-operative Banks in India are registered under the Co-
operative
Societies Act. The cooperative bank is also regulated by the
RBI. They are
governed by the Banking Regulations Act 1949 and Banking
Laws (Cooperative
Societies) Act, 1965.
OPERATION OF CO-OPERATIVE BANKING:
Establishments:
Co-operative bank performs all the main banking functions
of deposit
mobilisation, supply of credit and provision of remittance
facilities.
Co-operative Banks belong to the money market as well as
to the
capital market.
Co-operative Banks provide limited banking products and
are
functionally specialists in agriculture related products.
However, cooperative
banks now provide housing loans also.
UCBs provide working capital loans and term loan as well.
The chief functions of Co-operative banks are:
a. To attract deposit from non-agriculturist,
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b. To use excess funds of some societies temporarily to make
up for
shortage in another,
c. To supervise and guide affiliated societies.
The basic principles on which a Co-operative bank
works are:
A co-operative character of activities and trait of mutual aid
of credit granted.
Catering for collective organizations and their members.
Restriction on the number of individual votes.
As a result, during 2007-08, the Primary Cooperative
Agriculture and Rural Development Banks have again started
lending for the
Non-Farm Sector including Jewel Loans.
Aiming at high rates on deposits and low rates on lending.
Limitation of dividends out of profits and bonus to
depositors
and borrowers or grants to cultural or co-operative
endeavour.
These banks are constituted of voluntary association, self-
help and
mutual aid, one share one vote and non-discrimination and
equality of
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members. The co-operative banks are the
organizations of and for the
people.
CH. 3. ROLE OF CO-OPERATIVE BANKING
ROLE OF CO-OPERATIVE BANKING IN INDIA:
Co-operative Banks are much more important in India than
anywhere
else in the world. The distinctive character of this bank is
service at a lower
cost and service without exploitation. It has gained its
importance by the role
assigned to them, the expectations they are supposed to
fulfill, their number,
and the number of offices they operate. Co-operative banks
role in rural
financing continues to be important day by day, and their
business in the
urban areas also has increased phenomenally in recent years
mainly due to
the sharp increase in the number of primary co-operative
banks. In rural
areas, as far as the agricultural and related activities are
concerned, the
supply of credit was inadequate, and money lenders would
exploit the poor
people in rural areas providing them loans at higher rates.
So, Co-operative
banks mobilize deposits and purvey agricultural and rural
credit with a wider
outreach and provide institutional credit to the farmers. Co-
operative bank
have also been an important instrument for various
development schemes,
particularly subsidy-based programmes for poor.
The Co-operative banks in rural areas mainly finance
agricultural
based activities like:
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Farming
Cattle
Milk
Hatchery
Personal finance
The Co-operative banks in urban areas finance in activities
like:
Self-employment
Industries
Small scale units
Home finance
Consumer finance
Personal finance
Some of the forward looking Co-operative banks have
developed
sufficient core competencies to such an extent that they are
able to challenge
state and private sector banks.
The exponential growth of Co-operative banks is attributed
mainly to
their much better contacts with the local people, personal
interaction with
customers, and their ability to catch the nerve of the local
clientele. The total
deposits and lendings of Co-operative banks are much more
than the Old
Private Sector Banks and the New Private Sector Banks.
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IMPORTANCE OF CO-OPERATIVE BANKING
Co-operative bank forms an integral part of banking system
in India.
This bank operates mainly for the benefit of rural area,
particularly the
agricultural sector. Co-operative bank mobilize deposits and
supply
agricultural and rural credit with the wider outreach. They
are the main
source for the institutional credit to farmers. They are chiefly
responsible for
breaking the monopoly of moneylenders in providing credit
to agriculturists.
Co-operative bank has also been an important instrument for
various
development schemes, particularly subsidy-based
programmes for the poor.
Co-operative banks operate for non-agricultural sector also
but their role is
small.
Though much smaller as compared to scheduled commercial
banks,
co-operative banks constitute an important segment of the
Indian banking
system. They have extensive branch network and reach out
to people in
remote areas. They have traditionally played an important
role in creating
banking habits among the lower and middle income groups
and in
strengthening the rural credit delivery system.
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CH. 4. HISTORY OF CO-OPERATIVE BANKING
HISTORY OF CO-OPERATIVE BANKING
The origins of the cooperative banking movement in India
can be
traced to the close of nineteenth century when, inspired by
the success of the
experiments related to the cooperative movement in Britain
and the
cooperative credit movement in Germany, such societies
were set up in
India.
Now, Co-operative movement is quite well established in
India. The
first legislation on co-operation was passed in 1904. In 1914
the Maclagen
committee envisaged a three tier structure for co-operative
banking viz.
Primary Agricultural Credit Societies (PACs) at the grass root
level, Central
Co-operative Banks at the district level and State Co-
operative Banks at
state level or Apex Level.
In the beginning of 20th century, availability of credit in
India, more
particularly in rural areas, was almost absent. Agricultural
and related
activities were starved of organised, institutional credit. The
rural folk had to
depend entirely on the money lenders, who lent often at
usurious rates of
interest.
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The co-operative banks arrived in India in the beginning of
20th
Century as an official effort to create a new type of
institution based on the
principles of co-operative organisation and management,
suitable for
problems peculiar to Indian conditions. These banks were
conceived as
substitutes for money lenders, to provide timely and
adequate short-term and
long-term institutional credit at reasonable rates of interest.
The Anyonya Co-operative Bank in India is considered to
have been
the first co-operative bank in Asia which was formed nearly
100 years back
in Baroda. It was established in 1889 with the name
Anyonya Sahayakari
Mandali Co-operative Bank Limited, with a primary
objective of
providing an alternative to exploitation by moneylenders for
Baroda's
residents.
In the formative stage Co-operative Banks were Urban Co-
operative
Societies run on community basis and their lending activities
were restricted
to meeting the credit requirements of their members. The
concept of Urban
Co-operative Bank was first spelt out by Mehta Bhansali
Committee in 1939
which defined on Urban Co-operative Bank . Provisions of
Section 5 (CCV)
of Banking Regulation Act, 1949 (as applicable to Co-
operative Societies)
defined an Urban Co-operative Bank as a Primary Co-
operative Bank other
than a Primary Co-operative Society were made applicable in
1966.
With gradual growth and also given philip with the economic
boom,
urban banking sector received tremendous boost and started
diversifying its
credit portfolio. Besides giving traditional lending activity
meeting the credit
requirements of their customers they started catering to
various sorts of
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customers viz.self-employed, small businessmen / industries,
house finance,
consumer finance, personal finance etc.
CH. 5. FEATURES OF CO-OPERATIVE BANKING
FEATURES OF CO-OPERATIVE BANKING
1.Co-operative Banks are organized and managed on the
principal of cooperation,
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
maximization.
2. Co-operative bank performs all the main banking
functions of deposit
mobilisation, supply of credit and provision of remittance
facilities.
3. Co-operative Banks provide limited banking products and
are functionally
specialists in agriculture related products. However, co-
operative banks now
provide housing loans also.
4. Co-operative banks are perhaps the first government
sponsored,
government-supported, and government-subsidised 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 favoured" banking sector with risk of nationalisation.
For
commercial banks, the Reserve Bank of India is lender of last
resort, but
co-operative banks it is the lender of first resort which
provides financial
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resources in the form of contribution to the initial capital
(through state
government), working capital, refinance.
5. Co-operative Banks belong to the money market as well
as to the capital
market. Primary agricultural credit societies provide short
term and medium
term loans.
6. Co-operative banks are financial intermediaries only
partially.
The sources of their funds (resources) are:
(a) Central and state government,
(b) The Reserve Bank of India and NABARD,
(c) Other co-operative institutions,
(d) Ownership funds and,
(e) Deposits or debenture issues.
7. Some co-operative bank are scheduled banks, while
others are nonscheduled
banks. Co-operative Banks are subject to CRR and liquidity
requirements as other scheduled and non-scheduled banks
are. However,
their requirements are less than commercial banks.
8. As said earlier, co-operative banks accept current, saving,
and fixed or
time deposits from individuals and institutions including
banks.
9. In the recent past, the RBI has introduced changes in
interest rates of cooperative
banks also, along with changes in interest rates of
commercial
banks. The interest rates structure of co-operative banks is
quite complex.
The rates charged by them depend upon the type of bank,
the type of loans,
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and vary from state to state.
10. Since 1966 the lending and deposit rate of commercial
banks have been
directly regulated by the Reserve Bank of India. Although the
Reserve Bank
of India had power to regulate the rate co-operative bank
but this have been
exercised only after 1979 in respect of non-agricultural
advances they were
free to charge any rates at their discretion. Although the
main aim of the cooperative
bank is to provide cheaper credit to their members and not
to
maximize profits, they may access the money market to
improve their
income so as to remain viable.
11. Co-operative banks (COBs), in short, have played a
pivotal role in the
development of short-term and long-term rural credit
structure in India over
the years. The co-operative credit effort is said to be the first
ever attempt at
micro-credit dispensation in India.
Co-operative Banks share some common features
for their
customer benefit:
Customer's owned entities :
In a co-operative bank, the needs of the customers meet the
needs of
the owners, as co-operative bank members are both. As a
consequence, the first aim of a co-operative bank is not to
maximise
profit but to provide the best possible products and services
to its
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members. Some co-operative banks only operate with their
members
but most of them also admit non-member clients to benefit
from their
banking and financial services.
Democratic member control :
Co-operative banks are owned and controlled by their
members, who
democratically elect the board of directors. Members usually
have
equal voting rights, according to the co-operative principle of
"one
person, one vote".
Profil allocation :
In a co-operative bank, a significant part of the yearly profit,
benefits
or surplus is usually allocated to constitute reserves. A part
of this
profit can also be distributed to the co-operative members,
with legal
or statutory limitations in most cases. Profit is usually
allocated to
members either through a patronage dividend, which is
related to the
use of the co-operative's products and services by each
member, or
through an interest or a dividend, which is related to the
number of
shares subscribed by each member.
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CH. 6. TYPES OF CO-OPERATIVE BANKS
TYPES OF CO-OPERATIVE BANKS
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CLASSIFICATION OF CO-PERATIVE BANKS:
The Co-operative banking structure in India comprises of:
1. Urban Co-operative Banks
2. Rural Co-operatives
Some co-operative banks are scheduled banks, while others
are nonscheduled
banks. For instance, State Co-operative banks and some
Urban
Co-operative banks are scheduled banks but other co-
operative banks are
non-scheduled banks.
Scheduled banks are those banks which have been included
in the
second schedule of the Reserve bank of India act of 1934.
The banks included in this schedule list should fulfill
two conditions.
1. The paid capital and collected funds of bank should not be
less than Rs. 5
lac.
2.Any activity of the bank will not adversely affect the
interests of
depositors.
Every Scheduled bank enjoys the following facilities.
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1. Such bank becomes eligible for debts/loans on bank rate
from the RBI
2. Such bank automatically acquire the membership of
clearing house.
1. Urban Co-operative Banks:
Urban Co-operative Banks is also referred as Primary Co-
operative
banks by the Reserve Bank of India. Among the non-
agricultural credit
societies urban co-operative banks occupy an important
place. This bank is
started in India with the object of catering to the banking
and credit
requirements of the urban middle classes.
The RBI defines Urban Co-operative banks as small sized
cooperatively
organized banking units which operate in metropolitan,
urban
and semi-urban centers to cater mainly to the needs of small
borrowers, viz.
owners of small scale industrial units, retail traders,
professional and salaries
classes.
Urban Co-operative banks mobilize savings from the middle
and
lower income groups and purvey credit to small borrowers,
including weaker
sections of the society. These banks organize on a limited
liability basis,
generally extend their area of operation over a town. The
main functions of
these banks are to promote thrift by attracting deposits from
members and
non-members and to advance loans to the members. It is
registered under
Co-operatives Societies Act of the respective state
Governments. Prior to
1966, Urban Co-operative banks were exclusively under the
purview of
State Government. From March 1, 1966 certain provisions of
Banking
Regulation Act have been made applicable to these banks.
Consequently, the
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RBI became the regulatory an supervisory authority of Urban
Co-operative
Banks for their related operations. Managerial aspects of
such banks
continue to remain with State Governments under the
respective Cooperative
Societies Act. These banks with multi-presence are regulated
by
the Central Governments and registered under Multi-State
Co-operative
Societies Act. The RBI extends refinance to Urban Co-
operative Banks at
bank ate against their advances to tiny and cottage
industrial units. These
banks grants sizeable loans and advances under priority
sector for lending to
small business enterprises, retail trade, road and water
transport operators
and professional and self-employed persons. Urban Co-
operative banks are
mostly located in towns and cities and cater to the credit
requirement of the
urban clientele.
The objectives and functions of the Urban Co-
operative banks:
Primarily, to raise funds for lending money to its members.
To attract deposits from members as well as non-members.
To encourage thrift, self-help ad mutual aid among
members.
To draw, make, accept, discount, buy, sell, collect and deal
in bills of
exchange, drafts, certificates and other securities.
To provide safe-deposit vaults.
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Area of Operation :
The area of operation of these banks are usually restricted
by its
byelaws to a municipal area or a town. In some occasions it
exceeds this
limit. The study group on Credit Co-operatives in Non-
Agricultural Sectors
has recommended that normally, it would be advisable for
an urban cooperative
bank to restrict its area of operation to the municipality or
the
taluka town where it operates.
2. Rural Co-operatives:
Rural Cooperative Banking plays an important role in
meeting the
growing credit needs of rural population of India. It provides
institutional
credit to the agricultural and rural sector. The inadequacy of
rural credit
engaged the attention of RBI and Government throughout
the 1950s and
1960s. One important feature of providing agriculture credit
in India has
been the existence of a widespread network of rural financial
institutions.
The rural credit structure consists of many types of financial
institutions as
large scale branch expansion was undertaken to create a
strong institution
based in rural area. It has served as an important instrument
of credit
delivery in rural and agricultural areas. The separate
structure of rural Cooperative
sector for long-term and short-term loans has enabled these
institutions to develop a specialized institution for rural
credit delivery. The
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volume of credit flowing through these institution has
increased. The Rural
Co-operative structure has traditionally been bifurcated into
two parallel
wings, i.e.
I. Short-term Rural Co-operatives,
II. Long-term Rural Co-operatives.
There is a larger network of co-operative banks in the rural
sector,
consisting of 29 State Co-operative Banks and 367 District
Central Cooperative
Banks, with 13,025 branches. In addition, there are 92,000
Primary
Agricultural Co-operative Credit Societies , 19 State Land
Development
Banks and 745 Primary Land Development Banks, along with
1,847
branches, which are not strictly banks as they are not
covered under the
Banking Regulation Act, 1949. The RBI Governor's proposals
should,
therefore, encompass the entire Co-operative banking
system.
I. Short-term Rural Co-operatives:
The short-term rural co-operatives provide crop and other
working
capital loans to farmers and rural artisans primarily for short-
term purpose.
These institutions have federal three-tier structure.
At the Apex of the system is a State Co-operative bank in
each state.
At the middle (or district) level, there are Central Co-
operative Banks
also known as District Co-operative banks.
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At the lowest (or village) level, are the Primary Agricultural
Credit
Societies.
i. State Co-operative Banks:
State Co-operative Banks are the apex of the three-tier
Co-operative structure dispensing mainly short/medium term
credit. It is the
principal society in a State which is registered or deemed to
be registered
under the Government Societies Act, 1912, or any other law
for the time
being in force in India relating to co-operative societies and
the primary
object of which is the financing of the other societies in the
State which are
registered or deemed to be registered. The State Co-
operative Banks receive
current and fixed deposits from its constituent banks as well
as savings,
current and fixed deposits from the general public and from
local boards,
other local authorities, etc. Further, they receive loans from
the RBI and
NABARD. NABARD is the supervisory authority for State Co-
operative
Banks. The state government contributes the certain portion
of their working
capital. The principal function of State Co-operative Banks is
to assist the
Central Co-operative Banks and to balance excesses and
deficiencies in the
resources of Central Co-operative Banks. It also act as the
balancing
centre for Central Co-operative Banks in the sense that
surplus fund of
some of these banks are made available to other needy
banks. It also serves
the link between RBI and the Central Co-operative Banks and
Primary
Agriculture Credit Societies. But the connection between the
State Cooperative
Banks and Primary Co-operative Societies is not direct. The
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Central Co-operative Banks are acting as intermediaries
between the State
Co-operative Banks and Primary societies.
ii. Central Co-operative Banks:
Central Co-operative Banks form the middle tier of
Cooperative
credit institutions. These are the independent units in as
much as
the State Co-operative Banks have control to control or
supervise their
affairs. They are of two kinds i.e. pure and mixed. Those
banks are the
membership of which is confined to co-operative
organizations only are
included in pure type, while those banks the membership of
which is open
to co-operative organizations as well as to the individuals are
included in
mixed type. The pure type of Central Banks can be seen in
Kerala,
Bombay, Orissa, etc., while the mixed type can be seen in
Andhra Pradesh,
Assam, Tamil Nadu, etc. The pure type of banks is based on
strict cooperative
principles. However, the mixed type has an advantage over
the
pure type in so far as they can draw their funds from the
non-agricultural
sector too.
The Central Co-operative Banks draw their funds from share
capital, deposits, loans from the State C-operative Banks and
where State
Banks do not exist from the RBI, NABARD and commercial
banks.
NABARD is the supervisory authority for Central Co-operative
Banks.
Deposits constitute the major component of sources of
funds, followed by
borrowings. The main function of Central Co-operative Banks
is to finance
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the primary credit societies. In addition they carry on
Commercial banking
activities like acceptance of deposits, granting of loans and
advances on the
security of first class guilt-edged securities, fixed deposit
receipts, gold,
bullion, goods and documents of title to goods, collection of
bills, cheques,
etc., safe custody of valuables and agency services. They are
expected to
attract deposits from the general public. They also act as
balancing centres,
making available access funds of one primary to another
which is in need of
them.
The central co-operative banks are located at the district
headquarters
or some prominent town of the district. These banks have a
few private
individuals also who provide both finance and management.
The central cooperative
banks have three sources of funds,
Their own share capital and reserves
Deposits from the public and
Loans from the state co-operative banks
iii. Primary A griculture Credit Societies:
Primary Agricultural Credit Societies is the foundation
of the co-operative credit system on which the
superstructure of the shortterm
co-operative credit system rests. It deals directly with
individual
farmers, provide short and medium term credit, supply
agricultural inputs,
distribute consume articles and also arrange for the
marketing of products of
its members through a c-operative marketing societies.
These societies form
the basic unit of co-operative credit system in India. These
voluntary
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societies based on principle of one man one vote has posed
challenge to
exploitative practices of the village moneylenders. The
farmers and other
small-time borrowers come in direct contact with these
societies. The
success of the co-operative credit movement depend largely
on the strength
of these village level societies.
The major objective of Primary agricultural Credit Societies is
to serve the need of weaker sections of these society. For
this purpose, the
people with limited means, particularly with schedules
castes and scheduled
tribes, are encouraged to become members of these
societies. So, they must
function effectively as well-managed and multi-purpose
institutions
mobilizing the savings of the rural people and providing the
package of
services including credit, supply of agricultural inputs and
implements,
consumer goods, marketing services and technical guidance
with focus on
weaker sections. Government has promoted multi-purpose
societies in tribal
areas for the benefit of people living there.
Challenges faced by this societies, apart from
improving resources
mobilization, are the following:
Improving volume of business
Reducing cost of management.
Correcting imbalances in loan outstanding.
Improving skill of the staff and imparting proffesionalisation
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Strenghtening Management Information System (MIS).
II. Long-term Rural Co-operatives:
The long-term rural co-operative provide typically medium
and
long-term loans for making investments in agriculture, rural
industries and,
in the recent period, housing. Generally, these co-operatives
have two tiers,
i.e. State Co-operative Agriculture and Development Banks
(SCARBDs) at
the state level and Primary Co-operative Agriculture and
Rural Development
Banks (PCARDBs) at the taluka or tehsil level. However,
some States have
a unitary structure with the state level banks operating
through their own
branches.
i. State Co-operative Agriculture and Development Banks
(SCARBDs):
State Co-operative Agriculture and Development Banks
constitute the upper-tier of long term co-operative credit
structure. Though
long term credit co-operatives have been allowed to access
public deposits
under certain conditions, such deposits constitute a
relatively small
proportion of their total liabilities. They are mostly
dependent on borrowings
for on-lending.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
The main objective of the Co-operative State Agriculture and
Rural
Development bank is to finance primary agriculture and rural
development
banks. The bank undertakes the following functions to
achieve the above
objectives:-
(a) Floatation of Debentures,
(b) Receiving Deposits;
(c) Grant of loans to primary cooperative agriculture and
rural
development banks for purposes approved by the National
Bank for
Agricultural and Rural Development and Registrar of
Cooperative Societies;
(d) To function as the agent of any cooperative bank subject
to such
conditions as the Registrar may specify;
(e) To develop, assist and coordinate the work of affiliated
primary
cooperative agriculture and rural development banks.
The bank issues long term and medium term loans towards
agricultural and allied activities like construction of godowns,
cattle shed,
farm house, purchase of lands etc., and for minor irrigation
purposes like
construction of new wells, deepening of existing wells etc., In
addition, long
term loans are also sanctioned for animal husbandry,
fisheries, plantation,
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
farm mechanization, non-farm sector and other non-minor
irrigation
schemes.
ii. Primary Co-operative Agriculture and Rural Development
Banks
(PCARDBs):
Primary Co-operative Agriculture and Rural
Development Banks are the lowest layer of long term credit
co-operatives. It
is primarily dependent on the borrowings for their lending
business.
They provide credit for developmental purposes like minor
irrigation,
cultivation of plantation crops and for diversified purposes
like poultry,
dairying and sericulture on schematic basis. They get
requisite financial
assistance from the Cooperative State Agriculture and Rural
Development
Bank.
In order to widen their scope of lending to compete with
other
financial agencies, the primary cooperative agriculture and
rural
development banks have been permitted to finance artisans,
craftmen and
small scale entrepreneurs. They have also been permitted to
issue loans to
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
small road transport operators in rural areas for purchase of
goods carriers
and passenger vehicles.
As a result, during 2007-08, the Primary Cooperative
Agriculture and Rural Development Banks have again started
lending for the
Non-Farm Sector including Jewel Loans.
CH. 7. REGULATORY BODIES OF CO-OPERATIVE
BANKS
CO-OPERATIVE BANKS AND NABARD
As an apex bank involved in refinancing credit needs of
major
financial institutions in the country engaged in offering
financial assistance
to agriculture and rural development operations and
programmes, NABARD
has been sharing with the Reserve Bank of India certain
supervisory
functions in respect of co-operative banks and Regional Rural
Banks
(RRBs).
As part of these functions, it
Undertakes inspection of Regional Rural Banks (RRBs) and
cooperative
banks (other than urban/primary co-operative banks) under
the provisions of Banking Regulation Act, 1949.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
 Undertakes inspection of State Co-operative Agriculture
and Rural
Development Banks (SCARDBs) and apex non-credit co-
operative
societies on a voluntary basis
Undertakes portfolio inspections, systems study, besides
off-site
surveillance of co-operative banks.
Provides recommendations to Reserve Bank of India on
opening of
new branches by State Co-operative Banks.
Administering the Credit Monitoring Arrangements in Co-
operative
banks.
Core Functions of NABARD for Co-operative Banks:
NABARD has been entrusted with the statutory responsibility
of
conducting inspections of State Co-operative Banks (SCBs),
District Central
Co-operative Banks (DCCBs) and Regional Rural Banks
(RRBs) under the
provision of the Banking Regulation Act, 1949. In addition,
NABARD has
also been conducting periodic inspections of state level co-
operative
institutions such as State Co-operative Agriculture and Rural
Development
Banks (SCARDBs), on a voluntary basis.
REFORMS IN BANKING REGULATION ACT, 1949
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
Amendments to the BR Act would cover the following:
i. All cooperative banks would be on par with the commercial
banks as far as
regulatory norms are concerned.
ii. RBI will prescribe fit and proper criteria for election to
Boards of
cooperative banks. Such criteria would however not be at
variance with the
nature of membership of primary cooperatives which
constitute the
membership of the District/ Central Co-operative Banks and
State Cooperative
Banks.
iii. However, as financial institutions, these Boards would
need minimum
support at the Board level. Thus, the RBI will prescribe
certain criteria for
professionals to be on the Boards of cooperative banks. In
case members
with such professional qualifications or experience do not get
elected in the
normal electoral process, then the Board will be required to
appoint such
professionals in the Board and they would have full voting
rights.
iv. The CEOs of the cooperative banks would be appointed by
the respective
banks themselves and not by the state. However, as these
are banking
institutions, RBI will prescribe the minimum qualifications of
the CEO to be
appointed and the names proposed by the cooperative
banks for the position
of CEO would have to be approved by RBI.
v. Cooperatives other than cooperative banks as approved
by the RBI would
not accept non-voting member deposits. Such cooperatives
would also not
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
use words like bank, banking, banker or any other
derivative of the
word bank in their registered name.
If a State Government and the CCS units in that state are
enthusiastic
in implementing the package, fulfillment of all the above
conditionalities
and consequently release of the entire financial assistance
could be
completed even within a year.
REFORMS IN CO-OPERATIVE SOCIETIES ACT:
As making legal amendments is time consuming process, the
state
governments may issue Executive Orders under the existing
powers to bring
in the desired reforms which will relate to:
i. Ensuring full voting membership rights on all users of
financial services
including depositors in cooperatives other than cooperative
banks.
ii. Removing state intervention in all financial and internal
administrative
matters in cooperatives.
iii. Providing a cap of 25% on government equity in
cooperatives and
limiting participation in the Boards of cooperative banks to
only one
nominee. Any state government or a cooperative wishing to
reduce the state
equity further would be free to do so and the cooperative will
not be
prevented from doing so.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
iv. Allowing transition of cooperatives registered under the
CSA to migrate
under the Parallel Act (wherever enacted)
v. Withdrawing restrictive orders on financial matters
vi. Permitting cooperatives in all the three tiers freedom to
take loans from
any financial institution and not necessarily from only the
upper tier and
similarly placing their deposits with any regulated financial
institution of
their choice.
vii. Permitting cooperatives under the parallel Acts (wherever
enacted) to be
members of upper tiers under the existing cooperative
societies Acts and
vice-versa.
viii. Limiting powers of state governments to supersede
Boards
ix. Ensuring timely elections before the expiry of the term of
the existing
Boards.
x. Facilitating regulatory powers for RBI in case of
cooperative banks as
mentioned earlier.
ASSET STRUCTURE OF CO-OPERATIVE BANKS AS PER
2007
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
The cooperative banks/credit institutions constitutes the
second
segment of Indian banking system, comprising of about 14%
of the
total banking sector asset (March 2007).
Bulk of the cooperative banks operate in the rural regions
with rural
coop banks accounting for 67% of the total asset and 67% of
the total
branches of all cooperative banks.
Share of rural cooperatives in total institutional credit was
62% in
1992-93, 34% in 2002-03 and 53% in 2006-07.
Cooperative banks have an impressive network of outlets
for
institutional credit in India, particularly in rural India (1 PACS
per 7
villages).
In March 2007, there were 97,224 PACS in rural India
against 30,393
branches of commercial banks (more than 3 times of outlet
of coop
banks).
In March 2007, there were 102 savings A/C and 113
cooperative bank
members per 1000 rural in India.
Cooperative banks (both rural and urban) cater to small
and marginal
clients.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
Financial health of the cooperative credit institutions,
particularly the
rural cooperatives, has been found to be poor by several
Committees.
Structure of Co-operative Banking (March 2007)
Institution Number of
Institute
Number of
Branch
Asset Share
(%)
A. Rural Co-operative
Credit Structure:
1. Short term:
State Coop bank
Central Coop bank
Primary Agri Coop soc.
2. Long term:
State Coop Agri and Rural
Dev banks
Primary Coop Agri and
Rural Dev banks
107497
106781
31
369
97224
716
20
696
112895
111090
938
12928
97224
1800
1104
696
67
58
15
29
14
8.3
4.4
3.9
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
B. Urban Co-operative Banks: 49805 56600 33
CH. 8. STRENGTH AND WEAKNESS OF
COOPERATIVE
BANK
MAIN WEAKNESS OF CO-OPERATIVE BANKS
The main weaknesses of co-operative banks are as follows:
1. The vital link in the co-operative credit system namely,
the Primary
Agricultural Co-operative Societies, themselves remain very
weak. They are
too small in size to be economical and viable; besides too
many of them are
dormant, existing only on paper.
2. With the expanding credit needs of the rural sector, the
commercial banks
have come in actively to meet the credit requirements of this
sector, and this
has aggravated the difficulties of co-operative banks. The
theory that co-
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
operative banks would be buoyed up by the competition
from other financial
institutions does not appear to have worked.
3. Co-operative banks are not doing well in all the states;
only a few account
for a major part of their business. For example, 75 per cent
of total deposits
mobilised by State C-operative Banks was from only seven
states in 1987-
Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh,
Maharashtra, Tamil
Nadu, and Uttar Pradesh.
4. These banks still rely very heavily on refinancing facilities
from the
government, the RBI, and NABARD. They have yet not been
able to
become self-reliant in respect of resources through deposit
mobilisation.
5. They suffer from dangerously low or weak quality of loan
assets, and
from highly unsatisfactory recovery of loans. They suffer
from
infrastructural weaknesses and structural flaws. They do not
look like banks
and do not inspire confidence in the potential members,
depositors and
borrowers.
6. Poor resource base is main constraint of these banks.
Relatively low per
capita base and less equity base due to non-participations of
the members in
the financial activities and limited area of operation is
becoming a
permanent obstacle in the progress of this sector.
7. Poor profit position and burden of huge accumulated
losses of several cooperative
banks has threatened the very survival of these banks. The
amount
of cost of management of this sector has adversely affected
its profitability.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
8. Most of the Co-operative banks are suffering from the lack
of professional
management. In the deregulated environment and stiff
competition in the
banking sector, do to lack of the professionalism in carrying
out banking
activities, the weakness of these banks has become more
prominent.
9. Many co-operative banks even now continue to follow
age-old system and
procedures, which are not conductive in the present
technologically driven
banking environment. Except some Co-operative banks,
technological
development in Information Technology or computerized
data management
is conspicuously Absent.
10. There is a lack of proper governance. Corporate
Governance has great
relevance in the present environment. As there is no formal
system of
corporate governance in co-operative banks, many banks
have become the
hot bed of political patronage, unscrupulous financial
practice and gross mismanagement.
11. Another problem arises out of the duality of control over
them i.e. these
banks are organized under dual control of RBI and as well as
respective state
government. Apart from the intervention of the apex bodies,
the Government
is also found to exercise control in various ways on these
banks.
Government intervention in the management, administration
and business
operation of co-operative banks has made the institution
lose his own
distinct character.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
12. They suffer from too much officialisation and
politicisation. Undue
governmental interventions have prevented them from
developing steadily
as a self-reliant and resilient credit system. Most of them are
headed by
politicians.
13. They unduly depend on government capital rather than
member capital.
There is no active participation of their members in their
working, which can
come about if they work with members' money rather than
government
largesse.
GOVERNMENT INITIATIVES TO STRENGTHEN THE
DEVELOPMENT OF CO-OPERATIVE BANKS
Even before the submission of the Khusro Committee Report,
the
government and the RBI had initiated certain measures to
strengthen the
development of co-operative banks. Some of these policy
initiatives were as
follows:
(i) The NABARD had formulated a scheme for the
reorganisation of
Primary Agricultural Co-operative Societies and the
implementation of this
scheme had started in those states which have accepted it.
(ii) The programme for development of selected Primary
Agricultural Cooperative
Societies into truly multi-purpose co-operative societies has
been
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
implemented in many states and Unionterritories.
(iii) In addition to such programmes, certain state
governments like Andhra
Pradesh, Madhya Pradesh West Bengal had also initiated
development
programmes to strengthen the working of the co-operative
credit institutions
at the base level.
(iv) On the basis of their financial position as on 30 June
1987, 175 Central
Co-operative Banks and 7 State Co-operative Banks in the
country were
identified as 'weak' banks and brought under the programme
of rehabilitation
which, however, did not really work quite well.
(v) With a view to enabling weak banks which were either
ineligible or were
on the verge of becoming ineligible for refinance SUPP011, a
12-Point
Action Programme had been formulated and circulated by
NABARD to all
the state governments.
INITIATIVES TOWARDS DEVELOPMENT OF CO-
OPERATIVE
BANKS:
1. Reorganisation of Primary Agricultural credit Societies.
(a scheme by NABARD)
2. National Co-operative Bank of India (NCBI) was registered
in
1993.(Multi-state co-operative society)-it has no regulatory
functions.
3. Co-operative development bank (set up by NABARD).
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
4. Allowing all PCBs to undertake equipment leasing and
hire- purchase
financing.
5. Licensing of new banks.
SUGGESTIONS FOR EFFECTIVE OPERATION IN
COOPERATIVE
BANKING:
The following suggestions can be made for improving the
effectiveness in
operation of Co-operative banking:
1. It is apparent that the mountain overdue has become a
major problem of
most of the co-operative banks and their performance in
managing Non
Performing Assets is not satisfactory. Firm measure should be
followed to
make credit appraisal, documentation, disbursement,
monitoring, etc. The
following strategies may help the banks in avoiding or
reducing NPAs.
Pre-sanction strategies: Before sanctioning a loan, a bank
has to go for
detailed inquiry about borrower and his loan proposal.
Post-sanction strategies: After the loan is disbursed, proper
supervision of
loan utilization is to be ensured. Bank has to maintain proper
relationship
with the borrower and ensure that first installment id
deposited timely.
Persuasion or Follow-up: As a step, bank has to pursue with
borrower
and if required, rescheduling of installments be made.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
The bank should adopt he system of computerized
monitoring of loans.
2. These banks can also go for such schemes for opening of
saving bank and
other accounts treated as low cost deposit base as well as
clientele base of
the banks will take remarkable shape. In this respect, banks
can introduce
effectively various innovative deposit schemes like womens
savings,
childrens savings, savings scheme for youth, daily collection
etc.
3. With limited area of operation for so many decades
together, Urban Cooperative
banks cold not expand their business in other area in
general. At
this juncture, it should have governmental support and the
government
should liberalize this area of operation, so that they could
incrase their
business at their will.
4. All Co-operative banks should come in one umbrella i.e.
CORE
BANKING.
5. Co-operative banks, with their newly formed emphasis on
prudential
norms, need a high degree of professionalism in
management.
6. Some Co-operative banks particularly which are small
banks not having
sufficient branch network are suggested to enter into tie-up
arrangements
with commercial banks like ICICI Bank, HDFC Bank, etc and
in this way
these banks could expand their business.
Co-operative banks v/s Other banks
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
If we look at the return provided by various co-operative
banks, we
immediately find that they are higher than returns provided
by the various
nationalized and private banks. For amount less than 15
lakhs, The returns
provided by various co-operatives banks, SBI and ICICI are as
follows:
Banks
Name/ Period
91 days-
180
days
181
days to
1 Year
1 year to
540 days
541 days to
2 years
2 years to
3 years
3 years to
5 years
Abhyudaya Cooperative
Bank
6.50% 7.00% 7.25% 7.50% 7.75% 8.00%
THE BHARAT
Co-operative
Bank
(MUMBAI)
LTD
5.50% 6.75% 7.25% 7.25% 7.00% 7.00%
Saraswat Cooperative
Bank
5.25% 6.00% 6.50% 7.25% 7.25% 7.25%
Ahmedabad
Mercantile
Coop Bank
5.50% 6.00% 7.00 % 7.00% 7.00% 7.00%
State Bank of
India (SBI)
4.75% 5.25% 6.00% 6.00% 6.50% 6.50%
ICICI Bank 5.25% 6.00% 6.25% 6.25% 7.00% 7.50%
So, the first question which comes to our mind is why should
not put
our money in Co-operative banks rather than nationalized or
private banks.
But then there is a risk factor which comes in. In India 19 Co-
operative
banks have closed down in 2009! So, is it safe to park your
valuable money
in Co-operative banks?
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
While Co-operative banks were closing down, the Reserve
Bank of
India (RBI) tried to bring them under tighter control. Till a few
years ago,
Urban Commercial Banks were not strictly monitored with
two regulators in
the RBI and the Registrar of Co-operative Societies. But now
the RBI has
taken various measures to bring them under control.
It has signed MoUs with 11 states to set up task forces on
Urban Cooperative
Banks to work with the registrars on remedial action and
take the
tough decisions on the structure. It has also put a limit of 15
per cent of the
own funds of the bank for loans to one borrower group,
making it difficult
for the banks to give a huge loan to one entity and
compromise its stability,
as was happening earlier. According to the RBI, Co-operative
banks are
intended primarily for members and all financial information
pertaining to
the bank is required to be made available to them.
In addition, according to the existing regulations, a bank is
required to
publish its balance sheet in a newspaper in circulation in the
main area of
operations of the bank. They are also required to place their
annual accounts
before the annual general meeting. Certain minimum
disclosures have been
prescribed by RBI. All this information can be used by public
in making
investment decision.
However, the bank customer has to make his or her own
choice,
depending on which the bank offers the most suitable
product. While the
RBI is doing its bit, it says you should also run the following
checks to
ensure that you have a nice experience.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
Check for deposit cover. Ask the bank to what extent
your deposit
will be covered by DICGC insurance if you are not investing
in the
name of an individual but as a business organization.( In the
event of a
bank failure, DICGC protects bank deposits that are payable
in India.)
Scheduled banks. The 53 scheduled cooperatives banks
are fairly
safe.
Size. For non-scheduled banks, there is safety in size.
Decide in favor
of bigger urban co-operative banks.
Non-performing assets. These should be within single
digits. The
higher the NPA, the bigger the risk.
Capital adequacy. This ratio should not be less than 9 per
cent.
Credit-deposit ratio. Ideally, the ratio should be 66 per
cent.
Anything more shows that the bank is not in a position to
lend and,
hence, get new business to pay back the depositors.
Profits. Check whether the bank has been making profits
for the last
three years.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
RBI directive: Check out the current financial status of a
bank
operating under RBIs directive before dealing with it.
Some facts about Cooperative banks in India:
Some cooperative banks in India are more forward than
many of the state
and private sector banks.
The total deposits & lending of Cooperative Banks in India
is much more
than Old Private Sector Banks & also the New Private Sector
Banks.
This exponential growth of Co operative Banks in India is
attributed
mainly to their much better local reach, personal interaction
with
customers, and their ability to catch the nerve of the local
clientele.
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CH. 9. CASE STUDY
CASE STUDY
Vikas Souharda Co-operative Bank Ltd,
Karnataka, India
About Vikas Souharda Co-operative Bank Ltd.
Vikas Souharda Co-operative Bank Ltd. has its main office
located in
Hospet, Karnataka and has branches at Hospet Station Road,
Hospet Market
and Hubli. Established on 21 August 1997, the bank has an
estimated
deposit of 50 crores and has recorded profits to a tune of 1.4
crores for the
year ending March 2007. The bank offers financial services
to miners,
carrier owners, traders, and small and medium
entrepreneurs.
Latest Technologies
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
It is the first bank in the Indian co-operative banking sector
to introduce
Digital Dispenser Technology and also the first bank in the
state of
Karnataka to provide Telebanking facility to its customers. To
protect its
customers interests the bank has provided Fake Currency
Detectors and safe
deposit lockers facility.
Being a techno-savvy bank, it is the first bank in Karnataka
state to adopt
Electronic Fund Transfer (EFT) Scheme. It has been the first
institution to
respond to innovative concepts and has been a role model to
many other cooperative
banks in the state. The bank was quick in adapting to the
changing
banking scenario by maintaining not only the latest
infrastructure but also by
designing the interiors of the bank to get a look and feel that
is at par with
the multinational banks.
Goal of the Bank
Being a trendsetting bank in the co-operative sector that
serves its customers
365 days a year and 12 hours a day, the goal of the bank
was to improve the
quality of customer service, the turn-around time, and
accuracy of backoffice
operations thereby reducing costs and improving profits.
The banks goal is to provide customer satisfaction with
accuracy and
reliability of service. The bank ensures safety and
profitability of assets with
due diligence by adopting appropriate information
technology and
maintenance of sufficient backup of the system and the
data. The bank also
aims to increase its customer base by introducing a variety
of innovative
financial services and products.
The Banks Mission
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
Improve quality of customer service levels
Reduce cost of customer service
The bank also aims at:
Providing a range of financial services to the customer
Maintaining transparency in customer relations
Fulfilling all commitments
Practicing judicious management of risks
Offering services to customers' satisfaction
Training employees to render professional and pleasing
service to its
customers
Giving fair return to its staff and contributing to their general
welfare
VSofts SuVikas helped the bank achieve its goal
SuVikas, a user-friendly, cost effective, flexible and self-
supporting
application permits easy performance, improves overall
management
efficiency, and enables the bank to concentrate on the
business of finance
without much concern about the ever changing IT trends.
Through this, bank and customer got many benefits
like:
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
Quick customer service
The bank was able to substantially decrease the time a
customer spends at
the counter as the software provides a single view of all
accounts of the
customer. Which made the bank better as per their
customers.
Reduced redundant tasks
Reducing redundant tasks meant more resources available
for recovery. So,
customer were getting auick facilities.
New delivery channels
The bank was able to achieve business success because of
the operational
efficiency made possible by technologies such as Internet
Banking,
TouchScreen Banking, and Mobile Alerts to its customers.
Due to which
customer were very happy.
Funds transfer made easy
The bank was able to introduce EFT Scheme in urban c-
operative banks to
affect remittances on behalf of their customers to various
places in the
country. Under this service, funds are transferred from one
place to another
within a short time. This facility was made available to the
customers of cooperative
banks recently. The scheme also enabled better customer
service to
rural and semi urban customers.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
Multiple delivery channels
The bank was able to provide Any Branch Banking service to
its rural and
semi urban customers since 1997 by using high-end
software and hardware
equipment and network. The people at SUCO Bank
appreciate the value of
time and energy of the customers. By introducing Tele-
banking facility,
SUCO Bank has ensured that the customers can access their
account details
through telephone lines without leaving the comfort of their
home and not
having to travel long distances.
Extended Transaction Hours
SUCO Bank is the only bank to initiate transaction facilities
beyond the
regular banking transaction hours. This amply displays the
commitment of
the bank to customer service.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
CH. 10. CONCLUSION
Conclusion:
Now, It is very much clear that co-operative banks have very
much
importance in national development. Without the help of co-
operative banks,
millions of people in India would be lacking the much needed
financial
support.
Co-operative banks take active part in local communities and
local
development with a stronger commitment and social
responsibilities. These
banks are best vehicles for taking banking to doorsteps of
common men,
unbanked people in urban and rural areas. Their presence in
the social,
economic and democratic structure of the country is
essential to bring about
harmonious development and that perhaps is the best
justification for
nurturing them and strengthening their base. These banks
are sure to win in
the race because they are from the people, by the people
and of the people.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
BIBLIOGRAPHY
Banking Development In India 1947-2007 - Growth,
Reforms and Outlook
by Niti Bhasin
Banking Theory and Practice
by K.C. Shekhar and Lekshmy Shekhar
Co-operative Banks in India Functioning and
Reforms
by Amit Bhasak
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53
T.Y.Bcom (Banking & Insurance) Co-operative Banking
WEBSITES
en.wikipedia.org/wiki/Cooperative_banking.
www.banknetindia.com/banking/cintro.htm.
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T.Y.Bcom (Banking & Insurance) Co-operative Banking
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