Chapter – III

Functions and Role of District Central Co-operative

Banks

In India, the agricultural credit are characterized by dualism i.e.

institutional as well as non institutional. In institutional sources, it includes
commercial banks, co-operative credit institutions, regional rural banks
whereas in non institutional sources it includes money lenders, land lords,
commercial agents, traders, relatives and friends. Under institutional sources,
commercial bank entered this field very recently. The co-operative institutions
plays an important role in providing credit to agricultural sector. The district
central co-operative bank occupies a key position in the co-operative credit
structure. The success of the co-operative credit movement largely depends on
their financial strength.

The district central co-operative bank as the name suggests has an area
of operation cover a single district1. In any district, the banking system would
comprises of commercial banks, regional rural banks, co-operative banks and
other agencies like SFC, MFIs, informal credit institutions and nonbanking
credit agencies. In such a situation, how does a district central co-operative
bank position itself in the market? This issue needs to be understood by the
chief executive of the district central co-operative bank. With the available
resources and the unique strengths of the district central co-operative bank, a
market needs to be developed which is appropriate, adequate and profitable.
There is a room for all, but the capacity to identify ones niche market enables a
bank to be focussed and devote its resources to that activity rather than

1
C.B Mamoria, B.B. Tripathi, Agricultural problems in India, Kanishka Publishers. New Delhi
(2001) P 153-59.

94
spreading out the resources too thinly across several activities or worse still just
drifting along without any clear business plan2.
Function and Role of District Central Co-operative Banks
The district central co-operative banks play many significant roles.
Some of these are discussed below3: -
Leader of Co-operative Movement
The most significant functions of the district central co-operative bank
is to provide financial support to the primary co-operative societies that are
affiliated to it in the district4. These societies belong to highly diverse
categories like the primary agricultural credit societies, the producers co-
operative societies, handloom and handicrafts co-operative societies, salary
earners co-operative societies consumers co-operative societies, primary urban
co-operative banks etc. However, one of the most significant roles of the
district central co-operatives bank is to support and develop the primary
agricultural credit societies. Many PACS also undertake multiple activities like
sale of fertilizers, other agricultural inputs, and several acts as distributors of
ration items under the public distribution system (PDS). The officials of the
district central co-operative bank carryout inspection of the PACS affiliated to
them periodically. The main source of funds for the PACS is the DCCB and the
supervisors of the district central co-operative banks regularly supervise the
lending programme of PACS. The financial assistance for such activities and
other loans provided to members are also sourced from the DCCBs as the
PACS usually do not have major resource base of their own. Among the most
significant line of credit supplied by the DCCB to PACS is that for providing
production loans for crops to members of PACS. The significant source of own

2
B.S. Mathur: Co-operative in India, Sahitya Bhavan, Agra 1977.
3
Prassanna G. Deshmukh, Working of Co-operative Banks in India, Kanishka Publishers,New
Delhi; Ed.2002 page no. 1
4
Sr.No. / RB Channel/ Managing District Central Co-operative Banks / Aug. 2007 / Eng. / 29 pgs /
Version 1
95
resources of the PACS is the deposits placed with it by the members. A
specified percentage of such deposits collected by PACS are kept with the
DCCBs as reserve deposits to protect the interest of the member depositors.
The DCCBs also provide capacity building supports PACS. They conduct
training programmes for secretaries and directors of the board of the PACS.
Periodical seminars are also conducted to update the staff and members of
PACS on important developments affecting them.
Banking Entity
They accept deposits from public and provide loans to individuals and
institutions including primary co-operative societies. The district central co-
operative banks are banking entities recognised by the Reserve Bank of India
under the Banking Regulations Act. They are governed by the various
regulations stipulated by the Reserve Bank of India from time to time. Special
provisions have been made in the Banking Regulations Act 1949 considering
the special nature of their ownership, development role etc.
Board of the District Central Co-operative Bank
The board of the district central co-operative bank comprises of elected
Chairperson of PACS, representative of the state government and the state co-
operative bank apart from the CEO of the district central co-operative bank
who would be the member secretary5. The state co-operative bank protects the
interest of the major provider of funds to the district central co-operative bank.
The board meets periodically to review the task of the bank and provide policy
guidance. The board of the district central co-operative bank thus represents the
interests of the major stakeholders in the bank. The directors from the PACS
also take care of the PACS who are major borrowers from DCCBs. The
government is a significant stakeholder as the DCCBs functions under the
administrative control of the registrar of co-operative societies. Moreover the

5
Mrudul K.Gaikwad Historical Development of District Central Co-Operative Banks In India;
International Referred Research Journal, August, VoL.III 2011.
96
bylaws of the DCCBs are framed under the Co-operative Act of the respective
states in which they function. In terms of competencies the directors from
PACS bring in are empathetic understanding of the needs of the members of
the co-operative sector in the district. The state co-operative bank
representative provides mainly banking and regulatory competency while the
state government representative adds administrative skills to the board. In order
to carry out its functions effectively, the board can constitute sub committees of
the board6.
Leader in Agricultural Lending7
The district central co-operative banks have been considered as the most
important financial institution to support the short-term credit requirements of
the agricultural sector. These loans include both production loans and
marketing loans granted to the members. Usually the production loans are
granted on the basis of the "Scale of Finance" which is fixed for each major
agricultural crop in the district. The scale of finance is estimate by taking the
total cost of production of the crop based on average price of inputs including
labour. The yield and market value of the output are also estimate and the
credit required per hectare for raising the crop is determined. A committee
called the “District Level Technical Committee” fixes the scale of finance and
the DCCB is the convenor of this committee. The members of the DLTC
include the representatives of the agricultural sector, banks and NABARD etc.
Co-operative Governance
The governance structure defines the distribution of rights and
responsibilities among the different participants in the organization such as the
board, executives, shareholders, borrowers and the government and spells out
the rules and procedures for making decisions on affairs of the bank. With

6
Prasanna G. Deshmukh, Working of Co-operative Banks in India, Kanishka Publishers, New
Delhi. 2002. P 23-25.
7
Prasanna G. Deshmukh ibid.
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regard to governance in banks, the issues involved include greater transparency
in balance sheet, appropriate internal control systems and having defined and
well-stated policies. Governance is about commitment to values and ethical
business conduct and a high degree of transparency. It is all about how an
institution fulfils its mandate to its members and other stakeholders. The board
is expected to exercise objective judgment on corporate affairs provide
direction, oversee, monitor, and act in good faith, emphasize ethical. Practices,
review performance of top management, ensure a wise asset use policy and
assure a sound long-term policy. The management is responsible for day-to-day
operations and the board should provide adequate operational freedom and
avoid micro management.
Resource Mobilization
Any banking institution performs two primary functions deploying them
by providing those to persons who can utilize them productively and raising
resources from those who have financial surpluses.
If raising resources is the key then from whom are they be raised, at
what rates are they raised and for what period become relevant? District central
co-operative bank being local district level banks, their catchment is the local
population. However, their own clientele are farmers whose credit needs may
exceed the resources available. Later in time their own beneficiaries, the bank
has to compete in the market with the other institutions for mobilizations.
Usually the co-operatives offer a small premium over the rates offered by other
banks to attract deposits. However, apart from this other methods need to be
explored to make co-operative deposits attractive. One of the most neglected
areas in co-operatives is that of deposit mobilisation. Because of the easy
availability of resources from higher tier institution, the co-operatives have not
adequately paid attention to deposits8. Nevertheless, deposits are the backbone

8
D’Silva, John (Chief Editor); Co-operative Banks Dairy Mumbai, 23rd Edition. 2000 P1
98
of any banking institution and are a more stable resource for lending. There is
no dearth of deposits in rural areas as can be seen from the credit deposit ratio
of commercial banks. How do we attract a part of these deposits to the co-
operative structure? What does a depositor looks for when deciding where to
park his savings? There are broadly three criteria – profitability, liquidity and
safety. Let us examine these three aspects in some detail.
Profitability
The rate of interest offered should be competitive, without being a
burden to the bank. Most co-operatives offer a slightly higher interest rate than
commercial banks, but unless the rates are fixed after testing the yield on
assets, could do more harm than good. The rates of interest should be
constantly monitored and periodically reviewed. All though co-operatives in
comparison to their peers deploy money for development in their own area, that
in it would not be reason enough for a depositor to opt to save with the district
central co-operative bank.
Liquidity
Additional major factor that depositors look at is the capacity to draw on
their money in times of need, irrespective of the maturity period of their
deposits. This becomes a major issue for district central co-operative bank
branches with low branch level cash limits and no cash chest provision. This
involves the capacity of the bank to convert the deposit to cash on demand.
Requesting depositors to wait to get their cash even for a day could adversely
influence the reputation of the institution and result in loss of customers and
more significantly, word of mouth publicity for the bank. The ways to plan for
such situations include undertaking data analysis of past trends of cash inflow
and outflows and finding patterns, periodically reviewing retention limits of
branches and to keeping a "hub and spoke model" with key branches as hubs.
Where cash can be collected for transfer in the shortest possible time to the
smaller branches, within the day of demand. Maintaining an account with a

99
nearby commercial bank for instant transfers from head offices can also be
considered. In the current scenario of shared networks, DCCBs can also enter
into collaboration with other banks already having the network to transfer
funds on their network, without having to duplicate with their own network.
Saving be safe.
People desire that their savings should be secure. Several indicators are
there such as market reputation of the bank, the outlook of the branch and the
experience of the customer with the bank. Moreover, profitability is a function
of good asset management, housekeeping and effective business planning. One
of the reasons why the co-operative institutions do not attract deposits is their
poor financial health. The other dimension of security is the feeling of security
that the institutions provide. It is very essential that the district central co-
operative bank branches match the outlook of commercial banks in the area, as
they are the main competitors. Much more than what may be the true financial
health of an institution, the reputation of the Institution matter is the final sector
and needs to be preserved and developed. Therefore, the record of the bank
should be highlighted and every forum should be used to project the positive
aspects of the bank. If the financials of a bank are poor, however much they
may be kept secret, it is difficult to keep it from the intent look of the public.
All security measures should be not only there, but visible to customers such as
a secure cashier enclosure, a strong room and collapsible gates at the entrance.
The depositor should get a feeling that his money will be secure with the bank
when he enters the premises.
Capital and Reserves
The banking institution to raise resources, either as deposits or
borrowings would require that the institution have a capital base consisting of
equity and reserves. In a co-operative bank primarily driven by providing credit
to its members at a reasonable cost, maximizing return on equity remains
secondary. Further, raising capital from the public at large may compromise its

100
mandate. Hence, the equity of the district central co-operative banks is build
from the affiliated member institutions. Normally as per status, a borrowing
member has to contribute equity in proportion to the borrowings made by the
institution from the bank. This does make it complicated for the co-operative
banks to have a large capital base and in the present times when capital
adequacy is becoming a major issue in banks, co-operatives in the conventional
industry sense be undercapitalized. To overcome this hindrance of capital, state
governments have contributed to the equity of district central co-operative
banks to strengthen their capital base, but this has its own pros and cons. The
second source of own capital is the reserves and surpluses created from
operations. Functioning on small spreads, district central co-operative banks do
not accumulate too much surpluses and therefore this forms a small component
of the capital base9.
Borrowings
District central co-operative banks credit facilities are provided for a
specific purpose and with a fixed tenure. DCCBs have borrowing facilities
from their apex level state co-operative banks and from institutions like
NABARD. The second source of resources for DCCBs is borrowings from
higher tier institutions. Hence, unlike deposits, which in normal course would
have a rising trend while deploying borrowings it is essential to match the
tenure of the loan to that of the borrowing so that by the time the borrowings
become due for repayment, the loan has come back. The borrowing
arrangements of DCCBs are called refinance. DCCBs get refinance from
NABARD through the SCBs.
Loans and Advances
The major business of the co-operative banks is lending. One way of
granting of loans is according to the tenure for which the loans are made out.

9
Sr.No,. RB Channel, Managing District Central Co-operative Banks. Aug. 2007 Version 1
101
Scales of finance
As discussed earlier, the DCCB has a major responsibility in convening
the "District Level Technical Committee" on scales of finance (SOF) for the
district. These are fixed10 once a year before the major crop season in
consultation with all the stakeholders. The key inputs in the exercise are
recognising all major crops in the district, defining their cost of cultivation and
the returns that are coming from the crop and establish the scale of finance.
Since the scales of finance are averages, banks have the flexibility to offer
larger loans than the scales fixed for enterprising farmers. The process of fixing
a scale of finance is very useful as it harmonizes the rates across different
banks and each bank need not independently arrive at the SOF. Another major
area is the individual maximum borrowing power (IMBP) fixed by the bank.
This limit is based on various factors such as the local valuation of land etc. It
is one of the limiting factors that constraints the capacity to lend larger amounts
by the DCCBs. Since crops loan rates are externally pegged and the delivery is
usually through the PACS, it constraints the ability for importance innovations
in this product.
Short Term Production Loans
Short term production loans are extended for raising crops. These are routed
through the primary agricultural credit societies (PACS). For extending short-
term credit, each PACS is required to estimate credit need of its members and
forward the same to the DCCB. The DCCB based on the past performance of
the society and the resources available with it sanctions funds to the society for
disbursement of crop loans to the members. A large portion of the crop loans
disbursed by DCCBs is with refinance support from NABARD. The
government of India has introduced an interest subvention scheme whereby

10
Prasanna G. Deshmukh, op cit.

102
loans up to Rs 3 lakhs are flexible to farmers at an interest rate of 7% and
Government of India provides an interest subsidy of 2% to the banks. Short
term agricultural credit is a key area of the DCCBs operations and could be
considered a mandate of the bank. The needs for short term credit or crop loans
have an overriding priority in DCCB loans. Because of the overriding priority
that this segment of the lending portfolio of banks attracts, it receives attention
from the state co-operative bank, NABARD and the governments both State
and Central. The result is that the portfolio is directed and has limited
flexibility.
Term Loans
The co-operatives also offers term loans to farmers. These can be
delivered either through the PACS or directly to the farmers by the DCCBs.
For such financing, the DCCBs can obtain refinance from higher lending
agencies like NABARD, who channelize these funds through the state co-
operative banks. The loan requirement of the project is determined on the
aggregate cost of various components of investments and then deducting the
margin that the borrower will have to provide. Term loans are extended for a
wide range of purposes, from excavation of wells, purchase of pump sets to
horticulture, animal husbandry and even rural transport like tractors and other
farm equipments. The repayment instalment and period is fixed based on the
incremental income that will be derived from the asset and the life of the asset.
Usually, for small and marginal farmers around half of the incremental income
is taken for the servicing of the bank loan.
Other Loans
The DCCBs can also extend credit for other activities. One of the major
field for credit deployment by co-operative banks is extending credit to other
co-operative institutions in the district such as co-operative sugar factories,
milk unions and co-operative spinning mills. Considering the resources
available with the bank and the lending opportunities that emerge the banks can

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also deploy credit in other types of loans including jewellery loans, consumer
durable loans, loans to co-operative credit societies etc. But considering the
primary mandate of the bank, these activities can be done only after the
agricultural credit demands have been adequately met. All these potential
markets have been well identified in urban and semi urban centres, but there is
still a vast potential in rural India where the reach of the commercial banks is
inadequate and is unfamiliar territory for them. It offers good scope for the
DCCBs to build business there.
Customer Service Standards
Banking being a customer based enterprise, it is necessary to benchmark
oneself by setting functional standards and comparison with the industry
standards. The standards should not only be developed by the organization, but
also stated publically through display boards so that customers can know and
compare for themselves the quality standards that are provided11.
Cash Management
Cash is the liquid asset. However, it is also the most unproductive, as
holding cash does not yield any return. Further holding cash is risky. Then cash
is required to serve the day-to-day requirement of the client. The decision of
when the client will ask for his money is solely in the hands of clients. Based
on past trends, it is generally possible to predict the pattern of needs. Each
branch has specified a limit to which cash can be retained, and the balance
immediately emitted to wherever there is requirement or to the head office for
utilization to repay borrowings or invest. Overseeing this process on a daily
basis and monitoring it, several times a day is essential. This requires both
good communication links with all the units as well as appropriate mechanisms
for transfer. In some cases, the co-operative banks tie up with a nearby
commercial bank branch to deposit the cash and remit the amount as an

11
RB Channel op.cit
104
instrument instead of cash. In the recovery seasons, the bank requires to
monitor the cash balances at the society level and ensure that these balances are
transferred to the DCCB as quickly as possible.
Portfolio Mix
What would be the appropriate loan portfolio mix for a DCCB? These
requirements to be attention examined by the bank. For some of the purposes,
the resources mobilized are specific and there is no levy available to the bank
except in deciding on whether to undertake it or not and if to undertake, to what
extent to go. On the other hand, the bank would have flexibility in deploying its
own resources and the considerations that should go into taking a decision
would be profitability, safeguard and the capacity of the bank in handling that
portfolio.
As per Section 18 of the Banking Regulation Act 1949 (As applicable to
co-operative societies (AACS) every co-operative society is required to
maintain cash reserve ratio (CRR) equivalent to 3% of its demand and period
liability. The CRR is to be determined by the bank by way of cash with itself or
by way of balance in a current account with RBI or state co-operative bank or
by way of net balance in current accounts with SBI/ nationalised bank. In
addition to CRR, co-operative banks are required to maintain in cash or in
unencumbered approved securities, an amount equivalent to 25% of their
demand and time liability as statutory liquidity ratio (SLR) as per the
provisions of Section 24 of Banking Regulation Act 1949 (AACS).
Investments although the investment portfolio of the DCCBs may not be
significant in comparison to other institutions, the bank should have a defined
investment policy approved by the board, within the boundaries of which the
DCCB management can operate, reserves requirement
Inter Office Transactions
Most transactions between the various units in the co-operative credit
structures take place through inter office entries. These need to be regularly

105
monetary they are one of the most potent areas for frauds and irregularities.
Originating and responding to inter office transactions needs to be authorized
by a senior officer, and documents supporting the transaction should be
maintained at each end. At the head office level, all inter office transactions
should be checked and unreconciled entries tracked. By the end of the
accounting year, the effort should be to have no unreconciled entries in the
books.
Internal Checks and Controls
The methods of operations adopted have to be followed by standardized
procedures and practices so that there is uniformity across different branches,
offices of the organisation. The internal checks and controls is an integral part
of the management of any business organisation. The goodwill and public
confidence are crucial elements for the survival and growth of banks. Such
checks and controls are necessary to prevent any irregularities of omission and
commission during the course of daily business. Sound checks and controls are
critically important for the banking system as not only do they deal in money,
but also are the repositories of public savings held in trust. The internal checks
and controls present the occurrences of human error as a natural phenomenon
and try to negate them. It also prevents and dissuades employees and clients
from wilful perpetration of frauds and malpractices.The internal checks and
controls play an important role in maintaining the reputation of banks and are
key to a string financial sector in the economy. A loss of public confidence in
banking system can severely retard growth.
House Keeping
House Keeping in any banking institution is the key to effective
working. At each unit of the Bank, the cashbook should be can cited at the end
of each day and the cash balance as per the cashbook reconciled with cash on
hand. The books of accounts need to be written up on a daily basis and
reconciled periodically to ensure that there is a minimum scope for any

106
irregularities and frauds. All other ledgers need to be reconciled periodically,
preferably every fortnight. With the computerization in banks, these tasks have
been greatly simplified and automated.
Sundry and Suspense Account
Another major area to be managed and monitored very carefully is the
suspense and sundry account. This is a temporary head of account where debits
and credits are made when the transaction has not been concluded. For
example, an advance provided to an officer for undertaking an official tour. In
such cases, it is expected that the bills are settled and submitted within given
time. Often, many such entries remain unresolved and get carried into the
balance sheet as an item of asset. At the beginning of the next accounting year,
the aggregate amount is shown as an opening balance, and unless closely
monitored may become loss assets to the bank. A periodical check of sundry
and suspense balances at every accounting unit is necessary.

Objectives of Internal Control System12

The objectives of Internal Control System are to ensure that:-
 District Central Co-operative Bank is accounting norms and uniformity
in practices are followed.
 All records are systematically maintained to provide complete, accurate
and timely information.
 Business of the bank is conducted a prudent and orderly manner in
accordance with pre laid out, established policies.
 All assets of the banks are properly and adequately safeguarded and all
liabilities are controlled.
 All transactions in the bank are conducted only under specific authority
or general authority given to specific staff.

12
K.V. Lakum: Reading Materials-National Institute of Co-operative Management APH
publication new Delhi .2002 p. 21-42.
107
  Risks associated with the business are identified and assessed.

The Elements of Internal Control in a District Central Co-operative

Bank are:-
1. Administrative control
2. Accounts control
3. Internal Audit / Inspection
4. Concurrent audit
5. Review by Board of Directors
6. Vigilance cell and fraud monitoring arrangements

1. Administrative Control
Various administrative measures are followed to ensure the soundness
of internal checks and controls. These includes turnover of the staff engaged in
sensitive accounting and cash handling activities, periodic posting of staff etc.
These controls also include delegation of financial powers in respect of
sanction of advances and post sanction monitoring
2. Accounts Control
Proper record of accounts, upkeep of appropriate ledgers, supporting
subsidiary ledgers, other registers are important in the context of accounts
control. The bank follows standard practices of accounts and the basic books in
uniform formats are maintained by all offices/branches of the bank. The books
are periodically balanced which ascertains the accuracy of maintenance of
books. The balancing is carried out at specific periodic intervals and a
subsidiary balancing ledger is being maintained. The internal and ongoing
control mechanism include daily posting of the ledgers, verification of entries
by offices from the vouchers. The officers who verify the entries and the clerks
who make primary entries are specifically allotted such work and are
personally responsible. The books of the bank are certified as tallied and the

108
balances in the subsidiary balancing ledger tallies with the balances in the
general ledger.
3. Internal Audit / Inspection
The internal auditors of the banks carry out periodically audit. The audit
on the one hand ensure that the accounts are classily monitored correctly
reflected in the books. On the other, it also gives valuable feedbacks to the
management about systemic lacunas and risk areas. The internal audit
essentially ensures that the books are properly maintained and that the annual
accounts reflect the true and honest financial position of the bank. Audit deals
with financial transactions of the organisation. The inspections are broader in
its coverage and content than audit. The banks also carry out internal
inspections. Typically, the internal inspection of a DCCB include the review of
loan decisions, documentation, use of delegated powers, adherence to internal
checks and controls and branch management aspects. It also critically review
accounts books and various other housekeeping aspects. Inspection in fact, can
be stated to be a qualitative review of the affairs of the organisation.
4. Concurrent audit
Concurrent audit in district co-operative banks is usually carried out in
larger branches. This is to ensure that the vouching and accounting is done
judiciously and that the delegated powers are being used as consciously.
5. Review by Board of Directors
The management reports the status of the compliance with internal
checks and controls in head office departments and branches to the board. The
delays in reporting by branches, improper monthly certifications, deviations
between certification and actual verifications etc. are observed. Reports on any
frauds detected and progress in ongoing enquiries are also reported. The board
is apprised of the status of housekeeping and accounts. The board generally
appoints an audit committee, which goes into the details of such reports, call

109
for clarifications etc. The board also reviews the reports of internal audit and
inspections.
6. Vigilance Cell and Fraud Monitoring Arrangement
Frauds often occur in banks due to criminal deception of persons single
or in collusion with others. Unfortunately there is a rising trend of defalcations,
embezzlements, misappropriations etc. in the central co-operative banks. Such
frauds in banks are perpetrated through encashment of forged documents,
manipulation of accounts, operations of fictitious accounts. Unauthorised credit
facilities granted for reward or illegal gratifications, facilities provided to close
relatives without proper appraisal, complicity in manipulation of records and
documents while granting excess loan, etc. are types of frauds prevailing.
These frauds have multiplicity of negative effects in banks. The first fallout is
the weakening of the moral and ethical value system in the bank. Frauds occur
mostly due to laxity in internal checks and controls. It is often seen that the
internal staff come to know of frauds much before auditors and management
become aware of these. The pecuniary gains resulting from frauds may draw
more persons to commit such acts. The second and most significant is the
injustice to the depositors. It is a criminal breach of trust towards them and
results in the loss of goodwill among the present and potential consumers. In
rare cases, if frauds of such large intensity or very frequent in occurrence can
result in a run on the banks. The third impact on the bank is the actual physical
loss of money. This will influence the profitability of branches/banks, as
provisions may have to be made. It is the primary responsibility of the
management to prevent frauds. The management counters the situation
essentially in two ways. The first approach is to initiate investigations/enquiry
against all cases of fraud. The second by preventive vigilance. This include the
review of existing systems, periodically ascertaining that laid down procedures
are followed, staff is rotated as desirable, officers use delegated powers
appropriately, examine that security items, records etc. are properly

110
maintained. Insistence on regular reporting by branches to head office; and
identification of any exceptions to normal trends in the business of branches,
analytical review of such trends etc. are carried out. The management also
insists that internal auditors identify fraud prone areas and special efforts are
taken to tighten checks and controls in such areas. Usually the district co-
operative banks insist upon the branch managers to issue a monthly certificate
to the head office. The branch manager certifies that the cash balances are
correct, books are balanced, that specific officers check important accounts.
Returns are submitted and verified to higher authorities on time. Such
certification makes the branch managers and other verifying/authenticating
officers personally accountable for the proper compliance with laid down
systems, procedures, checks and counter checks. Surprise checks are also
conducted in branches as a measure of preventive vigilance. Both internal
enquiries as well as criminal investigation by the police are preferred. It is
significant to note that the investigations must be conducted diligently so that
deterrent punishment is meted out to the perpetrators. In certain cases, the bank
management has shown reluctance to prefer police complaints fearing the loss
of confidence of the public. However, this is neither the right practice nor the
right rationale. Frauds can have outsiders involved in it, may be committed due
to extortion, outside pressure, external criminal nexus etc. It may be committed
with the help of powerful elements within the bank. Such ramifications shall be
exposed only outside, neutral agencies. Therefore, it is insisted that frauds are
reported to higher agencies like NABARD and RBI and that cases are
immediately registered with the police. The modus operandi of frauds is
subjected to the detailed scrutiny to understand the weaknesses in the existing
systems and introduce newer checks and controls as well as modifying the
method and periodicity of checking and reporting as the case may be.

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Audit and Inspection
It is mandatory for all banks to undergo periodic audit and inspection. The
inspection of the DCCBs is undertaken by NABARD on a periodic basis to
confirm that the bank is working in a manner that is not in against the interest
of the borrowers. Inspection goes beyond the domain of audit and sees several
aspects including policies, procedures and their operations. Audit is the
verification of accounts book of the bank to confirm that they present a true and
fair picture of the financial position of the bank. This process if done on an
ongoing basis is called concurrent audit. Normally, the auditors of the co-
operative department conduct the audit of the DCCBs. In some states, chartered
accountants can also perform this task. One of the points of note is that a large
part of the portfolio of DCCBs comprises of the outstanding farmers at the
PACS. Hence the financial health of the DCCB will be impacted by the health
of the PACS. As on today, the financial statements of the DCCBs do not reflect
the aggregation of the financials of the PACS, as they are fully autonomous
entities.
Inspection of District Central Co-operative Banks
All district central co-operative banks are registered under the Banking
Regulations Act and are under the regulatory control of the Reserve Bank of
India. The banks have to follow the various relevant provisions of the Banking
Regulations Act and are subjected to periodical supervision to ensure that they
function as per the provisions of law and with prudence. In the case of the
district central co-operative banks, national bank for agriculture and rural
development has been designated as the supervisor along with Reserve Bank of
India. However, as a matter of convention, Reserve Bank usually does not
exercise its powers to inspect these banks. The supervision of banks is carried
out by onsite inspection as well as by offsite surveillance. The offsite
surveillance is carried out by scrutinising statements submitted periodically by
the banks. The supervisors prescribe these statements and their periodicity. The

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supervising officers scrutinise the accounts books, internal checks, decision
making process and management practices, policies, controls, funds
management etc. of the bank. The statements related to the position of
nonperforming assets, supervisors at the premises of the bank carry out the
onsite inspection.
The onsite inspection is considered the main platform of supervision
in the Indian context so far.
Objectives of On-site Inspection
The objectives of the onsite inspections are several. The first key
objective is to ensure that the business of the bank is conducted in conformity
with the relevant acts, rules, regulations, byelaws and various other directives
issued by the Reserve Bank of India. There are several provisions of the Bank
Regulation Act and the State Co-operative Society Act that are required to be
followed by the banks. These includes continuously maintaining minimum
prescribed cash balances, maintaining balances in investments in government
bonds, deposits with higher tier agencies at prescribed ratios to the total
deposits held by the banks, submitting regular returns to RBI & NABARD, etc.
The inspections also observe the various rules, guidelines etc. prescribed by the
Government, RBI, NABARD, etc. from time to time and the adherence of the
bank to these. The second objective is to ensure that the bank conducts its
business in such a manner that the interest of all present and future borrowers is
safeguarded. It must be remembered that the banks collect deposits from the
public and hold it in trust with the promise that it will be returned to the
depositors, either on demand or at the end of specific terms. The third
important objective of the onsite inspection is to examine the financial position
of the bank, assess the financial soundness and the correctness of maintenance
of the books of accounts. It also checks at the managerial soundness of the
bank. This includes the review of decision making process, the power
delegation and its use, the policies laid down by the management and

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adherence to it etc. The on-site inspections is also a tool used by the
supervisors to understand the weaknesses in the banks and to develop an action
plan to take care of such weaknesses as well as to help the bank to grow. Thus,
the supervisors examine the various aspects of the bank with a view to
understand the bank in its totality. This would mean that the inspection also
takes into account the potentials, the strengths, weaknesses, and the risks to
which the specific bank is exposed to in its business environment. In other
words, it is not an exercise to locate only operational deficiencies and find
faults.
Human Resources Management
Managing human resources in a district central co-operative bank is one
of the greatest challenges of senior management. The geographical area of
operation being limited and the staff being local develop, intimate relations
with the beneficiaries manage short temporary postings which works for the
benefit of DCCBs as compared to the commercial banks. The recruitment and
promotion policies are generally approved by the co-operative department,
(Registrar of Co-operative Societies) entry level positions in DCCBs such as
field supervisors are filled both by the promotion of secretaries of PACS and
by direct recruitment. For the officer cadres also, the vacancies are filled from
both the feeder cadre and by direct recruitment. In view of the precarious
financial position of many DCCBs there was a freeze on recruitment 13. This
has caused impediments in filling up vacancies arising from retirements and
depletion in staff further aggravating the problems of the CCBs. Fresh
recruitment of professionally qualified staff and increasing use of technology
can solve the situation considerably. As DCCBs do not have the opportunity to
recruit staff on an ongoing basis, it is essential that the capacity building of the
available staff is given a high attention. The banking industry like the Indian

13
Prasad, Bhagwati (2009), “Human Resource Management in Co-operatives: Same Issues”, The
Co-operator, Indian Co-operative Review, Vol. 46, No. 8, pp. 345-349.
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economy is advancing very fast and to keep pace with the changes, the co-
operatives will have to provide continuous exposure to their employees the best
and the latest happenings through participation in training, seminars and
workshops.
Coverage
The onsite inspection focus on the core areas of the bank functions,
these include the analysing the financial position, management, internal checks
and controls and the compliance with regulatory and policy requirements. The
basic approach of inspection of the DCCBs is called the 'CAMELSC' approach.
This stands for
1. Capital
2. Asset Quality
3. Management
4. Earnings
5. Liquidity
6. Systems &
7. Compliance

The coverage of the inspection is designed in such a way that the

process concentrates on the more important areas of supervisory concern
broadly the three key areas are the financial position and performance, the
management and operating systems and the compliance review.
The key elements under each of these broad areas are briefly
discussed below-
I. Financial Position and Performance
The following areas are reviewed critically:
i) Solvency and Capital Adequacy: The solvency of the bank means as,
that the net worth of the bank is positive. This means after taking
into consideration all losses, provisions required for bad loans,

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 investments, frauds etc., and the bank has a positive capital base. The
capital adequacy is a concept which ensures that the bank has a
minimum positive net worth to take care of its normal business risk.
The capital adequacy ratio is stipulated by the Reserve Bank of
India. Though a specific stipulation has not yet been prescribed in
the case of DCCBs. The inspection ensures the capital adequacy that
the bank overall financial position is healthy.
ii) The Asset Quality: The two most important bank assets are loans,
advances and the investments. During inspection the quality of the
banks, portfolios under these two categories are critically analysed.
The policies of the bank in collecting its assets, the adherence to
various laws, rules and prudential practices and quality of the
portfolios are analysed. Any deviations from norms, suspicious
trends, concentration in any specific sector etc. are reviewed.
iii) Earning Performance: The two most important parameters that are
reviewed during inspection to assess the earning performance of the
bank are (a) the net interest margin and (b) the net margin. The net
interest margin (NIM) is the difference between the total interest
paid by the bank on its deposits and borrowings and the total interest
earned on its loans/advances and investments. The Net margin is
arrived at after deducting all the other expenses from the NIM and
then adding all other income of the bank to it. It is usually expressed
as a percentage to total assets.
iv) Liquidity: The liquidity position is one of the most critical aspects of
banking in general. Liquidity of the bank ensures that the depositors
can be given their money on either demand or when the terms of
their deposits is over. The liquidity is assessed in two aspects. The
first is the compliance to statutory requirements. All DCCBs are
required to maintain 3% of their total demand and time liabilities

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 (DTL) as liquid cash either with them or as current account balances
with the state co-operative banks. Similarly they are also required to
invest 25% of their DTL in fixed deposits with state co-operative
banks or other investments approved by the Reserve Bank of India.
The second critical analysis is about the term for which bank has
built up assets and liabilities. The bank must ensure that the total
volume of its loans, advances and investments that is repaid matured
in one year time is equal to the volume of deposits are borrowings
that it has to repay during one year time. Such analysis can be done
in different brackets of time, like two years, more than two years etc.
v) Borrowings: The bank often has to borrow from higher financing
institutions to provide adequate funds for loaning. The borrowings
are always taken either from or through the state co-operative bank.
The bank is eligible for refinance from higher financing agencies like
NABARD, NHB, and NCDL etc. These borrowings are done
through the SCB, while direct borrowings are also made from them.
The terms and conditions of such borrowings, the actual need for
borrowing, rate and the proper utilisation and timely repayment etc.
Are monitored during inspection.
II. Compliance Reviews
The bank is expected to meticulously follow the various policy
guidelines issued by the Reserve Bank of India, NABARD, State Co-operative
Banks, and State Government etc. from time to time. It is also required to
follow various statutory provisions and said periodical statements and reports
to RBI & NABARD. The bank adherence to these is reviewed and critical
comments made during the inspection. Prudential norms sweeping reforms are
taking place in the world economies and the financial systems. One of the
major fall outs of these reforms is that there is a high degree of co-operation
and integration among world economies. The Indian economy and the financial

117
system is no exception to this. As a result, one global understanding is that all
financial institutions shall follow similar systems while representing their
financial positions. One approach to achieve this is to adopt prudential norms.
Prudential norms mean the use of prudent benchmarks and common yardsticks
to understand the financial position of financial institutions. Thus, the position
of a bank in India using prudential norms can be compared with a bank in
another country. It will also reflect the real position of the bank.
III. Management and Operating System
The inspection reviews through major aspects in this area. There are the
management quality at the level of the board, the CEO and the supervisory staff
of the bank, the various management systems and the informal checks and
controls. The soundness of the manage decisions, the adherence to various
systems, internal checks and controls are reviewed.

The major prudential norms adopted in Indian Banking system are:

1. Exposure Norms
2. Capital Adequacy
3. Income Recognition and Asset Classification

Such norms were used in Indian banking system for a long time, but the
benchmarks and norms varied from institution to institution. In the case of the
district co-operative banks the first two norms have been adopted till now.

Income Recognition and Asset Classification (IRAC) Norms

The income recognition and asset classification relates to transparency.
The international practice in banking is that a loan account is treated as 'Non-
Performing Asset' (NPA) if either the interest or an instalment is overdue for a
specific period. Not all income that occure in such accounts is recognised as
income. Simultaneously, all loan accounts which are classified as NPA, are
required to be provided for in anticipation of possible losses. These loans are
classified into three categories:
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 I. Doubtful Assets
II. Loss Assets
III. Sub Standard Assets

Loans in which either interest or instalments are overdue for more than 90
days to 36 months are classified as sub standard assets. 10% of the outstanding
loan amount has to be provided for towards anticipated losses by charging the
profit and loss account of the DCCB. If the loan is overdue for beyond a period
of 36 months, it is classified as doubtful assets.

The doubtful assets further sub-classified into three viz:

 Doubtful Assets I if it is overdue for a period of 36 to 48 months.
 Doubtful Assets II if it is overdue for a period of 49 to 72 months.
 Doubtful Assets III if it is overdue for a period more than 72 months.

As per the existing norms, the district central co-operative banks are
required to provide 20%, 30% and 60% of the outstanding amount respectively
for the above three sub classifications. The provisions shall be increased to 100
% by 31 March 2012 for the third category of doubtful assets.
The last category is the loss assets, which are loan accounts identified by the
banks or its auditors or supervisors (NABARD/RBI) as unrecoverable for any
reason. 100% of such loans shall have to be provided relaxations, however,
have been allowed for loans for agricultural purposes. In this case, loan is
considered as NPA only if it is overdue for two crop seasons and the 90 days
norm is not applicable. Apart from the provisions for the delinquent loan assets,
the banks are required to provide 0.25 % of all outstanding standard loan assets
to provide cover for any normal business losses that may arise in future.
Co-operatives and Microfinance
The self-help group movement in India has by now established strong
roots all across the country. A typical group comprises of 15–20 women who
come together to do savings and internal lending and in due course obtain

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access to resources from the banks. The linkage of the SHGs was mainly with
the commercial banks and regional rural banks, due to the difficulty of the co-
operative banks in dealing with an unregistered body. This matter has since
been addressed by several states by carrying out necessary amendments to the
state acts to enable SHGs to become members of the DCCBs and borrow funds.
Some of the DCCBs have recognised the unique potential that microfinance
business and have established special cells for the purpose.
Recovery
In any banking operation, the profit comes not only from lending but
from the ability to recover the money lent out. This is a function of not only a
proper appraisal system that makes correct assessment of the capacity of the
project to generate cash flow for the borrower to repay. In the agricultural
sector, the crop harvests are seasonal and so it is essential to track the
operations of the farmer and trap the cash flows before they disappear. The co-
operative structure has its own recovery mechanisms14. As explained above, the
timely recovery of the loans lend both by the DCCB directly as well as through
PACS will determine if the loan assets are performing or non performing. The
longer the loans remain unrecovered, the quality of loans become that much
worse. Apart from this, poor recovery of loans will also impair the ability of the
DCCB to get funds from the State Co-operative Banks as well as refinance
from higher financing agencies like NABARD, SIDBI, and NHB etc. These
institutions usually stipulate that unlimited amount of refinance is available,
depending on actual requirements, if the NPA levels of the DCCB is low at
25% or less and beyond certain percentages no refinance would be available.
The approaches for recovery of loans can be classified into three. These are
preventive steps, corrective steps and coercive steps. Some elements of these
are indicated below:

14
N.Muralydharan Balasswami, District Central Co-operative Bank in Agriculture Finance and
Recovery, India co-operative review, Vol. XXII, no.3 1985.
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1. Corrective Steps
 Motivate staff for regular follow up through acknowledging
performance, monetary incentives etc.
 Joint visits by DCCB and PACS officials.
 Special recovery efforts by members of the board, particularly the
elected directors from PACS.
 Personal visit to houses business centres of defaulting clients.
 Adopting innovative strategies like using Self Help Groups to encourage
villagers to repay, holding recovery camps, organising farmers clubs,
facilitating marketing of crop produce at right prices, promoting
contract farming etc.
2. Coercive Steps
 Attaching security of available through legal process.
 Sending legal notices.
 Using lok adalat for quick settlement.
 Repeated visits to the member.
 Using revenue recovery act.
 Conducting public auction of previously attached properties.
3. Preventive steps
 Raise demand notices in time to remind the borrowers about prompt
repayment.
 Regular and effective follow up.
 Proper assessment of the borrower regarding his/her ability to utilise the
loan and willingness to repay.
 Proper scrutiny and appraisal of loan proposals.
 Proper documentation.
 Regular monitoring of the loan portfolio at the bank level to catch early
warning signals.

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 However, it must be remembered that very often external factors also
contributes to loan defaults, particularly in agricultural and allied activities.
These include the occurrence of natural calamities like drought, floods etc.
which are beyond the means of the borrowers to cope with. Similarly,
market/economic reasons can also adversely affect recovery. Lower prices,
lack of demand for produce during particularly year etc. will affect the cash
flow of borrowers negatively and result in loan defaults. It is necessary to take
a sympathetic view towards such reasons and allow loans to be rephrased or
rescheduled. This will provide longer period for the borrowers to repay
providing fresh loans to carry on the activity during the next academic season
is also recovery.
Restructuring of Co-operatives
As discussed above, the Three Tier Co-operative Banking structure in
India plays a vital role for providing production credit to the agricultural sector
in the India. It is also the most important source of financial support to other
primary co-operative societies. But, unfortunately this sector is besought with
several weaknesses. The Government of India has felt the need to revamp the
three tier co-operative banking network and constituted the committee to
"Restructure and Revitalise the Co-operative Banks", under the chairmanship
of Professor Vaidyanathan. This Committee is also popularly known as the
Vaidyanathan Committee15.

The Committee has identified Several Major Weaknesses in the

System. Some of these are:
The co-operative credit system is impaired key areas of Governance,
Management and Financial Stability.
The system has submerged in a high degree of politicisation affecting prudence
in Governance.

15
See Recommendation of the Vadayanathem Committee, 2005
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 Poor governance has led to poor management of the banks and the
adoption of poor policies. The cumulative effects have huge losses in all the
three tiers, particularly the DCCBs and PACS.
The state government interference in the governance is often rampant
with the boards often superseded for flimsy reasons. Inordinate delays have
been noticed in conducting elections auditing etc. Quite often, there are both
political and administrative interferences in the operations of the banks and
societies.
Weaknesses are observed in housekeeping, particularly reconciliation of
books, balancing of books recovery follow up etc.
Political and administrative interference in the most vital aspect of recovery of
loans is seen to be rampant.
Various forms of loan waiver schemes announced by government of the
time have adversely affected both the credit discipline among members as well
as the overall financial stability of these institutions.
The Vaidyanathan Committee therefore, has recommended the
implementation of a revival package covering three broad areas: financial
assistance, legal and institutional reforms and measures to improve quality of
management.
1. Legal and Institutional Reforms
Full membership rights to all users, including depositor’s wider access
to all institutions for borrowing and investment Ensuring elections before end
of tenure of Boards Exit of State equity and consequent withdrawal from
Boards Empowering RBI to directly exercise full regulatory authority in
financial matters.
2. Measures to improve Quality Management
Co-operation of professionals on Boards Reduction of State intervention
in administrative and financial affairs limiting powers of state to supersede
broard introduction of prudential norms and audit by CAs. Implementation the

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Government of India has accepted the Vaidyanathan Committee
recommendations and rolled out the programme for revival of the
co-operative credit structure. NABARD is the nodal implementing agency for
the programme. By April 2008, 19 states had accepted the package and
commenced implementation.
3. Financial Assistance
The Co-operative Banks and PACS shall be provided financial
assistance under a revival package to make them strong to serve the credit
needs of the rural people, particularly the small and marginal farmers. Such
revival package shall include assistance to wipe out accumulated losses also.
The financial package shall also increase the capital base of the banks/societies
and reduce the government share of equity to 25% of the total subscribed share
capital of the society. Cost of training and capacity building to improve the
financial management skills of the staff and board of directors is also
envisaged. Financial support should be made available for installation of
uniform accounting and monitoring systems and computerisation of PACS.
Implementation
The Government of India has accepted the Vaidyanathan Committee
recommendations and rolled out the programme for Revival of the
Co-operative Credit Structure. NABARD is the nodal implementing agency for
the programme. By April 2008, 19 states had accepted the package and
commenced implementation.

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