PREFACE Co-operative banks are not banks in the ordinary sense of the term.

They are also development banks. But, unlike the private sector, commercial banks whose sole objective is to maximize profits through the handling of the large-scale operations in relatively better organized & more secured areas. Co-operative banks over the years have formulated sound banking policies & pursue them to achieve cooperative objectives. The co-operative banking structure in India has grown out of primary credit institutions setup at the grass-root level by men with small means on the basis of mutual trust and voluntary and collective membership. Although, co-operative banks are under-rated in terms of their contribution to the Indian financial system, nevertheless they form an important part thereof. In a country like India where 70% of the population is situated in villages, the importance that such banks have assumed in India is rarely parallel anywhere else in the world. Their role in rural financing continues to play a pivotal role even today. Today, the co-operative banks are trying to strike a balance between better performances abreast modern technology and being customer friendly. Co-operative banks are the integral part of the banking sector playing their role in developing Indian economy. Finally, the growth of the sector depends on professionalism of its management, inculcating good governance based on the cooperative spirit, technology up gradation and strict adherence to the regulatory framework will ensure positive growth in the co-operative banking sector.

INTRODUCTION The Co-operative banks have a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, 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 cooperative banks. While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc. along with some small scale industries and self-employment driven activities, the co-operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units, home finance, consumer finance, personal finance, etc. Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. According to NAFCUB the total deposits & lending of Co-operative Banks is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co-operative Banks is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. SYNOPSIS 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. The first urban co-operative bank in India was formed nearly 100 years back in Baroda.

Co-operative Institutions are engaged in all kinds of activities namely production, processing, marketing, distribution, servicing, and banking in India and have vast and powerful superstructure. Co-operative Banks are important cogs in this structure. 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. 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. 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 customers viz. self-employed, small businessmen / industries, house finance, consumer finance, personal finance etc. CATEGORIES There are two main categories of the co-operative banks. (a) Short term lending oriented co-operative Banks - within this category there are three sub categories of banks viz state co-operative banks, District co-operative banks and Primary Agricultural co-operative societies. (b) Long term lending oriented co-operative Banks - within the second category there are land development banks at three levels state level, district level and village level. The co-operative banks are small-sized units organised in the co-operative sector which opreate both in urban and non-urban centres. They finance small borrowers in industrial and trade sectors besides professional and salary classes. Regulated by the Reserve Bank of India, they are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. The co-operative banking structure in India is divided into 4 components: a) Primary Co-operative Credit Society The Primary Co-operative Credit Society is an association of borrowers and non-borrowers residing in a particular locality. The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks. The borrowing powers of the members as well as of the society is fixed. The loans are given to members for the purchase of cattle, fodder, fertilizers, pesticides, implements, etc. b) Central Co-operative Banks These are the federations of primary credit societies in a district and are of two types those having a membership of primary societies only and those having a membership of societies as well as individuals. The funds of the bank consists of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks. These banks finance member societies within the limits of the borrowing capacity of societies. They also conduct all the business of a joint stock bank. c) State Co-operative Banks The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the cooperative banking structure in the state. Its funds are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of India. The state co-operative banks lend money to central co-operative banks and primary societies and not directly to farmers.

d) Land Development Banks The land development banks are organised in 3 tiers namely, state, central and primary level and they meet the long term credit requirements of the farmers for developmental purposes. The state land development bank overseas the primary land development banks situated in the districts and tehsils in the state. They are governed both by the state government and Reserve Bank of India. Recently, the supervision of land development banks has been assumed by National Bank for Agriculture and Rural Development (NABARD). The sources of funds for these banks are the debentures subscribed by both central and state government. These banks do not accept deposits from the general public.

COMMERCIAL BANKS The commercial banking structure in India consists of: 1. 2. Scheduled Commercial Banks Unscheduled Banks

Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. This sub sector can broadly be classified into: Public sector Private sector (old and new) Foreign banks.

Public sector banks have either the Government of India or Reserve Bank of India as the majority shareholder. This segment comprises of: 1. 2. State Bank of India (SBI) and its subsidiaries; Other nationalized banks. FEATURES OF COOPERATIVE BANKS 1. 2. 3. 4. 5. Co-operative Banks are organized and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of "one member, one vote". function on "no profit, no loss" basis. Co-operative banks, as a principle, do not pursue the goal of profit maximization. Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. UCBs provide working capital loans and term loan as well. The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures also. Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural. Co-operative banks are perhaps the first government sponsored, government-supported, and governmentsubsidised 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 cooperative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance. 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.

7.

8. 9.

10. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans. 11. 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. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank. 12. Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative bank are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act. 13. 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. 14. Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India. 15. 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 co-operative 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. RBI POLICIES The Reserve Bank of India appointed a High Power Committee in May 1999 under the Chairmanship of Shri K. Madhava Rao, Ex-Chief Secretary, Government of Andhra Pradesh to review the performance of Urban Cooperative Banks (UCBs) and to suggest necessary measures to strengthen this sector. With reference to the terms given to the Committee, the Committee identified five broad objectives: To preserve the cooperative character of UCBs To protect the depositors' interest To reduce the systemic risks to the financial system To put in place strong regulatory norms at the entry level so as to sustain the operational efficiency of UCBs in a competitive environment and evolve measures to strengthen the existing UCB structure particularly in the context of ever increasing number of weak banks and To align urban banking sector with the other segments of banking sector in the context of application of prudential norms in toto and removing the irritants of dual control regime. CO-OPERATIVE CREDIT STRUCTURE: COMMITTEE RECOMMENDATIONS The committee on revitalization support to the co-operative credit structure, headed by minister of state for finance Balasaheb Vikhe Patil has recommended that financial support for each such credit institution be split between the Centre and the respective State Governments in the proportion of 60:40. However, for the NorthEastern States and Jammu and Kashmir, it has suggested that the Centre's proportion be raised to 90 per cent. Committee has recommended that the revitalization assistance could be in the form of bonds issued by the Centre and State Governments. These bonds should be self-extinguishing in nature, and after 10 years, the bonds will be extinguished without any redemption of the principal amount. The committee has also said that a panel be constituted comprising of the Secretary (Finance), Secretary (Agriculture), Deputy Governor, RBI, and Chairman, Nabard and representatives of State Governments for policy direction, review, and monitoring of the cooperative credit institutions. Similar committees may be constituted at the State-level, it added. The panel has said that the decision on de-layering of the credit system should be left to the individual State. For computation of assistance to the co-operative banks the committee has suggested that accumulated losses and interest overdue for over three years should be the basis of calculation. The committee has also said that scheduling of district co-operative banks will allow them to borrow funds from Reserve Bank of India and National Bank for Agriculture and Rural Development (Nabard) which will reduce their dependence on state co-operative banks. Committee hopes that recapitalisation would help the co-operative banks transform themselves into scheduled commercial banks.

COOPERATIVE BANKS: AN RBI PERSPECTIVE RBI has decided not to allow urban co-operative banks (UCBs) with less than Rs 50 crore net worth to spread their operations outside their state of jurisdiction.The main risk exposure of UCBs was not credit risk but interest rate risk. As interest rates paid by these banks, particularly on deposits, were out of sync with the rest of the banking sector. The sheer number of weak UCBs, which is well over 200, is a cause for concern for the RBI. Rehabilitation of these banks may involve strategies such as the registrars directing co-operative courts for speedy recovery process and execution of decrees, unviable branches being either relocated or closed down, exploring avenues for getting additional capital and merger with a well-managed bank. RBI is in favour of ending dual control for UCBs. Therefore, demarcation of banking-related functions and those that warrant only state governments' action were required. According to Mr Capoor the issue of dual control could be resolved in three ways: The first approach is by bringing the subject of co-operation under the concurrent list so as to enable the Union government to legislate in matters pertaining to co-operative banking. But such a move will involve constitutional amendments. The second approach would be for the states to enact progressive legislations thereby making the registrars confine their functions only to registration and acceptance of bylaws. This will lead to the dual command over UCBs ending automatically. The last approach would be to demarcate the regulatory roles of state governments and RBI in the state acts, as suggested by the Madhava Rao committee. Mr Capoor favors the third approach. Government is considering incorporating amendments to the Banking Regulations Act to empower the Reserve Bank of India to change the management and chief executive officer (CEO) of urban co-operative banks (UCBs). Meanwhile, the RBI had mooted a proposal to set up a separate supervising and regulatory body for UCBs in its recent Credit Policy. COOPERATIVE BANK'S FORUM This Discussion forum is to facilitate greater interaction among professionals from cooperative banks in India. It is also to provide a platform for professionals from other industries like IT, commercial banks etc to interact with colleagues from Cooperative Banks. Here your query or opinion on any matter will be forwarded to all the members of the group and their answer to your query will be forwarded to all the members of the group including you. The group also gives facility to store/share photos and files, coordinate events and more. This will create a strong platform for mutual discussion. TECHNOLOGY & COOPERATIVE BANKING INDUSTRY Technology plays a pivotal role in providing efficient customer service, creation of management information systems required at all levels of management hierarchy and assist in decision making. In the present competitive environment, to withstand competition and also to cater to wider and expanding service areas of its customers the use of technology definitely gives an edge over others. Realizing this, some of the Urban Co-operative Banks have fully computerised its operations way back in 1992, and more and more banks are falling in line. Various Co-operative Banks continue to upgrade the branches with latest technology and offer customer friendly facilities at all the branches which includes services like telebanking, internet-banking, Dmat services, ATMs (both in Branches and Off-line) etc. THE NATION CAN'T BANK ON THEM ANYMORE Well, what started as a seemingly harmless liquidity problem last month in Ahmedabad is in danger of snow balling into a gigantic banking sector crisis. Madhavpura Bank, which along with the "big bull" Ketan Parekh is in the eye of this pay-order scam, was declared a defaulter on March 12 by the Reserve Bank of India after a

preliminary inquiry revealed that the Bank was facing a major liquidity crunch. The various investigations currently underway have pegged the estimated damage from the pay-order scam at about Rs12bn. However, amid all this chaos the RBI, who has for long sought a greater regulatory role in the cooperative banking sector, is feeling vindicated. This also provides an opportunity for the central bank to press hard for changes in the regulation of the cooperative banking sector. The cooperative banking sector caters to the varied needs of small investors and small businesses. However, the 2,083 cooperative banks with a collective deposit base of Rs800bn cannot be considered as small. Especially, when you consider that the commercial banks collectively have a deposit base of Rs9.3trillion. Ahmedabad-based Madhavpura Mercantile Cooperative Bank was established on October 10, 1968 to cater to the varied financial needs of wholesale grocery traders in the Madhavpura. It had 12 directors on its board that included its chairman, Ramesh Parikh and its CEO and MD Devendra Pandya. The bank received a scheduled bank status from the RBI just a couple of years ago, which allowed the bank to expand its banking operations and start lending to stock brokers. The scheduled bank status also allowed the bank to invest 10% of its net worth in the capital markets. Until recently, the bank had managed to resist the allure and glamour of investing heavily in the capital market. But, the relation between the bank's chairman Ramesh Parikh and big bull Ketan Parekh did the trick and the bank is reported to have made huge advances in the last couple of months. The advance made by the bank to Ketan Parekh are pegged at around Rs2bn. However, the bank faced its worst crisis on the 8th of March when depositors panicked and started withdrawing money from the bank. This was following reports that the bank had given a huge bank guarantee to Ketan Parekh. The result, the bank was left with very little cash. The problems of the bank were further compounded when it had to down its shutters in Ahmedabad and Mumbai. Depositors were not the only ones to have been hit by the Madhavpura Bank crisis. With their money locked in Madhavpura Bank, many cooperative banks also faced payment problems. Those who resorted to the call money market found no lenders as commercial banks kept away from them. The crisis forced the RBI to step in and take some action to limit the damage. A preliminary inquiry by the central bank showed that the bank had a very bad liquidity position after it issued pay-orders worth Rs650mn to the depositors. The RBI was left with no other option but to recommend the Central Registrar of Co-operative Banks to supercede the board of the bank. There is another angle to the story as well. Ramesh Parikh's son Vinit Parikh runs a firm called, Madhur Capital and Finstock, which deals in shares. According to reports, Parikh is said to have cleared his son's stock market dues, which reportedly ran up to Rs500mn, through Madhavpura Bank's fund. Several public sector banks have been hit very hard by the Madhavpura Bank's misdemeanor. The banks include such big names as the State Bank of India, Bank of India and the Punjab National Bank, all of which have lost hefty sum of money in the Madhavpura scam. Bank of India lost about Rs1.2bn as pay orders issued by Madhavpura Bank to Ketan Parekh bounced. This was because the bank was unable to honor its commitment. Ketan Parekh reportedly used his seven Bank of India accounts to discount 248 payorders worth about Rs24bn in nine weeks between January 3 and March 9. Out of this, Rs11.95bn were routed to three of his shell companies, namely, Nakshatra Software, Chitrakoot Computer and Goldfish Computer. These payorders were reportedly issued by the Mandvi branch of Madhavpura Bank, Fort branch of Standard Chartered Bank, UTI Bank and Global Trust Bank. Parekh had several accounts in all these branches. Moreover, Parekh and his aides have routed Rs4.35bn from the account of Panther Investrade to Nakshatra Software, Rs3.96bn from Classic Credit to Chitrakoot Computer and Rs3.64bn from Panther Fincap Management Services to Goldfish Computer. Meanwhile, the State Bank of India (SBI) has also said that it has been hit by the financial crisis faced by a Classic Cooperative Bank, which specializes in bullion trading. SBI bank has pegged its exposure at Rs395.7mn after it sold bullion to a gold trader whose cheques drawn on the Classic Cooperative Bank bounced. Earlier this month, the RBI said that cheques issued by Classic Cooperative Bank on behalf of a gold trader to four commercial banks had bounced. The banks in question were, the SBI, Bank of India, Punjab National Bank and Standard Chartered Bank. RBI said their exposure was to the tune of Rs696mn. Ketan Parekh's pay orders, which were drawn on Madhavpura and discounted by various banks, including Bank of India, Punjab National Bank, Standard Chartered Bank and Global Trust Bank, bounced.

Apart from SBI and BOI, the Punjab National Bank (PNB) could also lose about Rs170mn due to the financial problems confronted by Madhavpura Bank and Classic Cooperative Bank. SS Kohli, the chairman of PNB, has said that PNB had about Rs100mn doubtful from Madhavpura Bank and Rs70mn from Classic Cooperative Bank. Two more banks are reported to have been hit by the recent cooperative bank scam, which has sent shockwaves throughout the country. According to reports, Dena Bank and a Kolkata-based Bank had lent to cooperative banks through the call money market. Dena Bank has an exposure of about Rs200-300mn to co-operative banks, including the Madhavpura Bank. While the other bank is said to have lent around Rs300-400mn in the market. Dena Bank officials said that though the bank had lent to these banks, they were fully covered through securities, which have been provided as collateral. Officials insisted that the funds lent in the market have only been "delayed" and cannot be written off as loss. Meanwhile, the scam has also brought to light the fact that loopholes within the banking system exist and the RBI as a banking regulator failed to respond quickly to the challenge posed by the recent scam. However, the central bank seems to have learnt its lessons, albeit a little too late, and has decided to plug the loopholes that allowed Madhavpura Bank and stock brokers to play havoc with the market. The RBI has reportedly drawn plans to revise payorder and demand draft discounting norms; stock lending norms; banks capital market exposure norms and gold lending norms. Taking into consideration the enormity of the crisis, calls have increased for a greater role for the RBI as a regulator of the cooperative banking sector. At present, cooperative societies are under the dual control of the RBI and the Registrar of Cooperative Societies. Under this system, the RBI only has jurisdiction over the banking operations of the cooperative society while the registrar looks after the managerial and administrative functions. A high power committee of the RBI set up in 1999 and headed by K Madhav Rao, said it was "absolutely necessary that the RBI should be the sole regulator of the banking business carried on by the Urban Cooperative Banks." The committee also added that it was "convinced that the dual control must end, and end soon." However, the greatest challenge in cleansing the system would be the state governments and the domestic industries, both of which enjoy a tremendous amount of influence on the cooperative banks. The High Power Committee on Urban Cooperative Banks noted RBI's attempts to get even model bye-laws adopted by state governments had drawn blank. The state governments had also ignored recommendations by earlier committees set up by the Finance Ministry or the RBI. Some banks had even overlooked RBI's orders on interest rates. With big banks and small banks caught in a trap, who can the customer bank on? EFFECTIVE GOVERNANCE STRUCTURE CRUCIAL The new scam involving the co-operative sector points to a crying need to have a speedier and better cocoordinated process for dealing with financial frauds as well as an effective governance structure and settlement system for efficient functioning of financial institutions. A surge of depositors inside a cooperative bank in Secunderabad in the wake of reports suggesting that the bank has gone to seed. AP WITH THE surfacing of the co-operative banks scam, once again the financial sector and its markets fell victim to the regulator's failure to check malpractices within the system. The new scam involving the co-operative sector points to a crying need to have a speedier and better co-ordinated process for dealing with financial frauds as well as an effective governance structure and settlement system for efficient functioning of financial institutions. The present crisis is virtually a replica of the 1992-securities scam that involved Harshad Mehta. While Mehta used banker's receipts to have an easy access to huge funds, this time, Home Trade Ltd., a broking firm, used government securities (G-Secs) to avail itself of money. The Nagpur District Central Co-operative Bank gave Rs. 124 crores to Home Trade on the assurance that the broking firm would deliver G-Secs worth the same amount to the bank within 30 days. But these securities were never delivered. An analysis reveals that the scams more or less followed the same pattern The Ketan Parekh Madhavpura Mercantile Co-operative Bank (MMCB) scam occurred in 2001 and is also an instance of diversion of funds from the banking sector to the stock market, like the 1992 securities scam.

In 1994, close on the heels of the 1992-securities scam, the Reserve Bank of India put in place a delivery versus payment (DVP) system under the Public Debt Office (PDO) of the central bank. This is linked to Subsidiary General Ledger (SGL) accounts in banks. At the end of the day the buyer or seller will have to fill the SGL form and deliver it to the RBI. Now with the inception of Clearing Corporation of India Ltd. (CCIL), the SGL form filling procedure no longer exists. However, co-operative banks are out of the purview of the DVP system. The RBI could have brought in cooperative banks under the ambit of DVP system when the MMCB scam broke-out. Last Monday all RBII-regulated entities have been asked to hold G-Sec in demat form. But the RBI waited for a scam to surface in order to initiated fire-fighting measures. Further, under no circumstances can the RBI allow a broker to act as a principal (a broker can only act as an intermediary between principals and cannot assume the role of a principal). In this case, Home Trade acted as a principal. Another issue is that many co-operative banks are not having Treasury divisions, which trade in securities. How the RBI allowed any bank without a Treasury division to operate in a debt market is a question that can be raised. In the case of co-operative banks, all the decisions of investment in securities are taken by the boards of directors which are elected rather than a full fledged Treasury that would otherwise be run by professionals. The role of Primary Dealers (PDs) is also in focus at this point of time. PDs are interested only in large dealings rather than small deals of co-operatives. Moreover, PDs are interested in running a book to make proprietary trading profits rather than disseminating debt to and developing the non-wholesale debt market for which they were set up. A banking source told The Hindu, that a large co-operative body has already approached the RBI to act as a PD for the co-operative sector. This could help the co-operative sector get professional help in the dealing of securities in the debt market.

VIOLATION OF NORMS The RBI found 25 urban co-operative banks spread across Gujarat, Maharashtra and West Bengal to be in violation of the RBI norms. Of these, eight co-operative banks have exposures to Home Trade. Among these, six banks are in Gujarat and the balance inMaharashtra. Four district central co-operative banks (rural) from Maharashtra also have exposure to Home Trade. In all, these 12 banks are suspected to have run up losses of around Rs. 500 crores. As more than one co-operative bank is involved, it is feared that this could be only the tip of the iceberg. In November 2001, the RBI found that these banks had flouted banking norms stipulated by it. However, action against these entities was initiated only in April. All boards of these cooperative banks were superseded by the RBI with the help of the Registrar of Co-operative Societies (RCS). The promoters of Home Trade Ketan Sheth and Sanjay Agarwal also duped the Seamen's Provident Fund to the tune of Rs. 94 crores. Investigations in this regard are proceeding separately. The National Bank for Agriculture and Rural Development (NABARD) is the supervising body for all rural co-operative banks with the RBI as a regulator making the rules for these banks. However, the day-to-day administration of these banks are supervised by the RCS that come under State governments. Urban co-operative banks are monitored by the RBI and the RCS. The RBI-appointed Madhav Rao Committee on Urban Co-operative Banks, the Jagdish Capoor Report on Co-operative Credit and the Expert Committee on Legal aspects of Bank Frauds 2001 were unanimous on the need for a restructuring of co-operative banks and abolition of its dual management. DUAL MANAGEMENT Even though the RBI made its representation to the Government on dual management; the Union Government does not want to take a view on this. In the Credit and Monetary Policy 2002-03, the RBI noted, "The events in the last two years have made it abundantly clear that the present system of dual/triple regulatory and supervisory control (involving Centre, States and the RBI) is not conducive to efficient functioning of the cooperative banks in the interest of their depositors. Several committees in the past have also recommended elimination of multiple layers of supervision and regulation of this sector. In view of the local interest involved, it is also clear that there is no consensus at present in favour of removing supervisory and regulatory responsibilities at Central/State government levels and for entrusting it exclusively to the RBI. As a result, the managements and boards of several co-operative institutions continue to reflect political interests rather than genuine co-operative spirit, and are not always amenable to normal banking discipline in their operations. In view of this, it would be best, in the interest of the public depositors, if the situation is faced squarely and a separate supervisory authority is set up, with representatives of Centre, State and other interested elements. Such a body can then be exclusively made responsible for efficient functioning of the co-operative institutions and also take responsibility for ensuring the safety of public deposits.'' It is also interesting to note the inaugural address of the

Reserve Bank Governor, Bimal Jalan, at the Natioal Institute for Bank Management (NIBM) annual day on "Corporate governance in banks and financial institutions'' in January. He stated, "By and large, the structure is weak in co-operatives and non-banking financial companies (NBFCs) for historical reasons, local practices, and multiplicity of regulators and laws. Old private sector banks also have poor auditing and accounting systems. New private banks generally good on accounting but poor on accountability. More modern and computerized, but less risk-conscious. One thing that is common to all is that corporate governance is highly centralised with very little real check on the Chief Executive Officer (CEO), who is generally closely linked to the largest owner group. Boards or auditing systems are not very effective.'' Dual management itself is not an issue, if all agencies can get together and take a co-ordinated action against the erring entities. In the present case, all the agencies came together and superseded the boards of the co-operative banks and appointed administrators. Can anyone assure that this will happen every time. A recent development in Kerala points towards the irresponsible interference of politicians and bureaucrats in the cooperative sector. A few months ago, the RCS of Kerala gave permission for many cooperative societies to use the word "bank'' with its names, without RBI's knowledge. According to the Banking Regulation Act nobody is permitted to use the word "bank'' or "banking'' without a licence from the RBI. When the RBI advertised in the interest of depositors against this in newspapers, the State Government made a hue and cry. In the same manner, when the RBI complained about MMCB, the Gujarat Government refused to take action against it. Political interference in commercial decision making brought down many premier institutions such as the Unit Trust of India. Another regulator, the Securities and Exchange Board of India too looked the other way, instead of booking Home Trade which is registered with SEBI as a broker of its lapses in the markets. The Listing Committee of the Bombay Stock Exchange (BSE) refused to give listing for Home Trade on charges that the company was involved in circular trading among its group companies. At that point, SEBI did not take interest in enquiring about it. The same was the case at the time of Ketan Parekh-related scam. Eventhough the RBI warned SEBI about the unusual price rise in Global Trust Bank, the capital market regulator chose to ignore it. No co-ordination among regulators and a delay in taking cases to their logical conclusion give scope for occurrence of such scams in the financial sector. It may be recalled that it took SEBI over six months to finalise its interim report on the Securities Scam of 2001. Co-operative banks or societies are meant for the people, of the people and run by the people. It is an excellent concept for a country like India, which is the largest democracy in the world. However, the boards of these cooperatives are more often than not filled with politicians and other unscrupulous elements as they are elected members. The Government and the RBI have formulated rules and regulations for the governance of these organisations. In this case, the managements of co-operatives failed to adhere to the rules and regulations and the regulator failed in its role of supervisor. WHAT SCAM? ITS JUST A FRAUD! It is scam-season worldwide, but Indian regulators, their well-wishers and the Finance Minister have chosen to remain in denial. First we had Deepak Parekh dismissing the gilt scam as just another fraud in a television interview. Then Mr Yashwant Sinha told the Rajya Sabha that there was no systemic failure, that the scam was a pure case of fraud and that the law would take its own course. A day later, the chief of the Securities Trading Corporation of India was on television telling viewers that there was no regulatory failure either regulations were more than adequate, he said. Try telling that to the seamen who saw 25 per cent of their provident fund vanish overnight. Or all other investors who put their money in Public Provident Funds on the assumption that it went into risk-free government securities and notified instruments, but are no longer sure that their money is safe. We are also told that the Reserve Bank of India is not in charge of regulating cooperative banks but only inspects them. Also, that it had warned state governments about the Nagpur Cooperative Bank and others but could do no more. Wasnt it RBIs job to ensure that government securities or G-Sec trading was secure? And isnt it now plugging several holes in the system because they exist in the first place? For instance, its recently launched Negotiated Dealing System, which combines the informal telephone market with screen-based negotiations, was to comprise only of an elite segment of G-Sec investors, namely large banks. They account for the bulk of G-Sec trading, are few in number and easy to control and supervise. RBI planned on a comfortable system where these banks traded with each other without the help of brokers.

Yet, on April 13, it decided to open up the NDS to more participants by asking scheduled cooperative banks to become members of the Negotiated Dealing System by the end of May. It also announced that all settlements would only be in electronic form. A little earlier, it had directed cooperative banks in Maharashtra to route their transactions through the Maharashtra State Cooperative Bank, which would act like an apex bank. It has also tightened its fraud detection machinery by threatening tough action against those banks that fail to report fraud within seven days. Sources connected with the Clearing Corporation of India Ltd or CCIL say that smaller cooperative banks can access the NDS and CCIL either through constituent accounts with larger banks, in the same manner that retail investors access the National Share Depository through Depository Participants. But this is certainly not a systemic solution to large regulatory gaps that remain in the gilt and bond market. In fact, all it does is to fragment the market instead of offering a comprehensive solution. A well regulated market needs RBI and the Securities and Exchange Board of India to cooperate with each other and also work with another regulator who would have a role in supervising these investments. None of them can carve out niches of authority when investors cut across multiple regulatory jurisdictions. Today, the RBI has carved the NDS out of the pool of investors who used to report to the National Stock Exchanges wholesale debt segment. The NDS is certainly an improvement over the telephone market, where transaction prices were reported to the NSE, without any clarity about the date, time and price of transactions. The system allowed brokers such as Home Trade to collude with banks and write transactions at prices that were completely out of line with the market. By segmenting the gilt market and leaving out a large pool of investors the RBI is showing an appalling lack of concern for the development of the debt market as a whole and could end up damaging the price discovery mechanism in the long run. It also disregards the avowed objective of enlarging the market. The Economic Survey says The CCIL, in conjunction with the NDS, is expected to facilitate extension of the repo market to non-government securities and enlargement of market participants. Encouraging retail investment in G-Secs was part of this expansion. What then is the gameplan to meet these objectives? When asked, sources at the NSE, whose debt segment had been logging in turnovers in excess of Rs 4,000 crore until recently, admit that they are clueless. But let us look at some numbers. In Maharashtra alone there are around 700 cooperative banks (including the regional rural banks); there are several hundred more in Gujarat, Andhra Pradesh, West Bengal and other states. Even if one assumes that all these banks will access the NDS through apex banks or constituent accounts, it would take some time to put in place an appropriate mechanism for their participation with a clear assessment of the counter-party risks involved. Moreover, this still leaves out an equally large segment of the market comprising provident funds and trusts. There are around 800 trusts that invest in G-Secs and public sector bonds in Maharashtra. According to industry sources there are over 5,000 PFs in the exempt category, which are independently managed and are probably under different ministries. When asked about the supervision of these entities and their trading practices, insiders say that the answer is to create a separate regulator for pension funds. Funnily enough, this is an issue on which the FM also shrugs (as he did in the Rajya Sabha) and points to his esteemed colleague the labour minister as the person responsible for regulating provident funds. Which brings us to the recommendations of the Oasis report on pension reforms (set up by the ministry of social welfare). This report has more or less been mothballed because it suggested that pension funds should be allowed to invest in risky equities and corporate debt. Given the mess at Unit Trust of India, ordinary investors naturally shrink from the idea that their lifetime savings could vanish into thin air. But Oasis also has several good suggestions too which should be accepted and implemented.It has proposed an Independent Pensions Regulator to clean up, reform and regulate the pension sector and ensure transparency and centralised record keeping. It also proposes an enforcement machinery which would punish errant economic agents. Instead of a separate IPA there is an obvious case for the Insurance Regulatory and Development Authority to regulate pension funds also. Whatever the decision, the time for action has arrived. But for this, the FM has to get out of denial mode, admit that there is a systemic problem and implement some quick and obvious solutions. CO-OP BANKING: SYSTEM RIDDLED WITH HOLES INVESTMENT in government securities may be the safest avenue for parking one's surplus funds. But recent events suggest that it is so only if one can safely negotiate the treacherous path laid out by unscrupulous traders in the journey towards eternal investment safety. The spate of losses reported by cooperative banks leads one to just this conclusion. Bank after bank in Maharashtra's cooperative sector has come out with rather embarrassing admissions that they have lost huge sums of money because the brokers to whom they had handed out monies for purchase of government securities reneged on their commitments.

It would be tempting to conclude that while systems in these organisations are all right, they are still not proof against the dishonesty of individuals operating it. On surface, this contention appears perfectly reasonable. But one could argue with equal force that there is a deficiency somewhere. For instance, that that somebody could obtain so much money under false pretences with impunity does say something about the quality of the criminal justice enforcement system. In that sense, it does seem a systemic problem, though on a larger plane. The fact of the matter is that governance of cooperative institutions is so structured that it lacks the disciplining mechanism that one associates with institutions handling public money. The proposition is perhaps best understood through the framework of corporate organisations. Imagine an unlisted company with a large capital base and multiples of such capital in the form of deposits. The arrangement prima facie is an invitation for misgovernance of the worst kind. Imagine, also, that the regulatory framework does provide for suspension of the democratic process of electing the board of directors and placing in its place a nominated chief executive! For added effect, a company's capital can be perpetually increased by roping in new shareholders without the existing ones having any say in the matter. Assume, further, that the laws of the land allow for the stake of existing shareholders to be undermined further by the simple expedient of granting each stakeholder one vote, irrespective of the actual stake held by them. If the general apathy of minority shareholders is reinforced by physical impediments to participation in the democratic process of electing office-bearers to the board, the ingredients make for a disaster in corporate management. That, in a nutshell, is the state of corporate governance in the country. These institutions are additionally supposed to be supervised by the Reserve Bank of India. The upshot of it is that while its supposed involvement in supervision by the RBI adds its own imprimatur of quality to governance, the absence of the countervailing force of supervisory tools at the RBI's disposal renders the cooperative institution vulnerable to exploitation by unscrupulous elements. The RBI's ability to invoke disciplinary powers is severely curtailed by the need to route it through the Registrar of Cooperative Societies. Let us say the RBI has issued directives on the percentage of investment in government securities or interest rates, etc. Should a scheduled commercial bank flout them, the central bank could well supersede the board and make a new set of nominees take its place. Something like that is unthinkable in cooperative institutions. The power to resort to such punitive action rests only with the Registrar of Cooperative Societies a State Government appointee. Taking the cooperative institutions out of the existing apparatus of State control has been suggested as a way out of the problem. But that is only attacking the symptom and not its root. The root of the problem is the principle of one-man-one-vote as opposed to a vote based on the quantum of ownership of capital. It is this principle that provides justification for all manner of intrusive powers of the State Government in the administration of a cooperative institution. The fear of management capture by wealthy stakeholders in rural credit institutions on the strength of their voting stock prompted the Government to introduce the egalitarian principle of one-man-one-vote. But the `rentier' politician of the State has taken the place of the rich kulak farmer. In some cases the two have merged into one. We might as well, therefore, have these institutions incorporated as banking companies, subject to RBI supervision, as is any other banking institution. The arrangement has the added advantage of ending the duality of control, which is worse than no control at all. In the case of district-level cooperative banks and the State-level apex cooperative banks there is no justification for a cooperative form of organisational structure. The traditional cooperative form of organisational structure would have had some merit if the contributors to the pool of surplus capital and borrowers form a narrow homogenous community. But that is certainly not the case. Like any other commercial bank, these institutions have a large base of depositors and a narrow base of borrowers. So, why have a different organisational structure when the stakeholder profile is common? Also the principle of one-man-one-vote is seen as critical to flow of credit to the large base of small agricultural borrowers. The risk of management capture is important only in the case of primary credit societies. But not so for district and state apex cooperative banks that are largely re-finance institutions funnelling funds into the primary agricultural cooperative societies. Bringing the district- and State-level institutions under the framework of the Companies Act has an important advantage. They can now be subjected to the discipline of the market mechanism and all the corporate governance implications that go with such an arrangement. The stock market-driven governance structure may not be the most perfect institutional arrangement. But, at least,

the social outcome should be superior to the existing arrangement, which only promotes plunder of public resources. ANOTHER 'TAINTED' INDIAN BROKER BITES THE DUST An Indian broker dealing in government securities was Wednesday remanded to a federal agency's custody for allegedly siphoning off nearly Rs.928 million from a seamen's organisation. Two other men have been arrested in one of the latest scams to hit the Indian financial market. They are Sanjay Agarwal, promoter of the Home Trade portal, and A.K. Ghond, former commissioner of Seamen's Provident Fund. The CBI's bank fraud and securities cell has registered a case against all three for cheating, breach of trust, forgery and corruption. The charge against Ghond is that he violated his official position by investing with Agarwal and Sheth without taking proper security to safeguard the money. Home Trade, which called itself a financial portal, had an incredible celebrity endorsement blitzkrieg. It reportedly spent Rs.600 million to employ sports celebrity like Sachin Tendulkar and top Bollywood actors like Hrithik Roshan and Shah Rukh Khan to promote its business. Home Trade is mired in a multi-million government securities scam that reportedly made 24 cooperative banks in different parts of the country lose about Rs.4000 million. Most of the banks paid Home Trade and other brokers for government securities that were not delivered. The scam came to light when the portal was unable to return the money. The Nagpur District Cooperative Bank was the first to blow the whistle. Its chairman went to police, alleging that the brokerage firms did not give receipts for securities worth Rs.1.25 billion. The bank faces liquidation. Nagpur Police arrested Kedar, who is a legislator of the ruling Nationalist Congress Party in Maharashtra as well as chairman of the stricken Nagpur bank. Cheating and fraud charges are also leveled against A.C. Choudhary, general manager of the bank, and four more broking firms. These are Indramani Services and Giltage Services in Mumbai, Syndicate Management Services, Ahmedabad, and Century Management Services, Kolkata. The other hard-hit cooperative banks are based in Nagpur, Osamanabad, Wardha, Dhule, Jalgaon, Beed, Nanded, Parbhani, Jalna and Solapur districts in Maharashtra. Reports received here indicated that their depositors are withdrawing their money and a severe financial crunch could occur in the coming week. SCAMS SPOILING THE FAIR NAME OF MAHARASHTRA Recent political developments in the state created a blot on the glorious tradition of upholding the democratic tradition as elected representatives indulged in crossing the floor without bothering about the political morality or provisions of the anti-defection Act. While memories of these scary incidents where MLAs claimed to be abducted or got themselves abducted are fresh, there are number of scams hogging the limelight. If one looks at various frauds being investigated, one will wonder whether Maharashtra has become a land of frauds. Even if one does not exaggerate what is happening in the state, one cannot ignore the fact that all is not well in the state.

Fractured mandate by voters delivered during the last assembly elections, lack of political leadership, deterioration of the state administration, rampant corruption invading the precincts of educational institutions and growing unemployment have really taken the state to a lowest level it sunk ever before. The massive network of cooperative banks in the state ensuring proper credit supply for agriculture sector is the backbone of state's economy. The Maharashtra State Cooperative Bank is one of the biggest cooperative banks in Asia with an annual turnover in the range of Rs 45000 crores and received several letters of appreciations from global institutions like Work Bank. The bank had shown interest in getting into the business of insurance when the government decided to privatize the insurance sector. NCP president Sharad Pawar held a series of meetings but nothing materialized as the involvement of Madhvpura cooperative bank in stock scam put a question mark on the nature and functioning of the cooperative banks across the country. Now that a bigger fraud has surfaced involving top-level politicians has surfaced in the district cooperative banks in the state, the MSCB has given up its ambitious plans of entering into sunrise sectors like insurance. Insiders apprehend that the needle of suspicion may ultimately point towards the apex MSCB that has to perform the job as a watchdog to keep District Cooperative Banks in fighting fit form. An upcoming and promising politician from Vidarbha, Sunil Kedar is being interrogated by the sleuths of the CID for his alleged involvement in the Rs. 153 crores government securities scandal. He was chairman of the Nagpur District Cooperative Bank and supervised its investment schedules. Another district cooperative bank

from Akola district is also under investigation due to fraudulent transactions with Home trade securities. Suresh Deshmukh of this bank is also under police investigation. One can assess the rot since large number of political leaders from the second rank are involved in this securities fraud. Pawanraje Nimbalkar from Osmanabad district cooperative bank is also named by police as a probable suspect in securities scam. He is influential as he is connected with energy minister Dr Padamsinh Patil and evaded arrest for almost two months. After much dilly-dallying police have initiated proceedings against Nimbalkar. How many more banks are involved in the security scams? No one knows but the cooperative department is slowly trying to ascertain the situation by seeking clarifications from the district cooperative banks in the state. Home trade brokerage firm in Mumbai is believed to have siphoned off huge amounts from the cooperative banks. The banks pledged huge funds with the trading firm for buying government securities but the banks did not get deliveries of these securities. This is not possible without active support from the political heads of these powerful institutions, insiders claim. The brokerage firm reportedly has given huge commissions to those involved in pledging huge funds for buying government securities. Chief executive of the Hometrade Sanjay Agarwal is also facing sleuths of the CID for his modus operandi and failure to deliver securities. Apart from involvement of these cooperative banks in securities fraud, many more skeletons in their cupboards have started coming out as police are checking their account books. These banks under the patronage of political heavy weights have given loans to firms and factories, which are not at all related with the agriculture sector and showed huge bad debt. Most of the time, these debts belong to political heavy weights or their relatives. The investigations in this bank fraud have somewhat slowed down after the state machinery was watching the political drama where the Deshmukh government survived by a very thin margin of votes. The state government's Anti-Corruption Bureau is also busy with another fraud of the decade involving the Maharashtra Public Service Commission. It was a well-oiled machinery of crooks, which made total farce of examinations, conducted by the MPSC as only proper contacts with touts and money could ensure jobs in government service. If you pay huge amount to get the job then naturally you try to get back your investment by devising ways to make more money by using whatever little power you have as a government servant making the system more corrupt. ACB is now investigating former MPSC chairperson Dr. Shashikant Karnik who is at present member of the UPSC and claims to be innocent. The way original answer papers and mark sheets were tampered by the involved racketeers is shocking. They not only replaced original answer sheets but also tampered with the computer data of scanned answer papers. These gangsters who worked like a corporate body tried to erase the computer data, fudged record, destroyed careers of several deserving students to enhance chances of undeserving candidates who paid huge sums to get government jobs. Deputy superintendent of police Baban Kadam is behind bar for involvement in MPSC scam. He has amassed huge property, which is under police scrutiny. Another social worker that used to move in the MPSC offices like an insider is also being questioned. She worked as an intermediary between students and MPSC staff. The MPSC fraud may not be as big as the one being exposed in Punjab but nonetheless it has shattered people's confidence in the institution. Another fraud being investigated is concerning fake revenue stamps. The deputy chief minister Chhagan Bhujbal has claimed that police unearthed fake revenue stamps worth Rs 2200 crores. One can imagine the kind of network and support these gangs must have required to print such huge number of revenue stamps and distribute them as official revenue stamp papers. How many fake revenue papers have been used so far? The government has no knowledge. The government can verify only those documents which have been submitted with the registration offices but what about the documents signed between two individuals and institutions which are not registered. What will happen to the deeds and agreements singed on fake paper? Will the court consider them as valid or will it be treated as 'raddi' paper. No one knows the answer and the government is still thinking what to do about these fake papers. The security press at Nasik is under the cloud of suspicion as the gang based in Karnataka used a new printing machine sold as a scarp machine. The revenue stamp fraud can involve many more states as the gang is operating in neighbouring states as well. Unless the government takes firm steps and set the things right, its own credibility will be at stake. This will damage the fare name of Maharashtra.

DEVELOPMENTS IN CO-OPERATIVE BANKING Co-operative credit institutions occupy an important position in the financial system of the economy in terms of their reach, volume of operations and the purpose they serve. Rural co-operative banks play a pivotal role in the rural credit delivery system with credit co-operatives forming almost 70 per cent of the rural credit outlets. Rural co-operative banks account for around 30 per cent of rural deposits and 44 per cent of the outstanding loans and advances of the banking system for agriculture and rural development. About 55 per cent of the short-term production loans for the agriculture sector come from co-operative credit institutions. Urban co-operative banks (UCBs), on the other hand, aim at mobilisation of savings from the middle-and low-income urban groups and purvey credit towards the weaker sections. The majority of credit from UCBs is channelised towards priority sector segments. In order to examine the functioning and the constraints being faced by co-operative banks and the rural credit system, a High Power Committee (HPC), a Task Force and an Expert Group were appointed in recent years. The objectives of setting up these Groups were to devise ways to improve the efficiency of the credit co-operatives and to make the credit delivery system of these credit institutions viable. Notwithstanding certain differences in their focus, the three Groups identified inter alia many common constraints being faced by different types of credit co-operatives and gave recommendations to improve the co-operative credit system. In line with the recommendations of these Groups, policy changes for the co-operative banks have been framed with a view to improving the credit delivery mechanism of co-operative banks and introducing various prudential measures for strengthening the financial health of these institutions. Major initiatives relating to co-operative credit institutions and the rural credit system undertaken since 2000-01 include the launch of a new tranche of Rural Infrastructure Development Fund (RIDF), enhancement of the reach of the schemes relating to Kisan Credit Cards (KCCs), Self-Help Groups (SHGs) and micro credit. There has also been significant change in the prudential and operational norms relating to UCBs. Introduced in 1998-99, KCCs have been popular among both farmers and bankers. Recently, the National Bank for Agriculture and Rural Development (NABARD), in consultation with the Reserve Bank, has dispensed with the floor limit of Rs. 5,000 for the KCC. This would enable small and medium farmers to take advantage of the facility. The Union Budget 2001-02 proposed the introduction of accident benefit scheme for KCCs holders. The Budget further proposed to accelerate issue of KCCs by banks so as to bring all eligible farmers within its scope in the next three years, i.e., by March 31, 2004. The RIDF has played an important role in the development of rural infrastructure, especially in the context of projects relating to irrigation and rural connectivity. In order to reduce the gap between the amounts sanctioned and disbursed under RIDF, the interest rate charged by NABARD on RIDF loans was reduced from 11.5 per cent to 10.5 per cent. A further allocation of Rs. 5,000 crore as net corpus of RIDF-VII was announced in the Union Budget 2001-02. It was proposed that during the current year, NABARD would link an additional 1 lakh SHGs to enable an additional 20 lakh families to access credit. While NABARD has so far been extending refinance to the rural co-operative credit institutions, subject to certain conditions, the facility has been extended to scheduled UCBs also, against both farm and non-farm rural credit extended by these banks. In the context of improving the health of the co-operative credit institutions, revised Entry Point Norms (EPNs) for UCBs were announced during August 2000. With an aim to align the prudential norms applicable to the urban cooperative banks with those prevailing for the commercial banks, UCBs have been advised to achieve capital to risk-weighted asset ratio (CRAR) at par with the levels applicable for commercial banks in a phased manner between 2002 and 2005. In view of certain developments in the urban co-operative banking sector during March 2001, the monetary and credit policy for the first half of 2001-02 announced some reform measures relating to this sector. These measures included, inter alia, ban on lending by the UCBs to the equity market, limits on their access to borrowings from call/notice money markets, ban on UCBs in keeping term deposits with other UCBs and revision in the form in which UCBs can maintain their Statutory Liquidity Ratio (SLR) reserves. In response to representations received from UCBs and their federations, the Mid-term Review of October 2001 has proposed to allow UCBs to grant loans to individuals against security of shares, subject to certain conditions. The Policy also proposed to modify the time-frame for achieving the prescribed levels of SLR holding.

http://www.managementparadise.com/forums/management-co-operatives/993-co-op-banks.html

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction. When do properties fall under this Act? If a borrower defaults on repayment of his/her home loan for six months at stretch, banks give him/her a 60-day period to regularise the repayment, that is, start repaying. On failure to do so, banks declare the loan an NPA and auction it to recover the debt. How is the auction price decided? It depends on the market value of the property. Professional valuers determine the property value based on which banks fix a reserve or minimum bid price. The valuations tend to be on the conservative side as it is a distress sale. If the price fetched exceeds the banks dues, the excess amount is given to the borrower. Where can buyers get information about the auctions? Banks advertise such sales in at least one English and one regional newspaper, 30 days prior to the auction. Alternatively, you can look at websites like www.foreclosure.com. How can you bid? Interested bidders must submit their bids in a sealed envelope to the bank. Along with the bid, they must also deposit a certain percentage of the reserve price as earnest money deposit. This amount differs across banks and is refundable if one withdraws from the process or does not win. On the auction day, the sealed envelopes are opened in front of the bidders and the highest bid is announced. Bidders may or may not get another chance to revise their bids. If you win, you have to pay up to 25 per cent of your bid amount to confirm the purchase. The bank may allow you to pay the remaining in 10-15 days. You can apply for a loan for the same. What are the pros and cons of such buys? Typically, these properties are 20-30 per cent cheaper than the market price. Also, since the bank had previously lent against the property, there is clarity on property title. However, these properties are sold on an as-is basis. There may be pending dues or even litigations. These liabilities, unless checked carefully, can get transferred to you automatically.
http://www.business-standard.com/article/pf/what-is-the-sarfaesi-act-111061600108_1.html http://rbidocs.rbi.org.in/rdocs/notification/PDFs/SC413R2104210.pdf

SARFAESI Act, 2002/Debt Recovery Tribunal - important points to be noted?

The object of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest and for matters connected therewith or incidental thereto and the Act came into force on 17-12-2002. The Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of Non-performing Assets of banks and financial institutions. The Act has been passed based on the

recommendations of Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms and to consider the need for changes in the legal system in respect of these areas. The provisions of the Act would enable the banks and financial institutions to realise long-term assets, manage problems of liquidity and asset liability mismatches and to improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. For getting a decree in usual course before a Civil Court, litigant including Banks have to file the suit before a Civil Court. After service of notice, written statement and trial, the suit would be decided by passing a decree. The decree would possibly be challenged by way of appeal up to Supreme Court and it would take about 5 to 15 years to attain finality. There would be possibility of dismissal of suit on various grounds. After the decree is passed by the competent civil court, the same would be put to execution by filing E.P. The Execution Court after service of notice would bring the property of the debtor/guarantor for sale through auction. To reach this stage, lot of money, especially very long time has to be spent. The above process is dispensed with by the Special Act "SARFAESI ACT" which is meant only for the financial institutions. As per the Act, the first step would be to issue notice U/s. 13(2) by the authorised officer who is deemed to be armed with a money decree which attained finality. By the statute, the authorised officer is clothed with powers of Trial Court and Execution Court and the Code of Civil Procedure which governs the civil proceedings is no more necessary. To put it otherwise, by the Special Act, the authorized officer acts like a Civil Court clothed with powers hitherto exercised by it. Though the provisions of the Act and the object appears to be clear, even after many judgments of Constitutional Courts from time to time, there still exist complications. The issue is about the availability of speedy and efficacious redressel to the borrower and the rights of the Bank to recover the loan amount under SARFAESI Act, 2002 are well protected till today. While no one can say that they will take loan and cheat the Bank, borrowers are really concerned at certain issues and they want an efficacious remedy to address their grievances. The various important and complicated issues are as follows:

1. The action of the Bank under the SARFAESI Act, 2002 starts with classifying an account of the borrower as NPA as per the guidelines issued by the Reserve Bank of India. The Courts have repeatedly held that RBI guidelines are mandatory and every Bank/Secured Creditor should follow the RBI guidelines when it comes to classifying an account of the borrower as Non-performing Asset (NPA). I personally feel that the Bank need not technically apply the guidelines issued by the Reserve Bank of India while classifying an account as NPA. Despite the guidelines, through an internal mechanism, if the Bank feels that the borrower can regularize the Account or the borrower is not a willful defaulter or if the Bank feels they will in no way get prejudiced by being liberal to the borrower to some extent, then, the Bank/Secured Creditor can adopt a reasonable approach in classifying an Account as NPA. Because, the object is to recover the outstanding loan amount and not to apply the guidelines technically. But, when it comes borrower, the borrower can question the action of the Bank in classifying his account as NPA if the classification is opposed to the guidelines issued by the Reserve Bank of India in this regard. The entire action of the Bank/Secured Creditor under the provisions of SARFAESI Act will get vitiated if the classification of account as NPA is illegal. When the classification as referred to is illegal, then, the borrower has two options

to challenge the illegality. The borrower can approach the High Court under Article 226 of Constitution of India and the High Court can also entertain a Writ Petition from the borrower if the borrower could establish his case clearly. I dont think that the High Court may insist on the principle of Alternative Remedy at this state. Even otherwise, the borrower can file an Appeal to the Debt Recovery Tribunal under Section 17 of SARFAESI Act, 2002 questioning the measures initiated by the Bank under section 13 (4) of the Act and the borrower can expose as to how the Bank has not followed the RBI guidelines when it comes to classifying the Account as NPA.

2. Once the Account is classified as NPA, then, in accordance with the procedure prescribed, the Bank will proceed to make a demand under Section13 (2) informing the borrower about the outstanding amount in the loan account and also the consequences. There is a general format to give a notice to the borrower under section 13 (2). The notice under section 13 (2) should substantially comply with the requirements and if the borrower raises a technical objection, those are not appreciated normally going by the precedents so far. Normally, borrowers may choose to remain silent after receiving a demand notice under section 13 (2), though, they can send their objections to the Bank/Secured Creditor. If the borrower sends any objections to the notice under section 13 (2) of the Act, then, the Bank should carefully consider those objections and should be fair in looking and replying to the objections. There should be a reply to the objections raised by the borrower under section 13 (3A). If the Bank chooses to ignore section 13 (3A), then, the entire action of the Bank under section 13 of the Act gets vitiated. If the Bank failed to reply to the objections raised by the borrower, then, the borrower can raise the same before the Debt Recovery Tribunal in an appeal under section 17 of the Act. This is the adjudication part and the Bank is supposed to act fairly at this stage considering the object of the special legislation SARFAESI Act, 2002. 3. After the adjudication part is over, then, the Bank proceeds to issue a possession notice under section 13 (4) of the Act informing the borrower that they have taken symbolic possession of the property. This is not actual possession of the secured asset or property of the borrower. The borrower gets a right to question the notice under section 13 (4) and all subsequent measures initiated by the Bank under section 17 of SARFAESI Act, 2002. In view of the clear provision in the Act about the time limit to file an appeal under section 17, the borrower is normally advised to file an appeal under section 13 (4) within the prescribed period. However, the subsequent and many judgments make it clear that all measures of the Bank under section 13 (4) of the Act can be questioned under Section 17 of the Act and as such, the cause of action to file an appeal under section 17 of the Act starts with the notice under section 13 (4) and it continues. That is why, even a challenge to the Sale Notice is entertained though the borrower is silent after receiving the notice under section 13 (4). As the object of the legislation is to help the Banks to recover the outstanding dues speedily, the Tribunals should be liberal when it comes to entertaining Appeals from the borrower under section 17 and substance can be appreciated at any stage. 4. After the possession notice under section 13 (4) and if there is no stay of further proceedings, the Bank will proceed to take physical possession of the property under Section 14 of the Act through District Magistrate or Chief Metropolitan Magistrate etc. Before the Magistrate under Section 14 of the Act, there will not be

any kind of adjudication and notice need not be given to the borrower at this stage. The Magistrate is required to look at the statutory compliance of Section 13 and if the is satisfied, he will assist the Bank in taking physical possession of the property. Normally, the Magistrate Court appoints an Advocate Commissioner to take physical possession of the property and the Bank officials too accompany him. The Magistrate Court can even grant police assistance to take physical possession of the property. If the property is under lock and key, then, the Magistrate Court permits to break-open the lock and thus, physical possession of the property is taken. If the borrower intends to question the order of the Magistrate under section 14 of the Act, he can approach the Debt Recovery Tribunal. Though it is very often seen where the borrower approaches the High Court challenging the action under section 14, the High Court may ask the borrower to approach Debt Recovery Tribunal. There are two conflicting views in this regard. On view supports that only High Court can look into the challenge to an order of the Magistrate under section 14 in view of the specific bar on other courts. Another view is that, as all measures under section 13 can be questioned under section 17 before the Tribunal, the borrower can certainly question the order of the Magistrate or the action under section 14 before the Debt Recovery Tribunal itself. It is to be noted that if there is a clear case, then the Debt Recovery Tribunal can restore the possession back to the borrowers even after taking physical possession.

5. After taking physical possession of the property under section 14, if there is no impediment to proceed further through an order from the Tribunal or the High Court, the Bank will proceed to sell the property/secured interest and the Bank is supposed strictly comply with the provisions of the Act and the SARFAESI Rules in this regard. If the Bank violates the SARFAESI Rules while proceeding to auction the property, then, the entire auction can be set-aside on that ground alone. Even after the confirmation of sale in a public auction conducted by the Bank, the auction can be set-aside if the Debt Recovery Tribunal decides infavour of the borrower in his appeal under section 17 of the Act. From and out of the sale proceedings, the residue is to be returned to the borrower.
Though the procedure and process under SARFAESI Act, 2002 is clear and unambiguous, there is a general feeling among borrowers that the Debt Recovery Tribunal is not fair in many cases and the borrowers feel that the remedy before the Debt Recovery Tribunal is not speedy and effective. Despite the stringent provisions under SARFAESI Act, 2002, no one can undermine the rights of the borrower and his right to property. The observation of Supreme Court in this regard in Karnataka State Financial Corporation Vs. N.Narasimahaiah (2008 (5) SCC 176) is as follows:-

"40. Right to property, although no longer a fundamental right, is still a constitutional right. It is also human right. In the absence of any provision either expressly or by necessary implication, depriving a person therefrom, the Court shall not construe a provision leaning in favour of such deprivation." "In a case where a Court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round." On the issue of functioning of Tribunals in India, the Honble High Court of Calcutta, in Chanda Engineers (India) Ltd Versus U.C.O. Bank (2005 AIR(Cal) 28, 2005 (125) CC 708, was pleased to observe as follows:

(2.) So far as the power of Article 227 is concerned, in earlier, High Courts hardly got any opportunity to apply the power of superintendence under it over the Lower Courts and Tribunals. Numbers of litigations were much less. Lower Courts had enough opportunity to go through procedural propriety. There was no mushroom growing of Tribunals. Only few traditional Tribunals were existing. Provision was normally applied where there was neither any scope of appeal nor any scope of usual revision. But since when various Tribunals either by way of Constitutional amendment or under the respective statutes are formed and also revisional jurisdictions are curtailed by way of amendment of the Code of Civil Procedure particularly in respect of the interlocutory matters, number of applications under Article 227 of the Constitution of India have been increased. Therefore, if the totality of the scenario is projected it will be seen that from when several jurisdictions of the High Courts are curtailed number of making applications under Article 227 of the Constitution of India have been increased. If this is the trend then formation of Tribunals for the sake of people is a big question for the legislature. It is high time to think whether the installation of various Tribunals is really minimizing number of disputes or increasing the number of disputes. This discussion is not academic.
http://drtsarfaesi.blogspot.in/2011/01/sarfaesi-act-2002debt-recovery-tribunal.html