Developments in Co-operative Banking

1 Developments in Co-operative BankingChapter IV1 Under the Banking Regulation Act, 1949 only Urban Co-operative Banks (UCBs), State Co-operative Banks (StCBs) andCentral Co-operative Banks (CCBs) are qualified to be called as banks in the Co-operative sector. The discussion in thisChapter also covers issues relating to other credit co-operatives viz., Primary Agricultural Credit Societies (PACS) and thelong-term structure of rural credit co-operatives. Data on scheduled urban Co-operative banks relate to 2003-04, while thosefor others pertain to Co-operative Banking system, with twobroad segments of urban and rural co-operatives,forms an integral part of the Indian financialsystem.

2 With a wide network and extensivecoverage, these institutions have played animportant developmental role in enlarging theambit of institutional credit by way ofinculcating Banking habits among the poor andthose in remote areas. In recent times, Co-operative banks have tried to improve creditdelivery through some financial structure of Co-operative banking1 thathas evolved over more than fifty years highlightsthe dual role of members as lenders and Co-operative credit structure in the countrycan be divided into two broad segments: the urbanco-operative banks and the rural co-operativecredit institutions (Chart ).

3 While the urbanco-operative Banking system has a single tiercomprising the Primary Co-operative Banks(commonly known as urban Co-operative banks UCBs), the rural Co-operative credit system isChart : Structure of Co-operative Credit InstitutionsCo-operative Credit InstitutionsRural Co-operativeCredit InstitutionsShort-TermStructureState Co-operativeAgriculture and RuralDevelopment BanksPrimary Co-operativeAgriculture and RuralDevelopment BanksLong-TermStructureState Co-operativeBanksCentral Co-operativeBanksPrimary AgriculturalCredit SocietiesUrban Co-operativeBanks98 Report on Trend and Progress of Banking in India, 2003-04divided into long-term and short-term co-operativecredit institutions which have a multi-tierstructure.

4 The short-term Co-operative creditinstitutions have a three-tier structurecomprising State Co-operative Banks (StCBs),Central Co-operative Banks (CCBs), and PrimaryAgricultural Credit Societies (PACSs) which arenot banks but only societies. The long-termco-operative credit institutions have generally atwo tier structure comprising the StateCo-operative Agriculture and rural DevelopmentBanks (SCARDBs) and the Primary Co-operativeAgriculture and rural Development Banks(PCARDBs). Long-term Co-operative creditinstitutions have a unitary structure in someStates, while in other States they have a mixedstructure (unitary and two-tier).

5 The States nothaving long-term Co-operative credit entities areserved by the State Co-operative Banks apartfrom being serviced by the branches of RegionalRural Banks (RRBs) and the rural /semi-urbanbranches of commercial banks. However, in theState of Andhra Pradesh, the co-operativestructure is integrated combining both short-term and long-term regulation and supervision ofco-operative banks poses several challenges inview of the large number of such banks, as alsothe multiple controls by supervisors, includingthe Reserve bank , the State Governments andNABARD. The co-operatives are at present underthe control of State Governments in all mattersrelating to registration, membership, election,financial assistance, loaning powers, businessoperations, loan recovery and audit.

6 Someaspects relating to Banking activities areregulated and supervised by the Reserve Bankof India/NABARD. While urban co-operativebanks come under the supervisory jurisdictionof the Reserve bank , rural co-operatives areregulated by the NABARD. There is thus no cleardemarcation of regulatory powers, which attimes has resulted in cross directives from thecontrolling agencies, thereby undermining theworking of several years of operationalexperience, financial performance of a numberof Co-operative banks is still below their potential(Appendix Table ). The infusion of elementsof good corporate governance, sound investmentpolicy, appropriate internal control systems,better credit risk management, commitment tobetter customer service, and focus on newly-emerging business areas like micro finance, isexpected to strengthen the Co-operative banksThe Reserve bank is in favour of a consultativeapproach to developing a regulatory frameworkand a revival plan in order to ensure a vibrantfuture for the Co-operative sector, and thusencouraging systemic stability of the overallfinancial Co-operative Co-operative Banks (UCBs)

7 Play animportant role as financial intermediaries inurban and semi-urban areas catering to theneeds of the non-agricultural sector, particularlysmall borrowers. In the context of the currenteconomic scenario and problems faced by theco-operative Banking sector, several initiativeswere taken in consultation with the federationsand associations of Co-operative banks. Theseinclude: deferring the application of 90 day NPAnorm for small loans and gold loans up to by two years, giving additional time formeeting the prescribed provisioningrequirements for assets classified in doubtfulcategory and permission to transfer Governmentand other approved securities up to 25 per centto held to maturity (HTM) category.

8 The ReserveBank has taken several initiatives to address theprocedural and regulatory issues. Theconsultative process has already been put inplace with respect to the UCBs in the form of aStanding Advisory Committee. As stated in themid-term Review of annual policy 2004-05, avision document for the future role of UCBs isbeing evolved to ensure depositors interests andavoid contagion, while providing useful serviceto local communities. In regard to structuralissues, the Reserve bank would be encouraginggrowth of strong and viable entities within thesector through consolidation. Further, theReserve bank would continue to pursue with theState and Central Governments regarding theissues that arise in their number of UCBs increased to 2,105including 179 banks under liquidation at end-June 2004 compared with 1,106 in 1966 theyear in which the UCBs were brought under thepurview of Banking Regulation Act 1949 (AsApplicable to Co-operative Societies (AACS)).

9 These include 80 salary earners banks, 112 Mahila banks and 25 SC/ST banks. State-wise99 Developments in Co-operative BankingTable : Distribution of Urban Co-operative Banks : State-wise(As at end-March 2004) of the StateNo. of banksNo. of branches Office cum-branchCounters123451 Andhra Pradesh133299102 Assam/Manipur/Meghalaya/Sikkim/Nagaland/ Tripura/Arunachal Pradesh192603 Bihar/Jharkhand5514 Gujarat3281,09135 Jammu & Kashmir41746 Karnataka3001,052187 Kerala6334408 Madhya Pradesh8110849 Maharashtra & Goa6394,3332310 New Delhi1660211 Orissa1350412 Punjab/Haryana/Himachal Pradesh1748113 Rajasthan42161714 Tamil Nadu & Pondicherry134180215 Uttar Pradesh & Uttaranchal803061416 West Bengal52862 TOTAL1,9268,16695distribution of branches shows that around 80per cent of the UCBs are concentrated in fiveStates viz.

10 , Maharashtra, Gujarat, Karnataka,Andhra Pradesh and Tamil Nadu (Table ).Only nine UCBs had a deposit size of more ,000 crore, while most of the UCBs (about60 per cent) had a deposit size of less crore (Table ) the 8,166 branches of UCBs, 883 wereunit banks , banks which function as HeadOffice-cum-Branches. The Centre-wisedistribution shows that Ahmedabad, Bangalore,Hyderabad and Nagpur had the highest numberof unit banks (Table ).Table : Distribution of UrbanCo-operative Banks : Deposit size-wise(As on March 31, 2004)Deposit sizeNo. of banks12 Less than ,000 crore18 Above ,000 crore9 Total1,539 ## Data in respect of 387 banks not : Distribution of Unit Banks:Centre-wise(As at end-March 2004)Sr.