PROJECT REPORT ON

An Analytical study of Capital augmentation of cooperative bank with special reference to The Akola Urban Co-operative Bank Ltd, Akola
COMPLETED FOR The Akola Urban Co-operative Bank Ltd, Akola

SUBMITTED BY

Mr. Rajesh J. Soni

SUBMITTED TO PUNE UNIVERSITY IN PARTIAL FULFILLMENT OF MASTER DEGREE IN BUSINESS ADMINISTRATION 2010-12

Jayawant Institute of Computer Applications (JSPMs), Pune

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ACKNOWLEDGEMENT
At the outset, I would like to thank The Akola Urban Cooperative Bank, Akola for giving me the approval to do this project in the organization. I am grateful to Board Secretary Akola for the moral support, encouragement and generous assistance. I thank my faculty guide MR.VIKAS BARBATE . For coordinating project work and giving me the guidance. This project would not have been possible without his help. I also wish to recognize and thank DR. AJAY KUMAR (Director) for inspiring me to make the best of the opportunity provided. A heartfelt thanks to the many respondents surveyed whose ideas, critical insights and suggestions have been invaluable in the preparation of this report. Last but by no means the least I would like to convey my special thanks to all the faculty members of ASMs Institute of Professional studies MBA for giving me the opportunity to work on this project and for providing us the computer lab and library facilities. Mr. Rajesh . J. Soni

DECLARATION

I Mr. Rahesh .J . Soni , a student of Jayawant Institute of Computer Applications

(JSPMs ) PUNE

hereby declare that the project report submitted by me is an original work conducted by me for the partial fulfillment of the degree of Master of Business Administration and the same has not been submitted by me for any other examination of this university or any other university.

Mr. Rajesh . J. Soni

Chapter Index
Sr. No. 1 2 3 4 5 6 7 8 9 10 Contents Introduction Company Profile Scope and objectives Research Methodology Data Analysis Observations and Findings Recommendation and suggestion Limitations Conclusion Bibliography Pg. No. 08-32 33-36 37-38 39-40 41-54 55 56 - 58 59- 60 61 - 62 63

EXECUTIVE SUMMARY Urban co-operative bank are an important par of financial system in India. It is therefore, necessary, that the UCB emerge as a sound an healthy network of jointly owned, democratically controlled an ethically manage banking institution providing need based banking system in India essentially in the middle and lower middle class an marginalize section of society. If we observe we will see that urban co operative witnessed a phenomenal growth an emerge as an important means of infrastructure development. In such situation, nee for capital will arise which can be meet by augmentation of capital. Capital augmentation can be defined as a system by which various method or process has been adopted to raise the capital structure of the UCB by various capital adequacy norms. The main purpose of capital augmentation is to increase the financial viability of UCB by using various instrument of capital augmentation as given in RBI circulars. Capital augmentation:Capital augmentation is totally a new concept which guides UCB in strengthening capital of Cubby following some norms of RBI. The concept is yet to be implemented and the project covered an analysis of capital augmentation and tries to explain it benefits obstacles in its implementation. Location of project:The project has been complete entirely in the corporate office of Akola Urban Co-operative Bank Ltd an it covered the study of its branches locate within the city...

Duration of project:The project has been completed in 60 days and it is as per the rules of Pune University. 1. In the first chapter name introduction we have explain about the cooperative movement in India, structure of cooperative movement in India, establishment of cooperative society act, importance of cooperative bank, its scope, need and development of cooperative bank in India. 2. In the II chapter we have explain about the topic capital augmentation, its concept, importance, objective, need etc. This chapter also covered various capital adequacy norm of RBI, basal committee recommendation an instrument of capital augmentation as the RBI norms. 3. Chapter III is Research Methodology it cover objective of research, need of research, sources of data collection and type of research design. It is also mentioned that why the topic of capital augmentation has been selected a structure of project is being mention. Objective of research methodology : To analyze and understand the concept of capital augmentation. To find out the need a scope of capital augmentation. To search the various means of capital augmentation. Importance of UCB in financial reform. To look after the role played by cooperative bank can play in capital augmentation.

Limitations: Concept of augmentation is new so collection of data is complicate task. The concept is yet to be implemented so conclusion may vary. Time is not sufficient because topic need detail study. There is no general specification given on capital augmentation in any site or book. Result will be approximate only. In the IV chapter Profile of Akola Urban Co-operative Bank. Establishment of Akola urban cooperative bank, their progress report an journey of Akola urban is mention. A case has also been taken to give information about the Akola urban bank. In the V chapter data Analyses an interpretation data of different has been compare which includes last 3 yrs comparisons an result thereof. Conclusion:In the last chapter i.e. conclusion we have given conclusion of the whole project along with the case study of Akola urban bank. It includes following points 1. 2. 3. 4. 5. Bank need to improve it NPA, s. It needs to invest in equities or bonds. Capital of bank needs good management. Reserve surplus need to be use for building of capital Management needs to be improved for expansion of AUB in metros.

Chapter-1.
INTRODUCTION CAPITAL AUGMENTATION MEANING:Capital augmentation is a division of two terms namely "capital" and "augmentation". Capital means owned money invest for some purpose and "augment" means to raise, to increase, to boost. So in general terms "Capital Augmentation is the process to raise capital to the higher level so that needs for capital can be fulfilled. Capital augmentation can be defined in other words as, "it is a instrument by which various sources of capital increment can be used to improve the capital structure. It is necessary in today as the requirement of funds from various sectors has been increased and to cope up with such a situation, it is necessary to maintain adequate capital to fulfill needs of various people. Especially in urban and primary co-operative banks the demand for agricultural loans and various other loans for rural development has been increased, so in such case the need for augmentation of capital arises. Capital augmentation can be done by few ways such as issue of bonds, equities and other commercial paper. But there are some guidelines given by "RBP regarding capital augmentation to co-operative banks. That can be explaining in details in upcoming chapters, but before that we should understand the aims and objectives of capital augmentation in details. IMPORTANCE: Strengthen of financial position of urban co-operative banks in India. Improvement in the banking structure of urban and rural sectors. Development of infrastructure, small scale industrial development in rural sectors. Effective utilization of various instruments in raising the lending capacity of urban co-operative banks, especially in rural development. Augmentation in the capital ratio of banks in rural region. To raise the funding ability of the banks for rural development. 8

Create a reform in banking sector of rural region. Following the announcement in the Annual Policy Statement for the year

Instruments for Augmenting Capital Funds-UCBs:2006-07, the Reserve Bank constituted a Working Group (Chairman: Shri N. S. Vishwanathan) to examine the issues concerning raising of capital by UCBs and identifying alternate instruments / avenues for augmenting their capital funds. The Working Group had members drawn from the urban co-operative banking sector and state governments. The Group submitted its report in November 2006. 2. The recommendations of the Working Group have been examined and it has been decided that in order to facilitate raising of capital funds (Tier I and Tier II) by UCBs for the purpose of compliance with the prescribed Capital Adequacy norms, they be permitted to issue the following financial instruments: A) Preference shares:Preference shares may be of the following types: i) ii) iii) iv) Perpetual Perpetual Redeemable Non-Cumulative Cumulative Non-Cumulative preference preference preference shares (PNCPS) shares (PCPS) shares (RNCPS) (RCPS)

Redeemable Cumulative preference shares

The detailed guidelines are given in Annex L While Perpetual Non-Cumulative Preference Shares (PNCPS) would be eligible to be treated as Tier I capital, Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be eligible to be treated as Tier II capital. UCBs, however, are not permitted to subscribe to the preference shares of other UCBs.

B) Long Term Deposits:UCBs may be permitted to raise term deposits for a minimum period of not less than 5 years, which will be eligible to be treated as Tier II capital. The detailed guidelines are given.

3. Share Linkage Norms:As per the current regulatory prescriptions, borrowings from UCBs are linked to shareholdings of the borrowing members. At present, the shareholding requirement is 2.5% for secured borrowings and 5% for unsecured borrowings. Taking into account the recommendation of the Working Group and the feedback received in this regard, it has been decided that the extant share linking norm may be applicable for member's shareholdings up to the limit of 5% of the total paid up share capital of the bank Where a member is already holding 5% of the total paid up share capital of an UCB, it would not be necessary for him to subscribe to any additional share capital on account of the application of the extant share linking norms. In other words, a borrowing member may be required to hold shares for an amount that may be computed as per the extant share linking norms or for an amount that is 5% of the total paid up share capital of the bank , whichever is lower. 4. Classification of Capital Funds:4.1 As per the extant instructions, capital funds are divided into Tier I capital and Tier II capital. Elements of Tier II capital are reckoned as capital funds up to a maximum of 100 per cent of Tier I capital (please refer to our circular UBD.No.DS.PCB.DIR.2/13.05.00/2004-05 dated April 15, 2005). It has now been decided that Tier II capital may further be divided into upper and lower tiers. Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be treated as upper Tier II capital. Long Term Deposits would be treated as lower Tier II capital. PNCPS should not exceed 20 % of Tier I capital (excluding PNCPS). Long term deposit should not exceed 50 % of Tier I capital and that total Tier II should not exceed Tier I capital. 4.2 As stated above, elements of Tier II capital are reckoned as capital funds up to a maximum of 100 per cent of Tier I capital. It has now been decided that the above restriction may be kept in abeyance for five years, i.e., up to March 31, 2013 for banks that are having CRAR less than the 9 % in order to give time to the banks to raise Tier I capital. In other words, Tier II capital would be reckoned as capital funds for 10

capital adequacy purpose even if a bank does not have Tier I capital. However, during this period, for the purpose of capital adequacy requirement, lower Tier II capital alone would be restricted to 50 % of the prescribed CRAR and the progressive discount in respect of Tier II capital would, be applicable. UCBs may issue preference shares and Long Term Deposits subject to compliance with their bye-laws/provisions of the Co-operative Societies Act under which they are registered and with the approval of the concerned Registrar of Co-operative Societies /Central Registrar of Co-operative Societies, wherever applicable and the Reserve Bank of India. The Central/ State Governments are being requested separately to make necessary amendments to Multi-State Cooperative Societies Act / Co-operative Societies Acts /Rules, wherever necessary. Guidelines to Primary (Urban) Cooperative Banks (UCBs) on issue of Preference Shares :A, Perpetual Non-Cumulative Preference Shares (PNCPS) :UCBs may issue Perpetual Non-Cumulative Preference Shares (PNCPS) with the prior permission of the respective Registrar/Central Register of Cooperative Societies (RCS/CRCS) granted in consultation with the Reserve Bank. PNCPS should be issued at par. The amounts raised through PNCPS which comply with the following terms and conditions will be eligible to be treated as Tier I capital. 2. Terms of Issue 2.1 Limits:The outstanding amount of PNCPS would be eligible for inclusion in Tier I capital and should not exceed 20 % of total Tier I capital excluding PNCPS at any point of time. The above limit will be based on the amount of Tier I capital after deduction of goodwill and other intangible assets but before the deduction of investments. 2.2 Amount: - The amount of PNCPS to be raised may be decided by the Board of Directors of banks. 2.3 Maturity: - The PNCPS shall be perpetual. 2.4 Options:(i) PNCPS shall not be issued with a 'put option' or' step up option',

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(ii) (a) (b)

However, banks may issue PNCPS with a call option at a particular date subject to following conditions: The call option on the instrument is permissible after the instrument has run for at least ten years; and Call option shall be exercised only with the prior approval of Reserve Bank of India (Urban Banks Department). While considering the proposals received from banks for exercising the call option, the Reserve Bank would, among other things, take into consideration the bank's CRAR position both at the time of exercise of the call option and after exercise of the call option.

2.5 Classification in the Balance Sheet: - These instruments will be classified as 'capital' and shown separately in the Balance Sheet. 2.6 Dividend: - The rate of dividend payable to the investors will be a fixed rate or a floating rate referenced to a market determined rupee interest benchmark rate. 2.7 Payment of Dividend:(a) (i) (ii) The issuing bank shall pay dividend subject to availability of distributable surplus out of current year's earnings, and if The bank's CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank; The impact of such payment does not result in bank's capital to risk weighted assets ratio (CRAR) falling below or remaining below the minimum regulatory requirement prescribed by the Reserve Bank; and (iii) (b) While paying dividends, it may be ensured that the current year balance sheet does not show any accumulated losses The dividend shall not be cumulative, i.e., dividend missed in a year will not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. (c) All instances of non-payment of dividend in consequence of conditions as at (a) above should be reported by the issuing banks to the Chief General Managers-inCharge of Urban Banks Department, Central Office of the Reserve Bank of India, Mumbai.

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2.8 Seniority of claim: - The claims of the investors in PNCPS shall be senior to the claims of investors in equity shares and subordinated to the claims of all other creditors and the depositors. 2.9 Voting rights: - The investors in PNCPS will not be eligible for any voting rights. 2.10 Other conditions:(a) (b) (c) PNCPS should be fully paid-up, unsecured, and free of any restrictive clauses. The PNCPS may be rated at the discretion of the issuer. Banks should comply with the terms and conditions, if any, stipulated by other regulatory authorities in regard to issue of the PNCPS, provided they do not result in violation of any of the terms and conditions specified in these guidelines. Any instance of conflict, shall be brought to the notice of the RBI for seeking confirmation of the eligibility of the instrument for inclusion in Tier I capital. 3. Compliance with Reserve Requirements:(a) The funds collected for the issue and held by the bank pending finalization of allotment of the Tier I preference shares will have to be taken into account for the purpose of calculating reserve requirements. (b) However, the total amount raised by the bank by issue of PNCPS shall not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will not attract CRR / SLR requirements. 4. Reporting Requirements:Banks issuing PNCPS shall submit a report to the Chief General Managerin-charge, Urban Banks Department , Reserve Bank of India, Mumbai giving details of the capital raised, including the terms and conditions of issue as specified above together with a copy of the offer document soon after the issue is completed. 5. Investment by Commercial Banks in perpetual non-cumulative preference shares issued by UCBs (a) Commercial banks can invest in PNCPS issued by the UCBs within the 10 % ceiling for unlisted securities or as prescribed by Department of Banking Operations and Development (DBOD), Central Office, Reserve Bank of India, provided they are rated. 13

(b)

The investments in PNCPS issued by UCBs will attract such risk weight for capital adequacy purposes, as may be prescribed by DBOD. in/grant of advances against Tier I preference shares UCBs

6. Investment

should not invest in PNCPS of other banks; nor they should grant advances against the security of the PNCPS issued by them or other banks. B. Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative Preference (RCPS) 1. Terms of Issue :UCBs may issue Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS) with the prior permission of the respective Registrar/Central Register of Cooperative Societies (RCS/CRCS) granted in consultation with the Reserve Bank. These three instruments will be collectively referred to as Tier II preference shares. These Tier II preference shares should be issued at par. The amounts raised through the Tier II preference shares, which comply with the following terms and conditions, will be eligible to be treated as upper Tier II capital. 2.1 Characteristics of the instruments The Tier II preference shares could be either perpetual (PCPS) or dated (RNCPS and RCPS) instruments with a fixed maturity of minimum 15 years. 2.2 Limits The outstanding amount of these instruments along with other components of Tier II capital shall not exceed 100% of Tier I capital at any point of time. The above limit will be based on the amount of Tier I capital after deduction of goodwill and other intangible assets but before the deduction of investments. 2.3 Amount The amount to be raised may be decided by the Board of Directors of banks. Shares (RNCPS) / Redeemable Cumulative Preference Shares

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2.4 Options:(i) (ii) (a) (b) These instruments shall not be issued with a 'put option', However, banks may issue the instruments with a call option at a particular date subject to strict compliance with each of the following conditions: The call option on the instrument is permissible after the instrument has run for at least ten years; and Call option shall be exercised only with the prior approval of Reserve Bank of India (Urban Banks Department). While considering the proposals received from banks for exercising the call option, the Reserve Bank would, among other things, take into consideration the bank's CRAR position both at the time of exercise of the call option and after exercise of the call option. 2.5. Step-up option:The issuing bank may have a step-up option, which may be exercised only once during the whole life of the instrument, in conjunction with the call option, after the lapse often years from the date of issue. The step-up shall not be more than 100 bps. The limits on step-up apply to the all-in cost of the debt to the issuing banks. 2.6. Classification in the balance sheet: - These instruments will be classified as 'borrowings' and shown separately in the Balance sheet. 2.7 Coupon: - The coupon payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. 2.8. Payment of coupon:2.8.1 The coupon will be payable only if (a) (b) The bank's CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank. The impact of such payment does not result in bank's CRAR falling below or remaining below the minimum regulatory requirement prescribed by the Reserve Bank. (c) The bank does not have a net loss. For this purpose, the Net Loss is defined as either 15

(i) (ii) (d)

The accumulated loss at the end of the previous financial year or The loss incurred during the current financial year. In the case of PCPS and RCPS the unpaid coupon will be treated as a liability. The interest amount due and remaining unpaid may be allowed to be paid in later years subject to the bank complying with the above requirements.

(e)

In the case of RNCPS, deferred coupon will not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. 2.8.2. All instances of non-payment of interest should be notified by the

issuing banks to the Chief General Managers-in-Charge of Urban Banks Department, Central Office of the Reserve Bank of India, Mumbai. 2.9. Redemption / repayment of redeemable preference shares included in Upper Tier II Redemption of these instruments at maturity shall be made only with the prior approval of the Reserve Bank of India (Urban Banks Department) subject inter alia to the following conditions: (a) (b) The bank's CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank. The impact of such payment does not result in bank's CRAR falling below or remaining below the minimum regulatory requirement prescribed by the Reserve Bank. 2.10. Seniority of claim:The claims of the investors in these instruments shall be senior to the claims of investors in instruments eligible for inclusion in Tier I capital and subordinate to the claims of all other creditors including those in lower Tier II and the depositors. Amongst the investors of various instruments included in upper Tier II, the claims shall info pari-passu with each other. 2 11 Voting rights: - The investors in Tier II preference shares shall not be eligible for any voting rights. 2.12 Amortization for the purpose of computing CRAR:-

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The Redeemable Preference Shares (both cumulative and non-cumulative) shall be subjected to a progressive discount for capital adequacy purposes over the last five years of their tenor, as they approach maturity as indicated in the table below for being eligible for inclusion in Tier II capital.

2.13 Other conditions:(a) (b) (c) The Tier II preference shares should be fully paid-up, unsecured, and free of any restrictive clauses. The Tier II preference shares may be rated at the discretion of the issuer. Banks should comply with the terms and conditions, if any, stipulated by other regulatory authorities in regard to issue of the Tier II Preference Shares, provided they do not result in violation of any of the terms and conditions specified in these guidelines. Any instance of conflict shall be brought to the notice of the RBI for seeking confirmation of the eligibility of the instrument for inclusion in Tier II capital. 3. Compliance with Reserve Requirements (a) The funds collected by the bank and held pending finalization of allotment of these installments will have to be taken into account for the purpose of calculating reserve requirements. (b) The total amount raised by a bank through the issue of these instruments shall be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR / SLR requirements. 4. Reporting Requirements:UCBs issuing these instruments shall submit a report to the Chief General Manager-in-charge, Urban Banks Department, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms and conditions of issue specified above together with a copy of the offer document soon after the issue is completed. 5. Commercial Bank's investment in Tier II preference shares issued by UCBs

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(a)

Commercial Banks may invest in Tier II preference shares issued by the UCBs within the 10 % ceiling for unlisted securities or as prescribed by Department of Banking Operations and Development (DBOD), Central Office, Reserve Bank of India, provided they are rated

(b)

Investments in Tier II preference shares will attract such risk weight for capital adequacy purposes, as may be prescribed by DBOD.

Guidelines to Primary (Urban) Co-operative Banks (UCBs) on issuance of Long Term Deposits 1. Term of Issue:UCBs may issue Long Term Deposits (LTD) with the prior permission of the respective Registrar/Central Register of Cooperative Societies (RCS/CRCS) granted in consultation with the Reserve Bank. LTDs may be issued to members and nonmembers, including those outside the area of operations of the UCB concerned. The amounts rose through LTD, which comply with the following terms and conditions will be eligible to be treated as lower Tier II capital. 2.1 Maturity: - LTD should have a minimum maturity of not less than 5 years. 2.2 Limits: - The outstanding amount of LTD, which is eligible to be reckoned as Tier II capital, will be limited to 50 percent of Tier I capital. The above limit will be based on the amount of Tier I capital after deduction of goodwill and other intangible assets but before the deduction of equity investments in subsidiaries, if any. 2.3 Amount: - The amount to be raised may be decided by the Board of Directors of banks. 2.4 Seniority of Claims:LTD will be subordinated to the claims of depositors and other creditors but would rank senior to the claims of shareholders, including holders of preference shares (both Tier I & Tier II). Among investors of instruments included in lower Tier II, the claims shall rank pan passu with each other.

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Options:(a) (b) LTD shall not be issued with a cput option or a 'step up option. The 'call option' will be permissible and may be exercised after 5 years with prior permission of the Reserve Bank. While considering the proposals received from banks for exercising the call option the Reserve Bank would, among other things, take into consideration the bank's CRAR position both at the time of exercise of the call option and after exercise of the call option.

2.6 Redemption/prepayment:Repayment of LTD at maturity shall be made only with the prior approval of the Reserve Bank of India (Urban Banks Department, Central Office) subject inter alia to the following conditions: (i) (ii) The bank's CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank. The impact of such repayment does not result in bank's CRAR falling below or remaining below the minimum regulatory requirement prescribed by the Reserve Bank. 2.7 Interest Rate: - LTD may bear a fixed rate of interest or a floating rate of interest referenced to a market determined rupee interest benchmark rate. 2.8 DICGC Cover: - LTD will not be eligible for DICGC cover 2.9 Progressive Discount: - These deposits will be subjected to a progressive discount for capital adequacy purposes as under: Remaining period of Maturity Less than one year More than one year and Less than two years More than two years and less than three years More than three years and less than four years More than four years and less than five years. Rate of Discount 100% 80% 60% 40% 20%

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2.10 Classification in the Balance Sheet: - These instruments will be classified as 'borrowings' and shown separately in the Balance Sheet. 3. Reserve Requirement:Total amount raised by a bank through the issue of LTD will be reckoned as a liability for the computation of net demand and time liabilities for the purpose of reserve requirements (CRR and SLR). 4. Reporting Requirements:Banks issuing such long term deposits shall submit a report to the Chief General Manager-in-charge, Urban Banks Department, Reserve Bank of India, Mumbai giving details of the deposit raised, including the terms of issue specified as above. 5 Investment in/grant of advances against LTD:UCBs should not invest in LTD of other UCBs; nor should they grant advances against the security of LTD issued by them or by other banks. Capital Adequacy Standards:1. General The fundamental objective behind introducing Capital to Risk Weighted Asset Ratio (CRAR) framework is to strengthen the soundness and stability of the rural co-operative banks. 2. Definition of Capital Funds etc :The Capital Funds can be segregated into two broad groups/tiers - Tier I and Tier II. While Tier I Capital, otherwise known as core capital, provides the most permanent and readily available support to a bank against unexpected losses, the Tier 11 capital consists elements that are less readily available. 2.1. Tier I Capital/Core Capital :Tier I Capital would include the following items: (a) (b) (c) Paid up share capital collected from regular members of a bank having voting powers. Free Reserves Capital Reserve representing surplus arising out of sale proceeds of assets.

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(d)

Any surplus (net) in profit and loss account i.e. balance after appropriation towards dividend payable, education fund, other funds whose utilisation is defined and asset loss, if any, etc.

Note:Amount of intangible assets, losses in current year and those brought forward from previous periods, deficit in NPA provisions, income wrongly recognized on non performing assets, provision required for liability devolved on bank etc., will be deducted from Tier I Capital. 2.2. Tier II Capital 2.2.1 Undisclosed Reserves:These often have characteristics similar to equity and disclosed reserves. They have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulation of profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses. 2.2.2. Revaluation Reserves:These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as 'Core Capital1. Revaluation reserves arise from revaluation of assets that are undervalued on the bank's books. The typical examples in this regard are bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation of those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 percent when determining their value for inclusion in Tier II capital i.e. only 45% of revaluation reserve is available for inclusion in Tier II capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.

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2.2.3. General Provisions and Loss Reserves:These will include such provisions of general nature appearing in the books of the bank which are not attributed to any identified potential loss or a diminution in value of an asset or a known liability. Adequate care must be taken to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier II capital as indicated above. To illustrate, excess provision in respect of Bad and Doubtful Debt, general provision for Standard Assets etc. could be considered for inclusion under this category. Such provisions which are considered for inclusion in Tier II capital will be admitted up to 1.25% of total weighted risk assets. 2.2.4 Investment Fluctuation Reserve:Balance, if any, in Investment Fluctuation Reserve of bank. Note: It may be noted that the total of Tier II elements will be limited to a maximum of 100 percent of total Tier I elements for the purpose of compliance with the norms. 3. Risk Adjusted Assets and Off-Balance Sheet Items:Risk adjusted assets would mean weighted aggregate of funded and nonfunded items. Degrees of credit risk expressed as percentage weightings have been assigned to Balance Sheet assets and conversion factors to off-Balance Sheet items. The value of each asset/item shall be multiplied by the relevant weights to produce riskadjusted values of assets and of off-Balance Sheet items. CAPITAL ADEQUACY l. Introduction:Capital acts as a buffer in times of crisis or poor performance by a bank. Sufficiency of capital also instills depositors' confidence. As such, adequacy of capital is

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one of the pre-conditions for licensing of a new bank as well as its continuance in business.

2 Statutory Requirements:In terms of the provisions contained in Section 11 of Banking Regulation Act (AACS), no co-operative bank shall commence or carry on banking business unless the aggregate value of its paid up capital and reserves is not less than one lakh of rupees. In addition, under Section 22 (3) (d) of the above Act, the Reserve Bank prescribes the minimum entry point capital (entry point norms) from time to time, for setting-up of a new Primary (Urban) Cooperative Bank. 3 Share linking to Borrowings:Traditionally, Primary (Urban) Cooperative Banks have been augmenting their share capital by linking the same to the borrowings of the members. The Reserve Bank has prescribed the following share linking norms: (i) (ii) (iii) 5% of the borrowings, if the borrowings are on unsecured basis. 2.5% of the borrowings, in case of secured borrowings. In case of secured borrowings by SSIs, 2.5% of the borrowings, of which 1% is to be collected initially and the balance of 1.5% is to be collected in the course of next 2 years. The above share linking norm may be applicable for member's shareholdings up to the limit of 5% of the total paid up share capital of the bank. Where a member is already holding 5% of the total paid up share capital of an UCB, it would not be necessary for him/her to subscribe to any additional share capital on account of the application of extant share linking norms. In other words, a borrowing member may be required to hold shares for an amount that may be computed as per the extant share linking norms or for an amount that 5% of the total paid up share capital of the bank, whichever is lower.

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Capital Adequacy Norms:The traditional approach to sufficiency of capital does not capture the risk elements in various types of assets in the balance sheet as well as in the off-balance sheet business and compare the capital to the level of the assets. The Basel Committee on Banking Supervision^ had published the first Basel Capital Accord (popularly called as Basel I framework) in July, 1988 prescribing minimum capital adequacy requirements in banks for maintaining the soundness and stability of the International Banking System and to diminish existing source of competitive inequality among international banks. The basic features of the Capital Accord of 1988 are as under: (i) (ii) Minimum Capital Requirement of 8 % by end of 1992. Tier approach to capital: Core Capital: Equity, Disclosed Reserves Supplementary Debts (iii) 50% of the capital to be reckoned as core capital. Risk Weights for different categories of exposure of banks ranging from 0 % to Capital : General Loan Loss Reserves, Other Hidden Reserves, Revaluation Reserves, Hybrid Capital Instruments and Subordinate

100 % depending upon the riskiness of the assets. While commercial loan assets had a risk weight of 100%, inter-bank assets were assigned 20% risk weight; sovereign paper carried 0 % risk weight Further, vide 1996 amendment to the original Basel Accord, capital charge was prescribed for market related exposures. 5 Capitals to Risk Asset Ratio (CRAR) for UCBs: 5.1 CRAR framework, as advocated by Basel Accord, has been adopted by most of the regulatory authorities as the basis of measurement of capital adequacy, which takes into account the element of risk associated with various types of assets 24

reflected in the balance sheet as well as in respect of off-balance sheet items and the level of capital held by the banks. RBI introduced a minimum CRAR of 8% in 1992, for the commercial banks based on the recommendations of the Committee on Financial Sector Reforms (Narsimham Committee I), in a phased manner. 5.2) The Reserve Bank had constituted a High Power Committee on Urban Cooperative Banks (Chairman: Shri K. Madhava Rao) in May 1999 to review their performance and to suggest necessary measures to strengthen them. The committee felt that the continued financial stability of UCBs could not be ensured unless they were subjected to the CRAR discipline. The committee recommended that CRAR norms should be implemented in respect of UCBs on account of the following reasons: i) ii) CRAR serves as a buffer, which can absorb the unforeseen losses a UCB may incur in future; Primary Urban Cooperative Banking sector is an important segment of the Financial system and exclusion of this segment from CRAR discipline would undermine the stability of the whole system; and iii) Primary Urban Cooperative Banks perform the same banking functions as Commercial banks and are subject to similar risks. To exempt UCBs from the CRAR discipline would, therefore, be untenable. 5.3 Pursuant to the recommendations of the High Power Committee ( Madhavrao Committee), UCBs were brought under the CRAR discipline with effect from March 31, 2002, in a phased manner. Accordingly, UCBs were advised to adhere to capital adequacy standards over a period of three years as indicated below:

25

Table: 1 Date 31.03.02 31.03.03 31.03.04 31.03.05 Scheduled UCBs 8% 9% As applicable to commercial banks i.e. 9% As applicable to commercial banks i.e., 9% Non-Scheduled UCBs. 6% 7% 9% As

applicable

to

commercial banks. 5.4 Essentially, under the capital adequacy framework, the balance sheet assets, and off-balance sheet items have been assigned weights according to the prescribed risk weights as indicated in Annex I. The value of each asset/item shall be multiplied by the relevant weights to arrive at the risk-adjusted values of assets and of off-balance sheet items. The aggregate will be taken into account for reckoning the minimum capital ratio. Primary Urban Cooperative Banks are required to maintain minimum 'Capital Funds' equivalent to the prescribed ratio on the aggregate of risk weighted assets and other off-balance sheet exposures on an ongoing basis. 6 Capital Funds:6.1 It may be noted that 'Capital Funds' for the purpose of capital adequacy standard consist of both Tier I and Tier II Capital as defined in the following paragraphs.

6.2 Tier I capital:Tier I would include the following items: 26

(i) (ii)

Paid-up share capital collected from regular members having voting rights Contributions received from associate / nominal members where the bye-laws permit allotment of shares to them and provided there are restrictions on withdrawal of such shares, as applicable to regular members

(iii)

Contribution / non-refundable admission fees collected from the nominal and associate members which is held separately as 'reserves' under an appropriate head since these are not refundable.

(iv) (v)

Perpetual Non-Cumulative Preference Shares (PNCPS). Free Reserves as per the audited accounts. Reserves, if any, created out of revaluation of fixed assets or those created to meet outside liabilities should not be included in the Tier I Capital. Free reserves shall exclude all reserves provisions which are created to meet anticipated loan losses, losses on account of fraud etc., depreciation in investments and other assets and other outside Liabilities. For example, while the amounts held under the head "Building Fund" will be eligible to be treated as part of free reserves; "Bad and Doubtful Reserves" shall be excluded.

(vi) (vii) (viii)

Capital Reserve representing surplus arising out of sale proceeds of assets. Innovative Perpetual Debt Instruments* Any surplus (net) in Profit and Loss Account i.e. Balance after Appropriation towards dividend payable, education fund, other funds whose Utilization is defined, asset loss, if any, etc. Guidelines on issue of Innovative Perpetual Debt Instruments are furnished in Annex of circular UCB. PCB. Cir.No. 39 / 09.16.900 / 2008-09 dated January 23, 2009.

NOTE:-

27

(I)

Amount of intangible assets, losses in current year and those brought forward from previous periods, deficit in NPA provisions, income wrongly recognized on non performing assets , provision required for liability devolved on bank, etc. will be deducted from Tier I Capital.

(ii)

For a Fund to be included in the Tier I Capital, the Fund should satisfy two criteria viz., the Fund should be created as an appropriation of net profit and should be a free reserve and not a specific reserve. However, if the same has been created not by appropriation of profit but by a charge on the profit then this Fund is in effect a provision and hence will be eligible for being reckoned only as Tier II capital as defined below and subject to a limit of 1.25% of risk weight assets provided it is not attributed to any identified potential loss or diminution in value of an asset or a known liability.

6.3 Tier II Capital: - Tier II capital would include the following items: 6.3.1 Undisclosed Reserves:These often have characteristics similar to equity and disclosed reserves. They have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulation of profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses.

6.3.2 Revaluation Reserves:28

These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as 'Core Capital1. Revaluation reserves arise from revaluation of assets that are undervalued in the bank's books. The typical example in this regard is bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market value of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation of those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 % when determining their value for inclusion in Tier II Capital i.e. only 45% of revaluation reserve should be taken for inclusion in Tier II Capital. Such reserves will have to be reflected on the face of the balance sheet as revaluation reserves. 6.3.3 General Provisions and Loss Reserves:These would include such provisions of general nature appearing in the books of the bank which are not attributed to any identified potential loss or a diminution in value of an asset or a known liability. Adequate care must be taken to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier II capital as indicated above. To illustrate : General provision for Standard Assets, excess provision on sale of NPAs etc. could be considered for inclusion under this category. Such provisions which are considered for inclusion in Tier II capital will be admitted upto 1.25% of total weighted risk assets. 6.3.4 Investment Fluctuation Reserve: - Balance, if any, in the Investment Fluctuation Reserve Fund of the bank.

6.3.5 Hybrid Debt Capital Instruments:29

Under this category, there are a number of capital instruments, which combine certain characteristics of equity and certain characteristics of debt. Each has a particular feature which can be considered to affect its qualification as capital where these instruments have close similarities to equity, in particular, when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital. The instruments are as follows: (i) Tier II Preference Shares Primary (Urban) Cooperative Banks are permitted to issue

Perpetual Cumulative Preference Shares (PCPS), Redeemable Non Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) subject to extant instructions as per Annex III (ii) Long Term Deposits (LTDs) would be treated as lower Tier II capital To be eligible for inclusion in Tier II capital, the instrument should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses and should not be redeemable at the initiative of the holder or without the consent of the bank's supervisory authorities. They often carry a fixed maturity and as they approach maturity, they should be subjected to progressive discount for inclusion in Tier II capital. Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included as part of Tier II capital. Subordinated debt instruments will be limited to 50 percent of Tier I capital. Other Conditions:(i) (ii) (iii) (iv) PNCPS should not exceed 20% of Tier I capital (excluding PNCPS). Long Term Deposit being lower Tier II capital should not exceed 50% of Tier I capital and that total Tier II should not exceed Tier I capital. All the components of Tier II capital mentioned above except Long Term Deposits are to be considered as upper Tier II capital. It may be noted that the total of Tier II elements will be limited to a maximum of 100 percent of total Tier I elements for the purpose of compliance with the norms. This restriction is kept in abeyance for five years i.e., up to 6.3.6 Subordinated Debt:-

30

March 31, 2013 for banks that are having CRAR less than the prescribed 9% in order to give time to the banks to raise Tier I capital. In other words, Tier II capital would be reckoned as capital funds for capital adequacy purpose even if a bank does not have Tier I capital. However, during this period, for the purpose of capital adequacy requirement, lower Tier II capital alone would be restricted to 50% of the prescribed CRAR and the progressive discount in respect of Tier II capital would be applicable. 7. Capital for Market Risk:7.1 The Basel Committee on Banking Supervision (BCBS) had issued an amendment to the Capital Accord inI996 to incorporate market risks. It contains comprehensive guidelines to provide explicit capital charge for market risks. Market risk is defined as the risk of losses in on-balance sheet and off-balance sheet positions arising from movements in market prices. The market risk positions, which are subject to capital charge are as under: The risks pertaining to interest rate related instruments and equities in the trading book; and Foreign exchange risk (including open position in precious metals) throughout the bank (both banking and trading books). 7.2 As an initial step towards prescribing capital requirement for market risks, UCBs were advised to assign an additional risk weight of 2.5 per cent on investments. It may, however, be noted that the additional risk weights are clubbed with the risk weight prescribed in the Annex and banks are not required to provide for the same separately. 8. Measures to augment capital funds :8.1 All UCBs are required to Endeavour to strengthen their capital funds and achieve the prescribed level of CRAR. They should review the existing level of capital funds vis-avis the prescribed level and chalk out strategy to achieve the requisite ratio, where it is not already attained. 8.2 Instruments for augmenting capital funds. Based on the recommendations of the Working Group constituted to examine the issues concerning raising of capital by Primary (Urban) Cooperative Banks, they have been permitted to issue the following financial instruments: 31

(A) Preference Shares:Preference shares may be of the following types (i) Perpetual NonCumulative preference shares (PNCPS) (ii) Perpetual Cumulative preference shares (PCPS) (iii) Redeemable Non-Cumulative preference shares (RNCPS) (iv) Redeemable Cumulative preference shares (RCPS) The detailed guidelines are given in Annex-Ill. While Perpetual NonCumulative Preference Shares (PNCPS) would be eligible to be treated as Tier I capital, Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be eligible to be treated as Tier II capital. UCBs, however, are not permitted to subscribe to the preference shares of other UCBs. (B) Long Term Deposits:UCBs may be permitted to raise term deposits for a minimum period of not less than 5 years, which will be eligible to be treated as Tier II capital. The detailed guidelines are given in the Annex - IV. Primary Urban Cooperative Banks may issue preference shares and Long Term Deposits subject to compliance with their bye-laws / provisions of the Cooperative Societies Act under which they are registered and with the approval of the concerned Registrar of Co-operative Societies / Central Registrar of Cooperative Societies, wherever applicable and the Reserve Bank of India. The Central / State Governments are being requested separately to make necessary amendments to Multi-State Cooperative Societies Act / Co-operative Societies Acts / Rules, wherever necessary. 9 Returns:Banks should furnish to the respective Regional Offices annual return indicating (i) capital funds, (ii) conversion of off-balance sheet/non-funded exposures, (iii) calculation of risk weighted assets, and (iv) calculation of capital funds and risk assets ratio. The format of the return is given in the Annex II. The returns should be signed two officials who are authorized to sign the statutory returns submitted to Reserve Bank.

32

Chapter 2 PROFILE OF AKOLA URBAN CO-OPERATIVE BANK LTD. AKOLA A cooperative movement in the state of Maharashtra started with overall development and progress of the people through cooperative. Maharashtra is a leading state in cooperative sector in our country. There are various types of cooperative society and cooperative bank in the state of which are making progress in respective area. Urban cooperative bank are one of them which are contributing an important role in cooperative movement of India. Akola is one of the important districts in western Vidarbha region of Maharashtra. It is the major center of banking transactions. There are many commercial, co-operative & nationalized banks in Akola. Apart from these, there is 10 urban co operative as well as credit society in Akola which meet the financial need of small borrowers. The commercials banks mainly provides finance to the large & medium industries while cooperative societies including co operatives banks provides finance to agriculture as well as small businessman, professionals, traders & enterprises. The Akola Urban CoOperative Bank ltd. Akola is one of them. The Akola Urban co-operative bank lid.(Multistate Scheduled Bank) is pioneer Urban co-operative bank in Akola which operates through its 29 branches. 5.1) Development of Bank:The Akola urban co-operative bank ltd. Akola (Multistate Scheduled Bank) was established on 28 sept. 1963 on the auspicious day of "Vijayadashmi". The business of the bank was started in Ramnath Bhavan hired buliding in Kirana Bazaar Akola. It is registered under Maharashtra state co-operative Act. 1961 on 19.04.1963. The bank has attained important status in its field within short period of four decade. Till the year 1990 the jurisdiction of this bank was only Akola district and eight branch were working since 1986 -87. The bank has made progress with the help of new generation during this year. In the globalization and liberalization and privatization and competitive environment in the decade 1991 2000 and on words the bank open 21 new branches and one extension counter in the state of Maharashtra . It got a status of Scheduled Bank on 22 may 1999. This shows the landmark achievement in the lifetime of the bank. THE Akola urban cooperative bank limited is a multistate scheduled bank from 31.08.2000. 33

The jurisdiction of this bank has been extended through out Maharashtra state and all so the Indore khandwa khargaon district of Madhya Pradesh. A shahakarenam jankalayanam is a slogan of the bank. At present our bank is working as an pioneer bank in vidharbha region, marathwada , khandesh and some western part of Maharashtra state . The Akola Urban Co-Operative Bank Ltd is a multistate scheduled bank. There are 29 branches of Akola Urban Co-Operative Bank are established id vidarbha & Maharashtra regions. Mostly Vidharbha region covered by the branches of Akola Urban Co-Operative Bank Ltd. The head office of Akola Urban Co-Operative Bank is situated in Akola. The branches of Akola Urban Co-Operative Bank are established in rural areas of vidarbha region 5.2) Management & Administration of the Bank: In the last 45 years bank had made progress under the leaderships of past and present board of directors of the bank There are 20 members in the panel of the 'Board of Directors' according to bank's regulation. The board of directors plans various schemes. Carryout various programmers for the overall development of the bank. All the decisions are taken untidy in the board of directors meeting. They enjoy a 5 year duration & twice the members from the board of directors panel were elected unopposed. They enjoy very cordial relationship among them & always work unified way. They contribute lot towards the all round progress of the bank. at the present Hon . Shri Atulbhai Ganatra is Chairman. bank At present bank are having 29 branch networks, 1 extension counter. 65885 shareholders, 645 staff, and 3.66 lack accountholders as on 31.03.2009. The total business of their bank has gone up to 2500 cores. The financial position of the bank is very sound on achieving all the norms and parameters, the reserve bank of India has awarded GRADE 1 status to bank For administrative purpose & to control all the branches of the bank the responsibility is given to Shri Omprakash Rathi. Is a Chief Executive Officer of the

34

Bank has taken active part in social part by providing many use full social service ., as a part of social awareness and responsibility and to educate bank has under taking various programs , campaign etc. at the time of natural calamities such as flood , riot earth quake , storms etc bank has help the affected and needed person financially and manually bank solve acute drinking water problem by providing bore wells supplied water through tanks etc. by providing financial as well as other human help to affected and needy person of the area In a span of 45 years bank provided dedicated services to the customers. Accountholders. Well- wishers of the bank through its branch network.

35

THE AKOLA URBAN CO-OPERATIVE BANK LTD. AKOLA (MULTISTATE SHEDULED BANK) Balance Sheet (Consolidated) As on 31 March 2007-10 Liability 1) Authorized capital 2) Paid-up capital 3) Reserves & funds 4) Deposits 5) Borrowings 6) Other liability & provisions 7) Profit & loss A/c Total Assets 1) Cash & Bank Balance 2) Investment 3) Advances 4) Interest receivable 5) Fixed assets 6) Other assets Total 2007-08 40 lack 27.08 78.66 1222.60 5.49 82.91 3.03 1419.76 2007-08 167.86 296.20 865.72 59.84 14.74 15.41 1419.76 2008-09 40 lack 33.15 100.46 1412.36 3.71 96.06 3.74 1649.48 2008-09 118.19 453.70 968.19 77.03 22.16 10.21 1649.48 2009-10 70 lack 41.77 110.43 1552.32 2.50 108.10 1.54 1816.66 2009-10 178.02 507.58 1002.60 93.73 22.70 11.74 1816.66

36

CHAPTER 3. OBJECTIVES & SCOPE.

Objectives of capital augmentation:1. 2. 3. 4. 5. 6. 7. 8. Understand the need and concept of capital augmentation. To know why augmentation is necessary in today's situation. Increase the lending capacity of urban co-operative banks. Improve the financial position of urban co-operative banks. Strengthening the financial background of banks. Maintain the position of urban co-operative banks in terms of lending, reserve etc. Conceptualized the augmentation in terms of other benefits. Increase the potential pool for working capital and its outsourcing as per the need

of the customer of Akola.

37

Scope of capital augmentation:-

The working area of the project is limited due to this the scope of The project is short, some of them is as follows:1. The growth of banking as an capital accumulation and augmentation institution is needed to increase and extract the best possibility of profitability to our Bank. 2. The growth trend analysis of creating portfolios for diverting it for profitable ventures is to enhance the credential of our banking institution. 3. Our work of study was confined to our Head Office of the Bank so field failure feasibility report was not accessible to our team 4. The work is done on the data from 2006-07 to 2009-10, Time frame allocation was limited , so all relevant datas was not bought to our analysis preview.. 5. The project is done on the basis of the balance sheet and profit and loss account of the Bank. 6. Better the rate of capital augmentation better will be the profitability of our banking institution as a group. 7. Reach and allocation of loans and schemes better than our competitors is the motive of our study. 8. Local seasonality analysis is to be done to embark our priorities as per the local festivity and harvesting pattern of Akola. 9. The bank will also be benefited from this project as it will make their fund management system more effective.

38

CHAPTER-4. RESEARCH METHODOLOGY RESEARCH DESIGN:Data is collected from both sources i.e. primary and secondary sources. Primary sources include bank publication, annual report, RBI circulars etc. Secondary data includes websites of reserve bank of India, capital augmentation; management help etc, which have, help us in collecting data and completion of project. RESEARCH METHODOLOGY: Descriptive method of data collection and research has been used. Primary as well as secondary data is being collected for project from the bank and its description at its ledger Primary data includes bank annual report, RBI circulars their publication updated till recent dates etc. Secondary data include RBI websites, capital augmentation websites, different books and research reports were also consulted prior to our study and observation. Tables and graphs are used to show comparison of total banking data augmented and accumulated at Akola since last 3 years. Assumptions has been made as concept is new and we are explaining its impact after implementation Data is in approximation only.

39

Research Method Used in the Report: Descriptive and analytical Method.

Reason for selecting this method: Descriptive design is used to get an accurate description of a situation, it helps to minimize the bias and maximize the reliability. Descriptive Research provides facts or details of a particular event or situation. It gives a description of the state of affairs as it exists of a particular situation. It includes surveys and fact-finding enquiries to study a particular situation or event. The researcher has no control over the situation or event. He can only report what has happened or what is happening. As opposed to exploratory research, descriptive research should define questions, people surveyed, and the method of analysis prior to beginning data collection. In other words the who, what, where, when, why, and how aspects of the research should be defined.

40

Chapter-5. DATA ANALYSIS & INTERPRETATION 1) Sources of funds 1) Authorized Share Capital Year 2006-07 2007-08 2008-09 2009-10 Authorized Capital 40 40 40 70 Increase/Decrease 15 0 0 30 (Rs In Crores) % increase/Decrease 60 0 0 75

Interpretation:The Share Capital of bank increased by 60% in the year 2006-07 as compared to previous year i.e. It shows the high expansion of bank, but if we see at the year 2007-08 there is no change in Authorized capital, it may because the paid up capital 41

not reached to the authorized capital. So there is no expansion in that year, it remains same. Year 2008-09 shows some changes as compared to previous year. In 2009-10 authorized capital is increase by 75% compare to previous year 2008-2009 2) Paid up Capital

(Rs. In cores)
Year Paid - Up Capital Increase/Decrease % increase/Decrease

2006-07 2007-08 2008-09 2009-10

s

23.70 27.08 33.15 41.77

3.20 3.38 6.07 8.62

15.6 14.26 22.41 26

Interpretation:In 2006-07the paid up capital is 15.6% and there is slight increase in paid up capital but the percentage is decrease. This change may occur because of changes in Authorized Capital. So it is assume that the bank is trying to keep more reserves for

42

future by paying less paid up capital. There is huge increment in 2008-09 in paid up

Year

Reserves Increase/Decr % increase/Decrease & ease Surplus 70.44 78.01 100.46 110.43 7.76 8.22 22.45 9.97 12.38 11.66 28.77 9.92

2006-07 2007-08 2008-09 2009-10

capital. In the year 2009-10 the paid up capital is increase as compare with previous year.

3) Reserves & Surplus :-

(Rs. In cores)

Interpretation:As above, we can see that there is a constant increase in Reserves & Surplus of bank each year. The bank is keeping more reserves for meeting the future uncertainties. If we see in year 2007-08 there is a slight change in percentage as compare 43

to the previous year. On this ground the bank is performing effectively in managing the Year Deposits Increase/Decrease % increase/Decrease

2006-07 1046.69 110.27 11.77 2007-08 1222.6 175.91 16.8 2008-09 1412.36 189.76 15.52 2009-10 1552.32 139.96 9.9 surplus. Reserves and surplus are boosted up in year 2008-09 and the market demand is increase reserve and surplus in 2009-10.

4) Deposits

( Rs. In cores)

44

Interpretation:The Deposit of bank is increased by 11.77% in the year 2006-07 as compared to previous year & the expansion is continue for next year i.e. 2007-08 by 16.8%. so it shows that the bank increasing its deposits as well as customers by giving good rate of return. It also shows the faith of customer on the bank. Deposits are increased in 2008-09.In the year 2009-10 deposit of the bank is expansion compare to previous year.

5) Borrowings:

(Rs. In cores)
Year Borrowings Increase/Decrease % increase/Decrease

2006 -07 2007 -08 2008

7.17 5.49 3.71

-0.07 -1.68 -1.78 45

-0.96 -0.96 -32.42

-09 2009 -10

2.5

-1.21

-32.61

Interpretation:In the above figure we can see that the Borrowings of the bank is decreasing ever 7 year. It may because the bank has sufficient Reserves to meet its demand. But although the bank has less borrowings its rate of interest is increasing day by day as per the market conditions. At this stage the bank is taking effective decisions. Borrowings are taking the negative paths in the yaer 2008-09 and 2009-10. 6) Other Liability & Provisions: Other Liabilit y& Provisi on 2006-07 2007-08 2008-09 2009-10 74.23 82.9 96.06 108.1 Increase/Decrea se

( Rs . In cores)
% increase/Decrea se

25.22 8.67 13.16 12.04

51.45 11.67 15.87 12.53

46

Interpretation:The other liability of bank is increase by 51.45% in the year 2006-07 as compared to previous year. This is caused because the bank has more outstanding cheques, but if we see the year 2007-08 the percentage is increase only by 11.67% compare to last Year, it shows that the bank is able to clear the dues in time & carry fewer burdens. It helps in gaining goodwill. In the year 2008-09 and 2009-10 is slidely increase

7) Net Profit: Year 2006-07 2007-08 2008-09 2009-10 Net Profit 2.46 3.03 3.74 1.54

( Rs . In cores) Increase/Decrease -2.58 0.57 0.71 -2.2 % increase/Decrease -51.19 23.17 23.43 -58.82

47

Interpretation:In the year 2006-07 the bank earned profit of Rs.2.46 core, but in the next year the profit is increase by3.03crore.2007-08 and next year also increase the net profit 3.74crore.in2008-09.

2) Uses of Fund 1) Cash & Bank Balances Year

Cash & Increase/Decrease % Balances increase/Decrease

2006-07

117.2

33.3 48

39.69

2007-08 167.86 2008-09 118.19 2009-10 178.02 s (Assets) :-

50.66 -49.67 59.83

43.22 -29.59 50.62

Interpretation:In the above chart we can easily see that there is continuously increase in cash in hand & bank balances of the bank between the year 2007 to 2008. This is happen due to increase in deposit & paid up capital. The bank also has retained a significant amount of profit. Year 2008-09 shows some Negative changes in cash balances.In year 2009-10 the cash and bank balance is increase by 50.62%

2) Investment:-

Investment Year

Increase/Decrease Increase/Decrease %
49

2006-07 2007-08 2008-09 2009-10

257.05 269.2 453.7 507.58

7.52 39.15 157.5 53.88

3.01 15.23 58.50 11.87

Interpretation:-

In the initial years investment has shown a narrow growth but in the yr 2007-08, it has shown a growth of 15% which shows that bank is searching new areas which give more return on investment and thus managing its investment in a better way. There is massive augmentation in investment in year 2008-09 and 20092010

50

3) Loans & Advances:Year Loans Increase/Decrease % Advances increase/Decrease

2006 -07 2007 -08 2008 -09 2009 -10

769.03 865.72 968.19 1002.6

97.71 96.69 102.47 34.41

14.55 12.57 11.83 3.55

Interpretation:Loans and advances showing a upward trend which means loans and advances are growing continuously. It proves that customer reliance on banks is increasing and bank is earning a fair amount of interest on their loans and advances and thus adding more to its revenue. Year 2009-10

51

4) Interest Receivable Year 2006-07 2007-08 2008-09 2009-10 Interest Receivable 51.09 59.84 77.03 93.73 Increase/Decrease 13.54 8.75 17.19 16.7 Increase/Decrease % 36.05 17.12 28.72 21.67

Interpretation:Interest receivables are increased by more than 30% in yr 2006-07 but in very next year it has grown by 17% only. It shows that in the yr 2006-07 interest receivables has fall by 40% which means the collection of bank fall in terms of interest as well as lending also. Due to increment in interest receivable in 2009-10 bank is in good position 52

5) Fixed Assets:Year 2006-07 2007-08 2008-09 2009-10 Authorized Capital 19.96 14.74 10.21 11.21 Increase/Decrease 1.17 -5.22 -4.53 1.00 % increase/Decrease 6.22 -26.15 -30.73 9.79

Interpretation Fixed assets have shown a mixed growth from the graph. In the yr 2006-07 fixed asset has increased by 6.22% but in the next yr it has fall by 26.15%. It means that in the yr 2006-07 bank has sell its fixed asset either in market or publicly. Year 2009-10 shows changes in fixed asset of bank

53

6) Other Assets:Year Other Increase/Decrease % Assets increase/Decrease

2006-07 2007-08 2008-09 2009-10

10.57 15.41 10.21 11.74

-8.98 4.84 -5.2 1.53

-45.93 45.78 -33.74 14.98

Interpretation:Other assets show negative trends in their operations. First it fall and then grow at a slight rate. These is a area where bank need to analyze its situation and do necessary corrections. Other assets are in positive ways in 2007-08 and the next year other asset is negative way 2008-2009. In year 2009-10 is increase in other asset as compare with 2008-09.

54

7) Total Asset
Year Total Assets Increase/Decrease % increase/Decrease

2006 -07 2007 -08 2008 -09 2009 -10

1224.9 1419.7 6 1649.4 8 1816.6 6

144.26 194.86 229.72 167.18

13.34 15.9 16.18 10.13

Interpretation:The total assets of AUB has shown a growth of 16.18% in the last three years which is a good sign for the growth of AUB and total assets will always a added advantage to any bank. Assets increase will allow bank to expand its horizon of its operations and will give benefit in future to AUB. There is huge increment in total asset in the year 2009-10

55

CHAPTER 6. OBSERVATION AND FINDINGS

1.

THE Bank Follows very hard and rigid documentation process because of there is

problem for borrower to raise the fund.. 2. Bank obtains full details of security through various reports like valuation report,

search report and documents like original title deeds in order to see if there is any legal encumbrance and whether it is marketable or not to protect its own interest. 3. Bank has kept on an average of 15% margin while granting loans .Bank makes use of Financial tools like ratio analysis and trend analysis to analyze the financial position and arrive at the credit limit. 4. Bank takes monthly and yearly review of loan accounts to check irregularities.

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Chapter 7. RECOMMENDATION AND SUGGESTIONS During past few years some important and beneficial changes have been taken place in urban co-operative banking sector which has given quite new and important outlook to urban banking sector. A beneficial climate has been created for the urban cooperative banks as opportunities for diversification is provided to them. The cooperative has been demanding central govt. to introduce democratic reforms in their regulations and functioning. With the continuous efforts of the National Co-operative Union the central govt. recently passed the Multistate Co-operative Society Act and also formulated a National Co-operative Policy that provides greater autonomy to urban cooperative banks. The laws relating to urban co-operative bank are being modified to make it stronger. RBI now contributes a lot for the healthy promotion of urban cooperative movement through its several activities such as supervision, research, training facilities etc. As a result now there are more co-operations among different continent of cooperative structure. However there are some recommendations which can be explain as: All UCBs are required to endeavor to strengthen their capital funds and achieve the prescribed level of CRAR. They should review the existing level of capital funds via-a-vis the prescribed level and chalk out strategy to achieve the requisite ratio, where it is not already attained. UCBs may be permitted to raise term deposits for a minimum period of not less than 5 years, which will be eligible to be treated as Tier II capital. The detailed guidelines are given in the Annex IV Primary Urban Cooperative Banks may issue preference shares and Long Term Deposits subject to compliance with their bye-laws / provisions of the Cooperative Societies Act under which they are registered and with the approval of the concerned Registrar of Co-operative Societies / Central Registrar of Co57

operative Societies, wherever applicable and the Reserve Bank of India. The Central / State Governments are being requested separately to make necessary amendments to Multi-State Cooperative Societies Act / Co-operative Societies. UCBs are permitted to determine their lending rates taking into account their cost of funds, transaction costs etc with the approval of their Board. However, banks are advised to ensure that the interest rates charged by them are transparent and known to all customers. Banks are also required to publish the minimum and maximum interest rates charged on advances and display the information in every branch. Acts / Rules, wherever necessary. Boards of banks are, therefore, advised to lay out appropriate internal principles and procedures so that usurious interest, including processing and other charges, are not levied by them on loans and advances. In laying down such principles and procedures in respect of small value loans, particularly, personal loans and such other loans of similar nature, banks may take into account Keeping in view the importance of credit discipline for reduction in NPA levels at the time of opening of current accounts banks should: insist on a declaration from the account holder to the effect that he is not enjoying any credit facility with any other commercial bank or obtain a declaration giving particulars of credit facilities enjoyed by him with any other commercial bank/s.

As certain whether he/she is a member of any other co-operative society /bank; if so, the full details thereof such as name of the society / bank, number of shares held, details of credit facilities, such as nature, quantum, outstanding, due dates etc should be obtained. Restrictions on holding shares in other cooperative banks by RBI should be removed.

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SLR requirement for urban cooperative banks should bring down below 25% which will facilitate UCB to use more funds for banking operations and creating more capital. A primary (urban) co-operative bank is need to be permitted to open and maintain CSGL A/cs of other PCBs / other entities like charitable institutions, trusts etc . Primary (urban) co-operative banks should allow undertaking any purchase / sale transactions with broking firms or other intermediaries on principal to principal basis. If primary (urban) co-operative banks have regularly received dividends from cooperative institutions, then their shares should be valued at face value.

In a number of cases, the co-operative institutions in whose shares the primary (urban) co-operative banks have made investments have either gone into liquidation or have not declared dividend at all. In such cases, the banks should make full provision in respect of their investments in shares of such cooperative institutions. .

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CHAPTER 8. LIMITATIONS LIMITATIONS

Topic is new so accurate results or an impact is not possible. Data collection is complicated as no guidelines or rules are mentioned regarding augmentation. Time is not sufficient as topic is new and need detail study. Applications are not possible because no proper format is given. Instrument for augmentation and it's applied for calculation are not mentioned

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HYPOTHESIS:-

Capital augmentation is a new subject, which is unknown to many people. It is applicable only to urban cooperative banks. Therefore, we have make a general analysis that what will happen if the concept is implemented and its impact on banking operation. General assumptions have been made on the basis of last three-year data . Therefore, we concluded that capital augmentation is very essential and needful in current situation. As demand for money in rural sector as well as in urban sector is rising continuously, it is must for cooperative banks to raise their capital, fulfill the demand of rural and other sector, and play a crucial role in development of rural development. It is also well known that urban co-operative banks allot loans on low rate of interest and give assistance in rural finance especially in agricultural loans. Therefore, by increasing their capital they can make their position strong as compare to other commercial banks and will play a crucial role in rural development of country as well as expansion of cooperative banks beyond rural level and its growth in terms of profitability.

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Chapter 9. CONCLUSION In a current scenario where the need for money in market has been rising continuously, it is utmost important for urban co-operative banks to increase their capital in order to compete with other commercial banks in terms of lending, deposits and other banking services in order to fulfill customer needs and demands, thus enabling them to get the required services as and when required by them. The performance of Akola Urban Co-operative Bank Ltd; showed a visible improvement in the period 2006-08. Deposit, Investment & Advances growth were higher during these three years. As far as operations are concerned profit has been declined in yr.2006-07 by 52% as compared to 2005-06 and the profit of 2007-08 has shown a growth of mere 23% which is not considered as satisfactory at all looking at the performance of other commercial banks. There are some major points which need to be discussed which can be summarized as below: Capital adequacy norms and Basel committee recommendation will definitely going to help urban bank in implementing capital augmentation norms. Levy of income tax on cooperative banks including UCB by amending sec 80p of income tax act can be bring down, which affect the growth of profit of urban cooperative banks. s Management and Administration are trying hard to comply with RBI norms and procedure.

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The bank has shown growth in paid up capital and advances; augmentation of capital will further help AUB to expand its horizon beyond rural level. It will allow bank to increase the liquidity & thus enable them to do more lending other than co-operative purpose. The banking operation will be more complicated as they have to use various means such as public issue, issue of equities and preferential shares etc. Augmentation will be as per the norms of RBI which have its own drawbacks and limitations. NPA of AUB will need to bring down and maintain consistency. It can be said that augmentation of capital will help UCB to expand its operations beyond rural level, but it has its own complications which they need to cope up. Capital augmentation whether raises the profit or not is different thing but it will allow cooperative banks to operate at par with other commercial banks in the country. The paid up capital of AUB has been increased by 35% during these three year period which shows that there is sufficient rise in capital but it is not utilized properly for further generation of capital. There is need to manage he capital which not only benefit the shareholders and bank but also to creditors and customers. Deposit has been reduced by more than 3% which is a big hurdle in augmentation of capital. Management of bank need to take note of that and suggests proper reforms, so that adequate liquidity will be available in bank. Reserve surplus have shown a good growth that need to be utilized for further increment in capital. Borrowing has been reduced which is a good sign but it could be below than these one. Cash & Bank balance have risen by more than 70% which shows that bank has enough liquidity which can be used for lending purpose leading in more growth in revenue. 63

BIBLIOGRAPHY Books:RBI policies and its fundamentals. (Manoj Jain, Mr.Reddy) Financial Management(Khan&Jain) Fundamentals of capital augmentation. (Himalaya publications) Websites:www.rbi.org.in www.capitalaugmentation.com www.timesl 00.com www. financemanaeement. Com.

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