Cooperative Banks in India

Agenda
Cooperative Banking Structure in India Features of Cooperative Banks Plethora of Problems in Cooperative Banking Sector Possible Solutions to Resolve Crisis

Cooperative Banking Structure in India

Emergence of Cooperative Banks

Enactment of Cooperative Credit Societies Act of 1904 New Act in 1912 was passed for establishment of Cooperative Central Banks To meet needs of small and medium income groups not adequately met through public and private sector banks Cooperative Banks are member driven institutions Every member has to have stake in the capital and irrespective of a member's shareholding, each member has only one vote. One Member, One Vote Registered with State based Registrar of Cooperative Societies No Profit, No Loss basis

Structure of Cooperative Banks

Rural Cooperative Credit Institutions

Short Term Credit

State Cooperative Banks District Central Cooperative Banks Primary Agricultural Cooperative Societies State Cooperative Agriculture and Rural Development Banks (SCARDB) Primary Cooperative Agriculture and Rural Development Banks (PCARDB)

Long Term Credit

Urban Cooperative Banks

Structure of Cooperative Banks: 3-Tier Architecture

RBI NABARD State Cooperative Banks District Central Cooperative Banks Urban Cooperative Banks

State Land Development Banks

District Central Land Development Banks Primary Land Development Bank Branches of State Land Development Banks

Primary Agricultural Credit Societies

Cooperative Credit Institutions: Classified as per Term of Credit

Cooperative Credit Institutions

Rural Cooperative Credit Institutions

Urban Cooperative Banks

Short Term Credit

Long Term Credit (Land Development Banks) State Cooperative Agriculture and Rural Development Banks (SCARDB)

State Cooperative Banks

District Central Cooperative Bank

Primary Agricultural Cooperative Societies

Primary Cooperative Agriculture and Rural Development Banks (PCARDB)

Scheduled Banking Structure In India

Scheduled Banks in India

Scheduled Commercial Banks

Scheduled Cooperative Banks

Public Sector Banks (27)

Private Sector Banks (30)

Foreign Banks (42)

Other Nationalized Banks (19)
State Bank of India and Associates (8)

Regional Rural Banks (196)

Scheduled Urban Cooperative Banks (51)

Scheduled State Cooperative Banks (16)

Old Private Sector Banks (23)

New Private Sector Banks (7)

Features of Cooperative Banks

Cooperative Banks

UCBs Not permitted to deal in Forex directly (On 3 UCBs allowed to access directly) UCB Exposure to Non-fund business (Letter of Credit and Bank Guarantees) is limited Restrictions in dealing in above due to small size and inadequate expertise UCBs grew at phenomenal rates in 70s & 90s 1993 Narasimhan Committee recommended liberalisation of norms for cooperative banks This led to mushrooming of Cooperative Banks

Cooperative Banks

2090 UCBs: Majority in Maharashtra (600), Gujarat (350), Karnataka, Andhra Pradesh and Kerala 52 banks are scheduled UCBs Cooperative Banks came under the purview of Banking Regulations Act only in 1966 Previously, RBI regulated Urban Coop Banks & NABARD regulated the Rural Coop Banks Now, RBI is directly regulating all Coop Banks State Registrars of Cooperative Societies also regulate certain functions of rural and urban coop banks

Cooperative Banks

Multi State Urban Coop Banks Regulated by Union Government Registered under Multi-State Cooperative Societies Act RBI is regulatory and supervisory authority Managerial aspects come under respective State Cooperative Societies Act Coop Banks area of operation mostly confines to a single or adjoining districts Only Coop Banks with Rs. 50 Crores net owned funds or above can extend their area of operation to rest of country

Plethora of Problems in Cooperative Banking Sector

Plethora of Problems

General mismanagement Financial impropriety Inadequate loan appraisal and credit planning Poor risk management Pathetic loan recovery Shocking investment decisions and lack of skilled manpower and leadership High proclaiming of dividends

Dual Control

Co-operative societies are governed by their respective state governments Powers derived from respective State Cooperative Societies Acts They are also governed by the Reserve Bank of India (under the Banking Regulations Act). Dual control necessitate legislative changes to State and Central Acts Narasimhan Committee II had also unequivocally recommended for ending dual control regime over Cooperative Banks

Dual Control

Many areas which directly relate to supervision over them have been kept beyond RBI's authority

RBI has no authority to deal with delinquent management in a cooperative bank. This requires intervention of the Registrar of Cooperative Societies Making investments out of surplus resources within the decision making powers of cooperative banks subject to RBI guidelines but this needs approval of the Registrar Writing off an unrealizable debt also requires permission of the Registrar Conflict between State Government and RBI

DICGC not to cover Multi-State Cooperative Banks

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

High Cost of Capital

Cooperative Banks not able to provide loans at cheap interest rates on par with commercial bank High cost of capital forced borrowers to shift to Commercial Banks Competition from Commercial Banks (especially from Private Sector Banks) Sugar and Textiles Cooperatives borrow at higher cost from Coop Banks forcing many companies to go into red National Cooperative Development Council is providing 20% subsidy on plant and machinery

Possible Solution to Resolve Crisis

Two Solutions

Solution 1: Restructuring and Revival of Cooperative Banking Structure

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

Solution 1: Restructuring and Revival of Cooperative Banking Structure

Option 1: Bringing in the subject of cooperation under concurrent list so as to enable the Union Government to legislate in matters pertaining to cooperative banking. But such a move involves amendments to the Constitution. Option 2: States enacting progressive legislations

3 ways of resolving dual control issues

Registrars confine their acts only to register and accept byelaws

Option 3: Demarcate the regulatory roles of state governments and RBI in the State Acts

Four Pronged Approach to Resolve Problems

Aligning co-operative banking sector with the rest of the financial system Deciding the future of weak entities Improving governance Resolving the issues emanating from dual control

Supervisory and Regulatory Rigours

In 1993, RBI introduced Income Recognition and Asset Classification Norms to Cooperative Banks Delay in introduction of Capital Adequacy norms until 2002 Main risk exposure of Cooperative Banks is not the credit risk but interest rates risk Interest rates particularly on deposits are out of sync with the rest of the banking sector Observance of Risk and Asset Liability Management guidelines should assume importance Prescription of disclosure standards:

Disclosure of level of owned funds, unimpaired networth, CRAR. Gross/Net NPAs, operating results, ROA. compliance with reserve requirements, per employee productivity, etc. with balance sheet figures

Strengthening the audit systems Professionalisation of Audit Mandatory concurrent audit for larger banks Redesigning audit format to ensure transparency and accountability Many state governments have yet to respond positively despite persuasion by RBI

Supervisory and Regulatory Rigours

Should banks have unrestricted access to inter-bank markets? Resorting to this avenue is essentially to meet their temporary liquidity mismatches rather than raising short term resources to fund their long term assets Volatile nature of capital market restriction of Coop Banks to Capital Markets Only Cooperative Banks with Rs. 50 Crores owned funds to go beyond their state of jurisdiction.

Supervisory and Regulatory Rigours

Whether a system can be evolved whereby fire-walls can be erected to avert payment crisis of co-operative banks by way of increased SLR / CRR Mandatory cash deposits with clearing houses for meeting payment obligations in the event of liquidity crisis

Increased Safety

Future set-up of weak Banks

Many licenses have already been cancelled and the banks have closed down Registrars should direct the co-operative courts for speedy recovery process of bad loans (substandard and doubtful assets) Unviable branches should either be relocated or closed down Avenues should be explored for the bank getting additional capital Merger with a well-managed bank. But, forcible merger of strong banks with weak banks should be strictly avoided

Improving Governance

Mechanism to ensure an effective system of internal governance Chief Executive should be a person of clean image and display a professional attitude Board should consist of knowledgeable persons who are aware of their responsibilities as board members Findings of audit and inspection teams and ensure compliance Ensure compliance with various regulatory instructions issued by RBI as also state governments

Separate Supervisory Structure for Cooperative Banks?

Large number of Cooperative Banks puts severe strain on the supervising and monitoring system RBI inspects them usually once in two years RBI has recently mooted the idea of supervision of Cooperative Banks to be entrusted to a separate apex authority

Prof. A Vaidyanathan of the Chennaibased Madras Institute of Development Studies appointed as the chairman of the task force To prepare an action plan for reviving rural cooperative banks Assessment of the financial assistance that the cooperative banking institutions will require for revival To submit its report by October 31, 2004

Recent Task force for revival of Cooperative banks

Other Reform Measures Suggested

Credit Appraisal Norms to be made more stringent Software for credit rating analysis based on balance sheet figures Political Non-interference Credit monitoring (post disbursal) and review one of the weak points of Indian Banking Industry Credit Recovery Policy to be in place (to curtail the relief to defaulting borrowers) Provisions under Securitization Act (SARFAESI) needs to be increased Measures for Corporate Debt Restructuring Exchange of Information about defaulting borrowers

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

Closure of Cooperative Banks

Release of over Rs. 100,000 Crores of liquidity to Commercial Banks and other Financial Institutions Encourage Commercial banks to establish presence at Grassroot level Model of MicroFinance can be encouraged in association with NGOs and Gram Panchayats (Community level). Better reach to priority sector via MicroFinancing This has to be done in a phased manner This will result in lower cost to borrowers

Control Measures

Better Control of flow of funds through smaller number of PSU Banks and Private Banks Regulation becomes easier Number of Intermediaries decreases More Private Sector Banks also have identified that Agricultural lending (by MicroFinance) is comparatively less risky than Industrial lending