Chapter 9

Co-operative Banks

 To discuss special features, types, growth & problems

of Co-operative Banks in India

The Genesis: woefully inadequate credit facility for agriculture &

related activities & Unorganised money market agencies

Co-operative Banks in India are registered under the Indian

Co-operative Societies Act.

The cooperative bank is also regulated by the RBI. They are governed
by the Banking Regulations Act 1949 and Banking Laws
(Co-operative Societies) Act, 1965.

The Financial inclusion agenda : Adequate short-term & long-term

institutional credit at reasonable rate
To bring about integration of the unorganised & organised segments
of the Indian money market
3

contd...

The Co-operative Banking Structure in India

1.

2.

3.

Function on the basis of no-profit no-loss: do not

pursue the goal of profit maximisation.
Function in the true spirit of co-operation, self help,
mutual help.
Functional specialisation : narrow degree of product
differentiation range of services offered are less
compared to commercial bank
Now into housing loans, advances against shares and debentures,
capital loans, term loans

More concentrated business in rural & agricultural segment

4.

Urban and non-agri business and non rural business has grown through
the years
Co-op banks have slowly demonstrated a shift from rural to urban while
commercial banks from urban to rural

Government sponsored , government-supported

government- subsidised financial agency

5.

&

Constitute most favored banking sector with no risk of nationalization

RBI lender of first resort provides financial resources
They are subject to control and audit by SG and control their
investments, use of reserves, loan policy
Compared to commercial banks they have much less free and flexibility
in operations

contd...
6.

Co-operative banks are subject to CRR and liquidity requirements

Although CRR = 3% and SLR = 25 %
Higher target ( 60% of advances) for priority sectors compared to
commercial banks
CAS although stopped fro commercial banks still in place for COBs

7.

Both scheduled and non-scheduled category exist among all cooperative banks

8.

Have a federal structure of three tier linkages

9.

Most primary credit societies are unit banks so are some UCBs
But SCBs , DCBs, CCBs, SLDBs, PLDBS and many UCBs have branches
COBs in each tier can be considered as a separate entity

Partially financial intermediaries

gets funds from CG, SG, RBI, NABARD, other COBs, debenture issues,
deposits
Intra sectoral fund flow greater in coop banking that comm banking
Intra sectoral competition is absent intra sectoral integration is high for
COBs
7

contd...

6.

7.

8.

9.

Belong to both money & capital markets

PACS provide short term and medium term loans
LDBs provide long term loans UCBs provide WC and FC requirements;
CCBs and SCBs provideboth long term and short term loans
Accept deposits (short and long term maturities), mobilize resources
through issue of debentures

Development of short-term and long term rural credit structure in

India
Coverage of over 74 % of therural outlets and 46 % of the total rural
credit
Not only loan provider but also investment provider in rural areas
Large retail outlets coverage in far flung areas of the country
Can improve if SG and RBI control over them is reduced and support is
given for infra, resources and professional mgmt

Part of a set of financial & supervisory institutional set-up

comprises the RBI, NABARD, Commercial banks, RRBs, cooperative societies
LDBs do not accept deposits in respect of resource mobilisation
8

contd...

6.

7.

Part of a set of financial & supervisory institutional setup comprises the RBI, NABARD, Commercial banks,
RRBs, co-operative societies
LDBs do not accept deposits in respect of resource
mobilisation
There was an increase in the number of all cooperative banks except the CCBs & PACSs

Deposits,credit,working capital & other indicators of

all types of co-operative banks and the co-operative
banking sector as a whole have grown many
fold( 1951-2006)
9

contd...

10

Average Size of Co-operative Banks

(1950-51 to 2006-07 )
In Crore
Type
In Terms of Deposit
1950- 1994 2002 2003
2004 2005
of
-04
-05
-06
Bank 51 - 95 - 03

In Terms of Credit Outstanding

2006 1950- 1994- 2002-03 2003-04 2004-05 2005-06 2006-07
51
95
07

SCBs

N.A.

1.25 374.7 1202.2 1132.41 1204.93 1280.12

N.A

1.31

412.
3
CCBs 0.07 51.5
6
PACS N.A. 0.03
SLDB N.A 5.6
UCBs N.A 14.0
5

1291

1430

212.8 216
0
N.A. N.A.
34.45 26.2
52.32 57.2

1429.8 1464
223

239

N.A.

0.07 50.52

173

183.97

199.25

216.39

N.A

N.A.
31.8
56.1

N.A. N.A.
31.8 N.A.
61.5 66.73

N.A. 0.13
0.50 282.3
N.A. 10.34

N.A.
693.5
33.42

N.A.
813.15
35.26

N.A
870.15
35.7

N.A.
885.65
38.6

N.A
N.A
43.3

Average size has increased in terms of deposits and

credits for all types from 2003-04 to 2006-07

11

Performance of Different Types of Co-operative Banks in India

Percent of Total Asset

Income

Scheduled UCBs
SCBs
CCBs
2001- 2002- 2003- 2004- 2005- 2006- 2001- 2002- 2003- 2004- 2005- 2001- 2002- 2003- 200402
03
04
05
06
07
02
03
04
05
06
02
03
04
05

200506

10.71

9.80

7.69

7.4

5.21

5.37

10.27

10.14

8.91

8.03

7.39

10.75

10.74

9.47

9.54

8.16

Interest 9.40
Income

8.58

6.15

6.5

4.53

4.71

9.90

9.62

7.83

7.49

6.95

10.17

10.14

8.77

8.56

7.46

Spread
(NIM)

2.06

1.59

1.9

1.61

1.85

2.04

2029

1.93

2.34

2.17

2.98

3.00

2.94

3.01

2.87

2.21

12

Certain broad prudential indicators like Capital to Risk-Weighted Asset

Ratio (CRAR), the Urban co-operative banks are classified into four
grades, viz., Grade I, II, III, IV
Grade I are the soundest and have no supervisory concerns
GRADE II

CRAR 1% below norms

Net NPA is >10 % and < 15%
Incurred Net loss in prev FY or
More or less continuous default in maintainence of CRR and SLR

GRADE III
CRAR < 75% of Norms but > 50% of the Norms
Net NPA is >10 % and < 15% or
Incurred Net loss in prev 2 out of 3 FY

GRADE IV
CRAR < 50 % of the prescribed norms
NET NPA >15 % or more for prev year
13

Implementation of the Task Force recommendation on Revival of

Long-Term Rural Co-operative Credit Institutions (Chairman: Prof. A.
Vaidyanatan)

Establishment of State level Task Force for Co-operative Urban

Banks (TAFCUBs) to remove the issue of dual regulatory
mechanism.
This task force consisted of reps from RBI as well as the SG and Federation
and association of UCBs
Revival path was to formulated either by merger or amalgamation with
stronger banks or conversion into societies or as last resort, liquidation.

Liberalisation of lending & deposit rates of all co-operative banks

14

contd...

A Co-operative development fund set up by NABARD to

improve managerial efficiency
All scheduled PCBs have been bought under the preview of
Banking ombudsman scheme (1995)
Prudential accounting norms have been made applicable to
SCBs/CCBs in 2 phases 1996-97 and 1997-98
SHG-Bank linkage programme to facilitate better credit
delivery
Establishment of National Co-operative Bank of India (NCBI)
as multi state co-operative society
RBI and NABARD have not extended support to it
It does not have any regulatory functions

Initiation process to merge

strong one

weak co-operative entities with

15

Low or weak quality of loan assets,

1.

highly unsatisfactory recovery of loans

Officialisation ,politicisation ,Govt. Intervention

2.

Most of them are headed by polictical leaders

Too much govt. intervention has stifled self relaint growth

Undue dependent on Govt. capital rather than

member capital
Lack of active participation of members

3.

4.

Which is only come about if there is members capital used

rather than govt capital.

16

5.
6.

7.

8.

9.

Unethical practices among members

Cumbersome regulatory & supervisory system
Existence of multiple regulatory authorities has come in way of efficient
regulation control and monitoring of the COBs
RBI has suggested single regulatory body but due to power politics its has
somehow been quashed.

Regional imbalance in the active operation

Not doing well in all states 75 % if the total deposits in 7 states AP, MH,
KN, MP, TN, UP, GJ.

Vital link in Coop credit system namely the PACS themselves

remain weak
They are too small to be economical and too many are dormant and just
exist on paper.

Competition from commercial banks

Commercial banks have actively risen to meet credits of rulral

areas and their strong marketing activities have left the COBs in
difficulties

17

Micro Finance (MF)

To play imp role in financial inclusion
Large gap in demand and supply of credit to the poor
Various challenges faced by micro finance system ( low education about
debt management high default, high int rates etc)

Regional Imbalances

Southern states have large concentration of SHGs and hence promotion of

credit
States which poor do not have covereage which is required

Quality of Self Help Group (SHG) Linkage

Factors affecting the SHG quality are are inadequate incenticves for
NGOs nurturing them, low skill and education on part of the SHGs
members in managing their groups.

Training of self-help promoting institutions, banks, SHG

members
Role played by SHPG and easy hassle free availability of bank credit `
Their internal strengths financial and managerial also matter

18

Graduation from credit to enterprise

SHG to help non-financially to set up business
But older SHGs are not funding from banks after initial rounds of
lending by the banks

Emergence of SHG Federations

Collective bargaining power for the SHGs
Fed should evolved member driven and function in a democratic
way

High Cost of Delivery

Due to low volume of loan and high cost of funds therefore high
interest rate charged.
Need to develop strategies to provide MFI services at a cost
affordable rate to the poor.
19

Capacity Building of MF institutions

If flexible, client driven and innovative Micro finance services are
to be built and delivered then
Capacities of the MFI and their primary stakeholders

Future Strategies to widen the scope and scale of financial

services
Altho SHG Bank Linkage has been successfull large section of
people are still denied access to financial services
Only 20 % of the low income groups population have access to
Fin. Services
Need to widen scope and scale of financial services to cover the
unreached
20

contd...

The market driven economy, is posing stiff competition for

cooperative banks through deployment of more capital,
advanced technology and skilled human resources
A combination of financial restructuring and institutional reform
can help to improve the efficiency.

No credit system has been subjected to as much

experimentation as the co-operative credit system has
been.the history of co-operative credit system has been the
history of alternating periods of growth, stagnation &
reorganisation Co-operation has failed but Cooperation must succeed
Khusro Committee, (RBI 1989)
21