CO-OPERATIVE

BANKS
ORIGIN
Originated with the enactment of the Co-operative
Credit Societies Act of 1904.

The Co-operative Credit Societies Act, 1912 provided
for establishment of co-operative Central banks by a
union of primary credit societies.

The Maclagan Committee appointed in 1914,
recommended the establishment of a State Co-
operative Apex bank.
Banks formed on the principle of co-operation are
called co-operative banks.
They provide short-term credit to agriculturists, artisans,
small farmers and small-scale industries.
Co-operative banks accept all kinds of deposits and
make loan to the members at lower rate of interest.

PRINCIPLE OF CO-OPERATION
Cooperatives work on basic concept of mutual
Help/assistance, democratic decision making,
open membership and one man one vote.
Every member have one vote, irrespective of his/her
shareholding.
NO VOTING BY PROXY - Voting must be done in
person .
Work on No-Profit, No Loss basis


COOPERATIVE CREDIT INSTITUTIONS
Urban Co-operative
Banks (1872)
Rural Cooperative
Credit Institutions
(106919)
Co-operative Credit Structure
ST/MT
LT
SCBs
DCCBs
PACSs
SLDBs
PLDBs
FSS LAMPS
The Co-operative banking structure in India is a
pyramid type of a three tier structure comprising;

Primary Agricultural Co-operative Credit Society
(PACSs) at the Village Level,
District Central Co-operative Banks (DCCBs) at the
District level, and
State Co-operative Bank (SCBs) at the State level.


STATE CO-OPERATIVE BANK
SCB is a federation of central co-operative banks.
It acts as a watch dog of the co-operative banking
structure in the state.
It receives deposits from the public and from local
boards, municipalities, etc.
The state governments contribute a certain portion of
their working capital.
The state co-operative banks lend money to central co-
operative banks which in turn lend to primary societies.
The district central banks act as intermediaries
between the state co-operative bank and primary
credit societies.
In smaller states and union territories, there exists a two
tier structure with SCBs at the apex level and PACSs at
the base level.
DISTRICT CENTRAL CO-OPERATIVE
BANKS (DCCBS)
A DCCB is a federation of PACSs in a specified area
normally extending to the whole district.
The central bank raise funds by way of share capital
from member societies, deposits from public and
loans from the SCBs.
The main task of these banks is to finance member
societies and they carry on commercial banking
activities.
DCCBs act as balancing centers making available
temporary excess funds of one primary society to
another which is in need of them.


PRIMARY AGRICULTURAL CREDIT
SOCIETIES (PACS)
The PACSs function at the base of the co-operative
credit system.
It may be organized by ten or more persons normally
belonging to a village or a cluster of villages.
The societies raise funds by way of share capital,
deposits from members and non-members and loans
from DCCBs.
The borrowing powers of members as well as society is
limited.
The loans are given for short periods for the
purchase of cattle, fodder, fertilizer, pesticides etc.

LAND DEVELOPMENT BANKS
Besides ST and MT advances, agriculturists require long-
term loans for permanent improvement in land, for
purchase of pump sets, tractors, digging up of wells, etc.
LDBs meet the long-term credit requirements of the
agriculturists.
It is two-tier structure with central land development
banks at the state level and primary land development
banks at taluka level or district level.
The banks of Tamil Nadu, Andhra Pradesh, Karnataka
are of this (two-tier) type.
In states like Gujarat, UP, and Jammu & Kashmir there
is unitary structure, i.e., the Apex Land Development
Banks operate directly through their own branches at the
district or taluka level.
The LDBs obtain funds mainly by the issue of long-term
debentures. Such debentures carry the guarantee of the
state government and are subscribed by the central and
state governments, commercial banks, life insurance
corporation and RBI.

URBAN CO-OPERATIVE BANKS
The term Urban Co-operative Banks (UCBs), refers to
primary cooperative banks located in urban and
semi-urban areas.
These banks, till 1996, were allowed to lend money only
for non-agricultural purposes..
They lent to small borrowers and businesses.
Today, their scope of operations has widened.
WEAKNESSES OF COOPERATIVE
BANKS
Too much dependence on RBI, NABARD and the
Government.
Too much officialisation and politicization.
Poor recovery of loans.
PACSs at grass root levels are small in size, very weak
and many of them are dormant.
Suffer from existence of multiple regulation and control
authorities.
Many urban cooperative banks have failed or are in the
process of liquidation.
CONT
They suffer from infrastructural weaknesses
They do not look like banks and do not inspire
confidence in the potential members, depositors and
borrowers.
They unduly depend on government capital rather than
member capital.
There is no active participation of their members in their
working.
They have been resorting to unethical practices.
ISSUES FACING THE COOPERATIVE
BANKING SEGMENT ININDIA

Governance Issues Dual Control and Borrower driven
structure
Management and HR Issues
Issues relating to Finance
GOVERNANCE ISSUES - DUAL CONTROL

Cooperation is a State subject under the Indian Constitution;
hence all cooperative societies are governed by the Cooperative
Societies Act of the State. Registration, incorporation,
management, amalgamation etc are governed by the particular
State.
At the same time, certain provisions of the Banking Regulation
(BR) Act, 1949, are applicable to the cooperative banks that accept
public deposit.
This duality of control and regulation has given rise to serious
problems in the governance structure (such as interference by the
State Govt. due to its combined role as dominant shareholder,
manager, regulator, supervisor and auditor.
BORROWER DRIVEN STRUCTURE
The rural cooperative structure in India is focused mainly
on credit. The upper tiers refinance the lower tiers hence
the structure is driven by borrowers at all levels.
Depositors are either non-members or nominal
members without voting rights while the borrowers have
full voting rights.
This also prevents any incentive for good governance
since the depositors, whose money is being
intermediated, have no say in the management of their
own money.
MANAGEMENT AND HR ISSUES

Management problem arises due to the impairment of
Governance.
Poor human capital leading.
Generally ageing staff profile characterized by
inadequate qualification and training.
ISSUES RELATING TO FINANCE (RURAL
STRUCTURE)

The poor recovery of outstanding credit,
Lack of standardized business model and risk
management systems,
Over exposure to the agri sector,
lack of diversification of the loan portfolios,
For the LT structure, the loan portfolio consists of a
single product long terms agri loan of > 5 years term.
REVIVAL AND REFORM INITIATIVES

Revival package (2006) for Rural Short Term Coop
Credit Structure (RSTCCS)
Draft revival package (2008) for Rural Long Term Coop
Credit Structure (RLTCCS).
RBIs vision document (2005) for Urban Cooperative
Banks.
REVIVAL PACKAGE FOR RSTCCS

1. Financial Revival: Assistance by Govt. of India to
eligible credit societies for (i) wiping out accumulated
losses; (ii) Bring a minimum CRAR of 7%; (iii) refund of
share capital to the State Govt; and (iv) cost of special
audit.
2. Capacity Building and Technical Assistance: For
capacity upgradation, training, installing common
accounting and monitoring systems and for
computerization.
The estimated budget for these 2 components is Rs.
13,596 Crore; to be shared by Central Govt., State Govts
and RSTCCS units in the proportion 68:28:4


CONT..
3. Institutional, legal and regulatory reforms: Amendments
in the State Cooperative Societies Act; in some
provisions of the BR Act (1949) and in the NABARD
Act to enable to refinance PACS
Remove State intervention in financial and administrative
matters
Give voting rights to depositors
Pave way to regulatory control by RBI
Bring coop banks on par with the commercial banks in
terms of regulatory norms

REVIVAL PACKAGE FOR RSTCCS: THE
STATUS SO FAR

As of Sept 2008, 25 out of 29 States have executed MoU
with GoI and NABARD.
As of March 2008, special audit was completed in 59294
PACS in the country.
As of Sept 2008, governments of 8 States have passed
bills to amend their coop societies Acts.
Common Accounting System (CAS) and Management
Information System (MIS) have been introduced along
with human resources development initiatives in the
States willing to participate.
GOVT. INITIATIVES TO STRENGTHEN
CO-OPERATIVES
A scheme for the reorganization of PACSs
Weak Banks brought under the rehabilitation
programme.
A 12-point programme has been formulated for the weak
banks to provide them refinance support.
Some development programmes are also initiated by
some of the state governments in their respective states to
strengthen the working of the co-operatives.

CO-OPERATIVE BANKING REFORMS
SINCE 1991
Licensing of new UCBs has been liberalized and have
been brought under income recognition, classification
of assets and other norms.
The National Co-operative Bank of India (NCBI)
was registered in 1993 as a multi-state co-operative
society. It is promoted by the National Co-operative
Union as the apex institution for the co-operative
banks.
The RBI and NABARD have not extended financial
support to it. The NCBI does not have any
regulatory functions.
CONT..
A co-operative development fund has been set up by
NABARD to improve managerial systems and skills in
these banks.
Lending and deposit rates of all co-operative banks
have been more or less completely freed or
deregulated.
The prudential accounting norms have been made
applicable to SCBs/DCCBs .
COMMERCIAL VS. COOPERATIVE BANKS
Profit Motive

Organized on Unitary
basis
Branch network is
spread far and wide
within the country and
some banks have set up
branches abroad

Self help and Mutual
cooperation for benefit of
members
Have a three-tier set-up.
Area of operation is
restricted to a particular
local boundary or district
or state.

CONT
RBI is a lender of last
resort for commercial
banks.
For cooperative banks it is
the lender of 1
st
resort
which provides financial
resources in the form of
contribution to the working
capital and refinance
through state government.
CONT..
Traditionally urban
oriented (Shift from
urban to rural)

Most commercial banks
are scheduled banks, eg.,
SBI, PNB, HDFC, etc.
Basically rural oriented ( a
shift from rural to urban)

Most are non-scheduled
like., Maharashtra State Co-
operative bank, Junnar
cooperative society, though
some are scheduled , like;
Saraswat Cooperative Bank
Ltd.
NABARD
National Bank for Agriculture and Rural
Development
OVERVIEW

The various financial agencies provided credit in a
fragmented way to various rural sectors. The RBI
felt the need for an agency at the national level that
will provide all types of credit to various sectors in the
rural economy in an integrated way for rural
development.
The Committee for Review Arrangements for
Institutional Credit for Agricultural and Rural
Development set up by the RBI in 1979
recommended in its report setting up of NABARD.

In 1982, NABARD was set up as a development bank
for facilitating credit flow for promotion and
development of agriculture and integrated rural
development.
The mandate also covers supporting all other allied
economic activities in rural areas, promoting
sustainable rural development and ushering in
prosperity in the rural areas.
With a capital base of Rs 2,000 crore provided by the
Government of India and Reserve Bank of India , it
operates through its head office at Mumbai, 28 regional
offices situated in state capitals and 391 district offices at
districts.

It is an apex institution handling matters concerning
policy, planning and operations in the field of credit for
agriculture and for other economic and developmental
activities in rural areas.
It is a refinancing agency for financial institutions
offering production credit and investment credit for
promoting agriculture and developmental activities in
rural areas.
Prepares on annual basis, rural credit plans for all the
districts in the country. These plans form the base for
annual credit plans of all rural financial institutions.
Undertakes monitoring and evaluation of projects
refinanced by it.
Promotes research in the fields of rural banking,
agriculture and rural development.
Functions as a regulatory authority, supervising,
monitoring and guiding cooperative banks and RRBs.
NABARDS ROLES AND FUNCTIONS
Credit Functions
Developmental and promotional Functions.
Regulatory Functions/Supervisory Functions
Role in training
CREDIT FUNCTIONS
NABARD's credit functions cover planning,
dispensation and monitoring of credit.
This activity involves:
Framing policy and guidelines for rural financial
institutions
Providing credit facilities to issuing organizations
Preparation of potential-linked credit plans annually for
all districts for identification of credit potential
Monitoring the flow of ground level rural credit

Prepares, on annual basis, rural credit plans for all the
districts in the country. These plans form the base for
annual credit plans of all rural financial institutions
Undertakes monitoring and evaluation of projects
refinanced by it
Promotes research in the fields of rural banking,
agriculture and rural development
Functions as a regulatory authority, supervising,
monitoring and guiding cooperative banks and regional
rural banks

DEVELOPMENTAL AND PROMOTIONAL
FUNCTIONS
Help cooperative banks and Regional Rural Banks to
prepare development actions plans for themselves
Enter into MoU with state governments, RRBs and
cooperative banks specifying their respective
obligations to improve the affairs of the banks in a
stipulated timeframe
Monitor implementation of development action plans of
banks
Provide financial assistance to cooperatives and
Regional Rural Banks
Provide organisation development intervention (ODI)
through reputed training institutes like Bankers Institute
of Rural Development (BIRD), Lucknow
www.birdindia.com, National Bank Staff College,
Lucknow www.nbsc.in and College of Agriculture
Banking, Pune, etc.
Provide financial support for the training institutes of
cooperative banks
Provide training for senior and middle level executives
of commercial banks, Regional Rural Banks and
cooperative banks
Provide financial assistance to cooperative banks for
building improved management information system,
computerization of operations and development of
human resources

SUPERVISORY FUNCTIONS
Undertakes inspection of Regional Rural Banks (RRBs)
and cooperative banks (other than urban/primary
cooperative banks) under the provisions of Banking
Regulation Act, 1949.
Undertakes inspection of State Cooperative Agriculture
and Rural Development Banks (SCARDBs) and apex
non-credit cooperative societies on a voluntary basis
Provides recommendations to Reserve Bank of India on
opening of new branches by State Cooperative Banks
and Regional Rural Banks (RRBs)
Administering the Credit Monitoring Arrangements in
SCBs and CCBs
AGENCY

CREDIT FACILITIES

Commercial Banks


Short Term Cooperative
structure (State Cooperative
Banks, District Central
Cooperative Banks, Primary
Agricultural Credit Societies)


LT credit for investment purposes,
financing the working capital
requirements of Weavers'
Cooperative Societies (WCS) and
State Handloom/Handicraft
Development Corporations
ST (crop and other loans),
MT(conversion) loans, Term
Loans for investment purposes,
financing weavers' cooperatives -
State Handloom Development
Corporations for working capital
by State Cooperative Banks

Types of Refinance facilities
AGENCY

CREDIT FACILITIES

Long Term Cooperative
structure (State Cooperative
Agriculture and Rural
Development Banks, Primary
Cooperative Agriculture and
Rural Development Banks)
Regional Rural Banks (RRBs)

Urban Cooperative Banks
(Scheduled)


Term loans for investment
purposes



Short Term (crop and other
loans) and term loans for
investment purposes
Long term investment
activities both in farm and
non-farm sectors in rural
areas.


AGENCY
CREDIT FACILITIES

State Governments




Non-Governmental
Organisations (NGOs) -
Informal Credit Delivery
System

Long Term loans for equity
participation in Co-operatives,
Rural Infrastructure
Development Fund (RIDF) loans
for rural infrastructure projects

Revolving Fund Assistance for
Micro Credit Delivery
Innovations and Promotional
Projects

ROLE IN TRAINING

National Bank Staff College, Lucknow
National Bank Training Centre, Lucknow
Zonal Training Centre, Hyderabad
Regional Training Centre, Mangalore
Regional Training Centre, Bolpur
Bankers Institute of Rural Development
(BIRD), Lucknow
NABARD TODAY
Initiates measures toward institution-building for
improving absorptive capacity of the credit delivery
system, including monitoring, formulation of
rehabilitation schemes, restructuring of credit
institutions, training of personnel, etc.
Coordinates the rural financing activities of all the
institutions engaged in developmental work at the field
level and maintains liaison with the government of
India , State governments, the Reserve Bank of India
and other national level institutions concerned with
policy formulation