Financing Sector Reforms; Role of Co-operative Societies in India

Subasish Mohanty*
ABSTRACT

Co-operative banking structure is one of the important sectors of providing financial

intermediary services. The wide spread network of such co-operative system helps providing
finance in the far flung remote areas and serves as an important tool of financial inclusion by
making available such financial services to a common man.
Although the Government grants certain reliefs, yet this sector needs some
improvements. The performances of such co-operatives are declining day by day, leaving an
impression of poor performance and reliability. Past few years have witnessed a gradual
decline in the working of this sector.
In the era of Micro-Financing, such co-operative banking sector can play a vital role
by assisting the needy section of the society by providing finance in a cheaper mode and
contribute to the overall development of the entire nation.

Key words : Co-operative Banking, Financial Inclusion, Financial Reforms, Inclusive

Growth, Strategies for Sustainable Financial Inclusive growth
___________________________________________________________________________
Research Scholar, Faculty of Commerce, Banaras Hindu University, Varanasi- 221005 (U.P) ,
email: [email protected]

INTRODUCTION
Cooperative banking sector plays an important role by providing financial
intermediation services to agricultural and allied activities, small scale industries and self
employed workers. Since the network of cooperative banks is widespread across different
parts of the country, these institutions are considered as a potential instrument to bring people
from far-flung areas under the formal banking network. However, the poor financial health of
cooperative banks in general, and grass root level cooperatives in particular remains as an
impediment, which needs to be addressed in order to fully utilise the benefits of wide spread
network of these institutions.
Table-1 represents the State wise distribution of UCBs in India. As on March, 2010
total 1645 UCBs were operating in India, having 8178 nos. of branches. 322 districts in India
was having UCB branches and in 268 districts were not having any UCB branches. The total
deposit and total advance amount of the UCBs in the above said period was recorded at
212031 crore and 136431 crore respectively. Highest 539 nos. of UCBs having 4526
branches were operating in the State of Maharastra. Similarly, Highest deposit amount and
advance amount has been recorded in the State of Maharastra. UCBs in Jharkhand and
Sikkim States have advanced lowest amount during the above said period.
Table-1
State-wise Distribution of UCBs (As at end-March 2011)

State

Total
numb
er of
UCBs

1.Andhra
Pradesh
2.Assam
3.Bihar
4.Chhattisg
arh
5.Delhi
6.Goa
7.Gujarat
8.Haryana
9.Himachal
Pradesh
10.Jammu
& Kashmir
11.Jharkhan
d
12.Karnatak
a
13.Kerala
14.Madhya
Pradesh
15.Maharas
htra
16.Manipur
17.Meghala
ya
18.Mizoram
19.Orissa
20.Puduche
rry
21.Punjab
22.Rajastha
n
23.Sikkim
24.Tamil
Nadu

106

Total
Total
Total
number number numb
of
of
er of
branch Extensi ATMs
es
on
(includi Counte
ng head
rs
office
cum
branch
es)
260
6
3

8
3
12

22
5
22

15
6
243
7
5

Numb Numb Deposi Advanc

er of
er of
ts (Rs. es (Rs.
distric distric
Cr.)
Cr.)
ts with
ts
a
withou
presen
ta
ce of presen
UCB
ce of
branc
UCB
h
branc
h
21
2
5,348
3,963

1
2

0
1
0

5
2
8

22
22
10

438
65
369

187
33
120

79
66
853
17
9

1
1
2
1
1

0
0
70
0
0

1
2
24
7
3

0
0
1
13
3

1,563
1,696
22,422
397
346

854
1,019
13,250
219
193

19

16

307

156

36

17

268

840

18

30

14,333

9,602

60
52

358
90

2
1

1
0

14
23

0
26

5,522
1,317

3,844
624

539

4526

117

1003

35

90,260

3
3

10
4

0
0

2
3

7
4

138,12
4
176
106

1
12
1

1
46
6

4
0

0
0
0

1
13
1

7
17
3

23
1,017
122

8
578
100

4
39

19
200

1
3

0
3

2
23

18
10

717
3,711

356
2,159

1
129

3
313

2
32

2
0

13
4,822

9
3,773

80
49

25.Tripura
26.Uttar
Pradesh
27.Uttarakh
and
28.West
Bengal
All India

1
70

2
242

19

0
9

2
39

3
33

1
4,052

9
1,953

61

2,037

1,340

46

103

11

2,969

1,593

1645

8178

180

1118

322

268

212,03
1

136,341

Source-RBI, Report on trend and Progress of Banking in India, 2010

Net profits of the UCB sector improved substantially during 2010-11 (shown below in
table-2) as compared to the previous year when this sector witnessed a slowdown in net
profits possibly due to the spill over effects of global financial crisis. This increase in profits
was primarily attributable to a robust growth in income surpassing the growth in expenditure,
thus improving the overall financial position of this sector. In case of non scheduled UCBs,
which witnessed their expenditure growing at a higher rate than income, the increase in
profits was mainly attributable to a fall in provisions and contingencies, taxes and staff
expenses.

Table -2
Financial Performance of scheduled and Non-scheduled UCBs
Item
Scheduled
Non-Scheduled
All UCBs
% variation
200910
8561
7347

201011
9842
7809

200910
11157
9500

201011
12601
10770

200910
19718
16847

201011
22443
18579

Total Income
Total Expenditure
Profits
(a)Amount
of 1214
2033
1657
1832
2871
3865
operating profit
(b)Provision for
666
800
948
862
1614
1662
contingencies
Amount of net
548
1233
709
970
1257
2203
profits
Source-RBI, Report on trend and Progress of Banking in India, 2010

200910
7.1
12.7

201011
13.8
10.3

17.0

34.6

18.5

12.7

19.6

75.3

As at end-March 2011, almost 14 per cent of total advances of UCBs were disbursed
to weaker sections6 of which more than 60 per cent was absorbed by small enterprises. The
advances to weaker sections constituted almost 30 percent of total priority sector advances as
at end-March 2011

Table-3
Advances to weaker sections by UCBs ( As at end of March 2011) Amount in crore
Sector
Amount
Percentage share in
total advance
Agriculture and allied activities
1507
1.1
Small enterprise
11,928
8.7
Micro credit
1,000
0.7
State sponsored organisations for SC/ST
96
0.1
Educational loans
399
0.3
Housing loans
4,021
2.9
Total
18,951
13.9
Source-RBI, Report on trend and Progress of Banking in India, 2010
RURAL CO-OPERATIVES
The short term structure of rural cooperatives comprises of STCBs operating as the
apex institutions in each State, DCCBs operating at the district level and PACS operating at a
more granular level. While StCBs and DCCBs witnessed fall in their net profits, PACS
continued to incur losses. The NPA ratio, however, decelerated for StCBs and DCCBs at endMarch 2010 as compared to the previous year.
STCBs and the DCCBs were heavily dependent on deposits for resources whereas
borrowings constituted a major part of total assets in case of PACS, SCARDBs and
PCARDBs. Out of the total loans and advance issued by the rural cooperatives, DCCBs
accounted for almost 47 per cent followed by PACS and STCBs (Table-4).
The share of long term cooperatives in total loans and advances stood at less than 3
per cent, thus indicating the dominance of short term structure in rural credit disbursement.
The short term cooperatives (except PACS) were found to be better placed as compared to
their long term counterparts in terms of asset quality and recovery performance. The NPA
ratio was found to be higher in case of long term cooperatives. Within the short term
structure, the PACS, however, reported highest NPA ratio, indicating poor asset quality of
these grass root level cooperatives
Table-4
Profile of Rural Cooperative Banks (As on 31 March, 2010)
Particulars
Short Term
Long Term
StCBs DCCBs
PACs SCARDBs PCARDBs
No. Of cooperative Banks
31
370
94,647
20
697
i.Owned funds
(capital plus reserves)
ii.Deposits
Iii.Borrowings
iv.Loans and advances issued
TotalLiabilities/Assets

Balance sheet indicators

11,871
31,370
12,479
79,150
23,550

1,46,404
28,735

35,286
51,764

53,588 1,18,393 74,938

1,20,662 2,18,676 1,35,192
Financial performance

4,510

5,165

759
15,581

461
12,832

3,205
25,562

2,465
25,037

Institutions in profit (No).

29
322
40,936
Amount of Profits
462
1,659
1,132
Institutions in losses
2
47
41,679
Amount of loss
209
523
2,347
Other profit/loss
253
1,136
-1,215
Accumulated loss
575
4757
-Recovery of loans to demand (%)
91.8
75.7
-Source-RBI, Report on trend and Progress of Banking in India, 2010

10
127
9
155
- 27
1,190
41.0

276
123
416
538
-415
4,154
41.5

Table-5
Working of State Cooperative Banks (Region wise) As on 31.03.10 (Amount in crore)
Name of the
Amount of
NPA as % of loans
% of Recovery to
Region
Profit/Loss
outstanding
demand
( End of June)
2009
2010(p)
2009
2010(p)
2009
2010(p)
Northern Region
106
72
31
3.2
97.3
97.9
NE Region
18
68
37.4
36.1
49.2
45.5
Eastern Eastern
33
33
9.6
7.1
87.2
91.6
Central Region
68
45
10.0
7.3
93.0
92.4
Western Region
(--)34
64
20.1
18.4
83.3
81.8
Southern Region
127
(-)29
11.3
5.3
95.0
93.9
All India
318
253
11.8
8.8
91.8
91.8
Source-RBI, Report on trend and Progress of Banking in India, 2010. (P) :- Provisional.

Table-5 shows the working results of Region wise SCBs of India. As on 31.3.2010,
318 SCBs have earned a profit of 318 crore and the amount of profit has reduced to 253 crore
in 2010. The NPA as percentage of loans outstanding which was recorded at 1`1.8 in 2009 has
reduced to 8.8 showing, an improvement. However, the percentage of recovery to demand
during the above two periods remained same at 91.8,highest percentage of recovery has been
achieved by Northern Region where as lowest percentage of recovery has been made by the
North-Eastern Region in 2010.The asset quality of StCBs improved as at end-March 2010
over the previous year with their NPAs declining both in absolute as well as percentage
terms. Analysis of various categories of NPAs further revealed that the decline in NPA was
mainly on account of a decline in sub-standard and doubtful assets while there was a steep
increase in loss assets in 2009-10 as compared to previous year.
STATE COOPERATIVE AGRICULTURE AND RURAL DEVELOPMENT BANKS
(SCARDBS)
Total assets/liabilities of SCARDBs registered a moderate growth of 0.7 per cent in 2009-10 as
compared to 2.5 per cent in 2008- 09. On the liabilities side, borrowing, which is the major source
of funds for SCARDBs registered a negative growth during 2009-10. The other important items on
liabilities side, i.e., net owned funds (capital and reserves) and deposits, however, increased during
the same period. On the assets side, loans and advances accounted for almost two thirds of total
assets, as at end-March 2010.

SCARDBs witnessed a sharp deterioration in their financial performance during 2009-10.

This is evident from the fact that SCARDBs reported net losses during 2009-10 as compared to
profits during 2008-09. Deterioration in their financial performances can be attributed to sharp fall
in interest income on one side, and significant rise in operating expenses, including wage expenses
on the other side.
The growth of balance sheet of PCARDBs moderated in 2009-10 as compared to the
previous year mainly on account of contraction in other assets and liabilities and also slower
growth in two major components of their balance sheet i.e., borrowings as well as loans and
advances. As at end-March 2010, borrowings constituted more than half of total resources of
PCARDBs where as capital and reserves together constituted almost 21 per cent of the same. On the
assets side, the share of other assets was maximum followed by loans and advances, and
investments. Investments grew at a higher rate than loans and advances during 2009-10.
Financial performance of PCARDBs deteriorated with the amount of losses increasing in
2009-10 as compared to the previous year. There was an overall fall in income of PCARDBs owing
to fall in both interest as well as non-interest income. On the expenditure side, there was steep
increase in staff expenses as well as provisions and contingencies. It is, however, worth mentioning
that PCARDBs reported operating profits at end-March 2010, but due to high provisioning and
contingencies reported net losses
Need for Revival of the Cooperative Credit Institutions
Given the above indicators, there has been considerable debate on whether there is an imperative
need for revival of these institutions. Herein, it may be pertinent to reiterate the following points:
1.
In the first place, India is a country with a population of more than 100 crore, of which
around 70 crore reside in a little over 6 lakh villages. As there are a little over one lakh PACS in the
country, the first fact to be appreciated, therefore, is that every 6th village, on an average, has an
existing cooperative credit outlet.
2.
Secondly, although the rural credit system includes about 45,000 rural and semi urban
branches of commercial banks and RRBs, if one would net out the cooperatives from the aggregate
rural presence of all RFIs, the per outlet population coverage deteriorates from 1:4,393 to 1:14,893.
The short point is that on grounds of outreach, cooperatives cannot be ignored.
3.
Thirdly, the outreach is significant not merely in absolute numbers but also in terms of
location of outlets. The number of PACS located in hilly terrains, deserts and other areas with poor
access far exceed the number of rural branches of commercial banks and RRBs.
Initiatives towards Rural co-operative Banks
1.
Package for revival of Rural Co-operatives
Based on the recommendations of the Task Force on Revival of Rural Co-operative Credit
Institutions (Chairman: Prof. A. Vaidyanathan) and in consultation with state governments, the
central government had approved a package for revival of rural co-operatives at the apex level. An
aggregate amount of `8,993 crore has been released by NABARD up to June 30, 2011 towards
Government of Indias share for recapitalisation of PACS in sixteen States while the State
Governments have also released `854 crore as their share.
2.

Licensing of Rural Co-operative Banks

The Annual Policy Statement of April 2009 had announced a roadmap for licensing of unlicensed
state and central co-operative banks in a non disruptive manner and revised guidelines were issued
for the same in October 2009. Subsequent to the issuance of revised guidelines, 10 STCBs and 160
DCCBs have been licensed taking the total number of licensed STCBs and DCCBs to 24 and 235
respectively as at end-June, 2011.
Role of Deposit Insurance and Credit Guarantee Corporation
Deposit insurance constitutes an important element in preventing any runs on the banks due to
unforeseen events. Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly
owned subsidiary of Reserve Bank of India. All Co-operative Banks across the country except three
UTs of Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are also covered by deposit
insurance.
3.

4.
Common Accounting System (CAS) and Management Information System (MIS)
While the process of adoption of CAS is underway in 16 States, in the other States where MOUs
have been signed the RCS concerned have been advised to adopt CAS on the lines suggested by
NABARD.
5.
Special Audit for PACS
Guidelines and formats for conduct of special audit were circulated to all participating States.
Further, training for master trainers and departmental auditors for conduct of special audit of PACS
has been completed in all 25 implementing States. So far, special audit has been taken up in 80, 773
PACS and completed in 80,639 PACS.
CHALLENGES
1. Increased inter-linkages between UCBs and Commercial Banks

In recent years, the integration of cooperative banks with the financial sector has increased
following the inclusion of UCBs in Indian Financial Network (INFINET) and Real Time Gross
Settlement System (RTGS) from November 2010. Further the annual policy statement of the
Reserve Bank for 2010-11 envisages inclusion of financially sound UCBs in the Negotiated Dealing
System (NDS) and opening up of internet banking channel for UCBs satisfying certain criteria.
2. Dual Regulatory System
The banking related activities of UCBs are governed by the Reserve Bank, whereas the
registration and management related activities are governed by the Registrar of Cooperative
Societies (RCS) in case of UCBs operating in single State and Central RCS (CRCS) in case of
multi-State UCBs. In case of rural cooperatives, the structure is even more complex with the
Reserve Bank and the NABARD sharing the responsibility of regulating banking related activities
and RCS regulating registration/ management related activities.
3. UCBs continued to be concentrated in the western region
An analysis of the State-wise data on number of UCBs as well as advances and deposits
revealed that UCBs continued to remain concentrated in terms of number as well as banking
business in the western part of the country. As at end-March 2011, almost 48 per cent of the total
UCBs were located in the western States followed by southern States, accounting for 34 per cent of
total UCBs.
4. Financial performance of long term cooperatives was relatively weak

As at end-March 2010, there were a total 95,765 rural cooperative institutions operating in
the country. Out of the total number of rural cooperatives, short term cooperatives constituted a
majority while only one per cent of the total cooperatives operating in the country were long term in
nature.
5. Almost one third of total rural cooperatives boards under supersession
As at end-March 2010, almost one third of total rural cooperative credit
institutions(excluding PACS) had their boards under supersession. Among various types of rural
cooperatives SCARDBs witnessed the highest percentage of boards under supersession
RECOMENDATIONS & SUGGESTIONS
1. Dual Regulation
The problem the regulator faces in monitoring these banks arises due to the sheer number of banks.
This makes it extremely difficult if not impossible for the regulator to gather data to detect and
suggest prompt corrective measures. Prompt regulatory action is further aggravated by the dual
regulation that is prevalent in the sector.
2. Political interference
Another problem that plagues cooperative banks is the involvement of politicians in their
functioning. It is commonly argued that politicians use cooperative banks to allocate favours to
extract political rents. This makes banks weak as they are used to allocate loans in exchange for
political favours. The interference of politicians also creates hurdles for regulators in implementing
corrective measures in mismanaged banks.
3. Management expertise and lack of skilled staff
Another aspect that raises inefficiencies in cooperative banks is the lack of professional
management. Most often cooperative banks are run like any other family business with the
involvement of friends and relatives. The lack of professional management and the involvement of
family in the running of banks also leads to related lending.
4. Market discipline
Apart from the role of the RBI in supervising cooperatives, the question as to whether market
discipline can be used more effectively remains unanswered. Cooperative banks unlike other public
and private sector banks do not rely on the equity markets for funds. So the question of discipline
through the equity markets does not arise.
5. cooperatives have to reorient their structural functioning and management
Enhancing the competitive strength in cooperatives by their merger and division, wherever
necessary
Non-viable societies that do not have scope for revival should be liquidated.
6. Need for constituting two separate boards
With the growing diversification and size of operations in cooperatives, there is a need for
constituting two separate boards namely, policy-board, consisting of elected representatives of the
members and executive-board, consisting of senior executives headed by the chief executive, with
clear demarcation of areas of their powers and functions.

7. Funding Arrangement
Large-scale enterprises in the cooperative sector may require huge funds. To mobilize more funds,
cooperatives may enter capital market and mobilize funds by means of deposits, debentures etc. At
the same time, cooperatives must evolve deposit-insurance scheme, to instil confidence among the
depositors, both in urban and rural areas.
8. Development of rural sector
For the development of rural sector, which is still very largely in the Informal spheres, the
parameters of the new system do not apply. In such cases, we should identify:
The areas where the cooperatives cannot penetrate or cover
The areas where the cooperative sector has a comparative advantage
The areas where cooperatives can build up strategic alliance with private sector, public sector
and International agencies. Such an understanding will greatly help in the vertical and
horizontal integration of support services for agro-industrial production processes.
9. Up-gradation of Human Resources
For building up professionalism in the management of the cooperative enterprises, it is necessary on
the one hand to upgrade the quality of the staff with latest developments and on the other hand,
develop proper and cordial relationship between the managers and members of board of directors.
Proper and continuous training must be provided to both cooperative leaders and profession
executives.
10. Laws for Self- Reliant Co-operatives
It is only now that cooperatives have an opportunity to thrive for years, despite their relevance
restricted by a hostile legal and policy environment fell far short of their promise. The extensive
powers conferred on the registrar of cooperative societies, are a drag on the efficiency of the
cooperative system. Parallel-laws for self-reliant cooperatives; provide a legal environment that
allows cooperatives to function as autonomous, democratic, member-sensitive, member-controlled,
self-reliant enterprises.
CONCLUSION
In a developing country like India with huge deficits in terms of quality and quantity, the State has
to shoulder the primary responsibility of providing cooperative credit. Considering the low living
standards of common man, incomplete and imperfect markets, and other socio political
considerations it is the primary duty of the government to ensure that its citizens have easy access to
cooperative credit. The need of the hour for the cooperative sector in the era of liberalized
environment is to seize every opportunity available to it. Thus, the future vision of cooperative
movement will have to be based on efficiency parameters relating to promotion of excellence,
improvement of operational efficiency and strengthening of financial resource base.
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