Issues and Challenges in Regulating,

Supervising and providing Deposit Insurance

to Rural Banks and Cooperatives in India

Kula Lumpur
November 01, 2007

Usha Thorat
Chairperson, DICGC and
Deputy Governor, Reserve Bank of India

Outline of presentation
Indian Financial Intermediaries
Deposit Insurance in India
Rural and Cooperative Banking Issues, Challenges and Strategies:
Regional Rural Banks (RRBs)
Rural Cooperative Banks
Urban Cooperative Banks (UCBs)
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(Figures in brackets indicate number of insured deposit accounts in millions)

Indian Financial Intermediaries
Banks
(683)

Commercial
Banks (552)

NBFCs

Coop. Banks
(131)

Public Sector Banks

(451)

Deposit Taking

PACS

Non-Deposit
Taking

Urban Co-Op Banks

(55)

Private Sector Banks

/LABs
(48)

State Co-Op Banks

(5)

Foreign Banks
(2)

Central Co-op Banks

(71)

Deposits
insured
(mandatory)

Deposits
not insured

RRBs
(51)

Indian Deposit Insurance a quick view

DICGC (Since1962) - Wholly owned by RBI.
Pure Pay Box System of deposit insurance
Limited to INR 100,000 (US $ 2,500) per depositor.
Mandatory cover & uniform flat rate premium.
Fully Protected: 95% of total deposit accounts;
Insured Deposits: 59% of total assessable deposits;
(coverage: 2.72 times of per capita GDP )
Insured accounts : 683 million;
Insured deposits : U.S $ 352 billion;
Reserve Ratio : 0.80 %
4

Co-operative Banks Vs. Commercial Banks

(Share as of March 2007)

Co-operative
Banks

Commercial
Banks

Insured Deposits

14.75 %

85.25 %

Claims Settled

89.00 %

11.00 %

Recovery Rate
(Overall 5.13 %)

2.08 %

28.76 %

Aptly summarized
We are adopting a three-track approach with regard
to capital adequacy rules. On the first track, the
commercial banks are required to maintain capital
for both credit and market risks as per Basel I
framework; (urban) cooperative banks on the second
track are required to maintain capital for credit risk
as per Basel I framework and surrogates for market
risk; RRBs (and rural cooperative banks) on the third
track which though subject to prudential norms do
not have capital requirement on par with the Basel I
framework
- Governor Dr.Y.V.Reddy
6

Rural Banking

in India
7

Rural / Cooperative Banking - Salient Features

Key role in Financial Inclusion
Limited area of operations; Local flavour
Client profile: Typically farmers, small business
establishments, small scale industries, retail
traders, professionals, self employed persons
New outreach: Self Help Groups / Joint Liability
Groups and other micro credit vehicles.

Rural Cooperative Credit Structure - 3 Tiers

State
Cooperative Banks
(SCBs)
27

5 Million Accounts
Insured for USD 3,080 Million

District
Cooperative Banks
(DCCBs)
363

71 Million Accounts
Insured for USD 14,125 Million

Primary Agricultural
Credit Societies
(PACs)
109,000

128 Million Accounts

No Deposit Insurance available
Not regulated by RBI

Regional Rural Banks (RRBs)

Since 1976; Owned by Central/State Govts./Sponsor Banks.
196 RRBs (Sept. 2005); now, 95 following Mergers.
Sponsored by 28 banks in 26 States; 14,519 branches.
Business ranging from US $ 6 Million to US $ 1,200 Million each
Local flavour; a major vehicle for inclusive growth.
Higher Cost-income ratio & NPAs; lower profitability.
Recap of RRBs having negative net worth GOI plan.
Challenges Governance, Skills, IT, Payment systems.
Deposit Insurance available; No impact on DICGC as yet.

10

Task Force for Revival of

Rural Cooperative Credit Structure (CCS)
National level Task Force attributed
problems of CCS to:
Impairment in Structure
Impairment in Governance
Impairment in Management
Financial Impairment
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Rural Cooperative Credit Structure

Recommendations of Task Force
Special financial assistance
Institutional restructuring; Changes in legal framework
Capacity building ; Fit and proper criteria
Road map for CRAR
Current position
Implementation of recapitalisation package underway
in MoU States.
No challenges posed to DICGC by Rural cooperative
banks.
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Urban Co-operative Banks - a few large failures

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Dual Control Cooperative Banks

State Subject
Central Act

Federal Subject
Multi State

Co-operative

Registration / Audit / Liquidation

RCS State Govt.

Banks

Licensing / Supervision / DI
BR Act (AACS) -RBI
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Urban Cooperative Banks (UCBs)

Mushrooming of UCBs.
(1993-2001)
Weak governance, managerial
failures, poor financial health.
Dual Control.
Failure of a few large UCBs since
2001.
Out of total claims of US $ 650
million admitted for all banks so far,
over 88% was in respect of 176
UCBs alone.

Current concern to DICGC.

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Confidence in UCBs shaken!!

16

Addressing UCBs Problem Our Approach

Bank / branch licensing on hold since April 2005.
Vision Document.
MoU/TAFCUB mechanism.
Merger guidelines.
Fit and proper criteria for CEOs.
Twin tracked Regulatory/Supervisory regime.
Incentives for stronger banks in MoU States.
Graded Supervisory Action.
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UCBs - Current Challenges and Strategies

Restructuring of problem banks- our experiences.
Avenues for raising Capital:
working group recommendations.
Scheme of amalgamation.
Restructuring liabilities of problem banks.
Expeditious settlement of claims: revised guidelines.
Coordination mechanism between DICGC and RBI.

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UCBs
Emerging Trends
Rising Strength & Public Confidence
As on No. of Of which: Deposits Advances
Mar 31, UCBs Weak banks (US $ billion) (US $ billion)
2007
2006
2005
2004

1813
1853
1872
1926

563
677
725
732

30.2

19.7

(6.1%)

(9.8%)

28.5

17.9

(8.6%)

(7.1%)

26.3

16.7

(- 4.8%)

(-1.6%)

27.6

17.0

(Figures in brackets indicate YoY Growth)

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