3.35 Asset quality is an important aspect of the evaluation of banks. Prudential norms relating to asset classification have been extended to the StCBs and CCBs since 1996-97 and to SCARDBs and PCARDBs since 1997-98. The asset classification norms for the co-operative banks have been further tightened from the year ended March 2000, in line with those for the commercial banks. The co-operative banks and RRBs are required to make a general provision on ‘Standard Assets’ at a minimum of 0.25 per cent of such assets, effective from 1999-2000. The asset classification and provisioning norms in respect of advances guaranteed by the State Government where guarantee has been invoked have also been introduced from April 1, 2000.

3.36 The aggregate gross NPAs of StCBs were estimated at Rs.2,748 crore and formed 12.6 per cent of their outstanding loans as at the end of March 1999 (Table III.9). This was marginally higher than the revised figure of 11.8 per cent for the year ended March 1998. Out of the 26 reporting banks, 6 banks were found to have NPAs which was less than 5 per cent of the outstanding loans and advances (Table III.10). As against this, 5 banks reported NPAs above 50 per cent of total loans and advances. The aggregate NPAs of CCBs were estimated at Rs.6,573 crore and formed 17.8 per cent of their outstanding loans as at the end of March 1999 which showed a marginal improvement from 18.1 per cent at end-March 1998. The share of NPAs (in total advances) of SCARDBs and PCARDBs were estimated at 19.4 and 16.8 per cent, respectively, during 1997-98. These figures declined marginally in the subsequent year. The total NPAs of SCARDBs as on March 31, 1999 was estimated at Rs.1,977 crore and constituted 19.2 per cent of their outstanding loans. Similarly, the aggregate NPAs of PCARDBs at Rs.784 crore formed 16.1 per cent of their outstanding loans as at the end of March 1999.

3.37 At present, the co-operative banks are not subjected to any minimum capital adequacy norm. However, taking into account the initial stipulation of 8 per cent capital adequacy ratio for the commercial banks, it was observed that as on March 31, 1999, 135 of the 367 CCBs had CRAR of 8 per cent and more, while 116 CCBs had negative CRAR and the remaining 116 CCBs had CRAR ranging 0-8 per cent.

3.38 In terms of Section 11(1) of B.R. Act, 1949 (AACS), CCBs and non-scheduled StCBs should have minimum share capital of Rs.1 lakh each. The number of banks not complying with this provision has increased, especially after the introduction of prudential norms. As on March 31, 2000, 137 CCBs and 5 non-scheduled StCBs (all in the NorthEastern Region) defaulted in complying with the above provision. In respect of most of such banks, the erosion in the value of their assets was larger than their owned funds. To address this issue, NABARD impressed upon the respective State Governments to initiate measures like augmenting the share capital base of these banks, helping these banks in their recovery efforts, etc.

3.39 The National Bank for Agriculture and Rural Development (NABARD), established in 1982, plays a crucial role in meeting the credit requirements of the rural economy. A n important aspect of NABARD’s functioning is the provision of refinancing facility to the rural financial institutions to augment their resource base.

3.40 The flow (net) of resources to NABARD during 1999-2000 amounted to Rs.4,381 crore as against Rs.3,778 crore in the previous year (Table III.11). A substantial portion of this accretion was on account of RIDF deposits (Rs.1,818 crore). Contribution to NRC (LTO) fund from the surplus generated out of their operations during the year was also high at Rs.1,021 crore (while accretion to reserves and surplus amounted to Rs.128 crore). Market borrowings through the issue of bonds and debentures were higher by 93.2 per cent at Rs.508 crore in 1999-2000 as compared with Rs.263 crore in 1998-99. Term money borrowings from financial institutions amounted to Rs.203 crore as at end-March 2000 as against total absence of such borrowings a year ago. Deposits with NABARD, mostly from tea companies and private sector commercial banks on account of shortfall in their priority sector lending target, increased by Rs.40 crore in 1999-2000 as against a rise of Rs.92 crore during 1998-99. Borrowings from the Central Government declined further by Rs.86 crore in 1999-2000 on top of a decline of Rs.56 crore in the previous year. Drawals under the General Line of Credit from the Reserve Bank, however, increased further by Rs.235 crore in 1999-2000 over and above a rise of Rs.678 crore in 1998-99.

3.41 The outstanding refinance from NABARD by StCBs, RRBs and State Governments decreased by 2 per cent from Rs.6,279 crore as at end-June 1999 to Rs.6,151 crore as at end-June 2000, mainly due to decrease in outstanding credit to RRBs from Rs.1,237 crore to Rs.1,150 crore in the above period. Outstanding credit to State Governments increased from Rs.499 crore in end-June 1999 to Rs.508 crore as at end-June 2000 (Table III.12). A major part of this outstanding refinance was for short-term (ST) purposes (Rs.5,226 crore or 85 per cent). Of the ST credit limit of Rs.6,962 crore sanctioned to the StCBs, ST credit limits for seasonal agricultural operations (SAO) aggregated Rs.6,095 crore. Similarly, of Rs.1,203 crore credit limit sanctioned to RRBs for ST purposes, SAO accounted for Rs.1,009 crore. Refinance availment by the banks in the North Eastern Region continued to be low despite certain relaxation in respect of refinance support to co-operative banks in that region extended by NABARD. NABARD sanctioned long-term loans to 13 State governments aggregating Rs.91 crore for contribution to the share capital of co-operative credit institutions.

3.42 RIDF-I was established in 1995-96 with a corpus of Rs.2,000 crore with the major objective of providing funds to State Governments and State owned corporations to enable them to complete various types of rural infrastructure projects. This development scheme was continued in the subsequent years as RIDF-II in 1996-97 (Rs.2,500 crore), RIDF-III in 1997-98 (Rs.2,500 crore), RIDF-IV in 1998-99 (Rs.3,000 crore) and RIDF-V in 1999-2000 (Rs.3,500 crore). Under RIDF-V the scope of the scheme was widened so as to provide loans to Gram Panchayats, Self-Help Groups and other eligible organisations for implementing village level infrastructure projects. The Union Budget 2000-2001 announced the introduction of RIDF-VI with a corpus of Rs.4,500 crore. Out of this, a sum of Rs.500 crore has been earmarked for assistance to North-Eastern States and Sikkim and Rs.500 crore for financing through Panchayat Raj Institutions, Self-Help Groups, Non-Government Organisations, etc.

3.43 The corpus of RIDF is contributed by the scheduled commercial banks to the extent of the shortfall in their priority sector lending targets. The amount mobilised under the various RIDF schemes increased from Rs.3,737.29 crore as at end-March 1999 to Rs.6,043.92 crore as at end-March 2000 (Table III.13). The cumulative sanctions and disbursements of loans under RIDF increased to Rs.13,933.08 crore and Rs.6,074.44 crore, respectively, as at end-March 2000, from Rs.10,269.68 crore and Rs.3,796.89 crore, respectively as at end-March 1999. The progress of sanctions and disbursement under various RIDF tranches are given in Table III.14.

3.44 The proportion of disbursements in relation to sanctions increased from 37.0 per cent as at end-March 1999 to 43.6 per cent as at end-March 2000. The utilisation ratio (amount disbursed as a proportion of amount phased up to end-March 2000) stood at 59.4 per cent as at end-March 2000. The low level of utilisation of funds was mainly due to inadequate budget of the State Governments affecting timely flow of funds to the implementing departments, delays in completion of formalities relating to drawal of funds, and also delays in completion of preliminary work in respect of irrigation projects which involves land acquisition formalities, obtaining environmental clearance from the Central Government, tendering procedures, etc. In order to speed up disbursal from RIDF funds, a High Power Committee has been constituted in each State, under the chairmanship of Chief Secretary/Development Commissioner of the State.

3.45 The repayment period of loans given to the State Governments was extended from five to seven years under RIDF-V and RIDF-VI. Further, the rate of interest on lending to State Governments was reduced by 0.5 percentage point to 11.5 per cent under RIDF-VI. A more detailed account of State-wise financial assistance provided under RIDF I-V till end-March 2000 is presented in Appendix Table III.3.

3.46 Loans under RIDF are given for various purposes like irrigation projects, watershed management, construction of rural roads and bridges, etc. Purpose-wise details of the amount sanctioned under various RIDF schemes are given in Table III.15. It may be observed that while in the initial tranches of the scheme, the accent was on sanctioning loans for various irrigation projects, in the later stage, construction of rural roads and bridges claimed the major portion of the fund. Irrigation projects accounted for as much as 43 per cent of the total amount. Of the total amount sanctioned under RIDF schemes as at end-March 2000, construction of rural roads and rural bridges accounted for about 38 per cent and 14 per cent, respectively.

3.47 During 1999-2000, NABARD oriented its policy initiatives to further augment the flow of credit to the rural sector by implementing the Kisan Credit Card Scheme and worked as a catalyst in linking SHGs to the banking system. As a part of the follow-up of the recommendations of the Expert Committee to Review the Supervisory Role of NABARD (Chairman: Shri U.K.Sharma), NABARD set up a Board of Supervision in November 1999 for supervision of StCBs, CCBs and RRBs. NABARD replaced the Credit Authorisation Scheme (CAS) with Credit Monitoring Arrangement (CMA), effective 2000-2001, to provide more freedom to the co-operative banks.

3.48 As per the extant guidelines from NABARD, banks/NGOs were required to charge an interest rate of 12 per cent per annum for their lendings to SHGs under ‘SHG-bank linkage programme’. Effective June 1, 1999, these rates were freed and left to the discretion of concerned banks. Similarly, the rate of interest on bank loans to NGOs was also freed from the previous stipulation of 10.5 per cent per annum from the above date.

3.49 NABARD accelerated the pace of issue of Kisan Credit Cards (KCCs) by the cooperative banks and RRBs, initiated during the previous year. With the issue of 37.69 lakh KCCs involving credit limit of Rs.4,011.06 crore during 1999-2000, 39.30 lakh cards involving an aggregate credit limit of Rs.4,847.83 crore were issued as at end-March 2000. Further, 27 PSBs issued 13.7 lakh cards during 1999-2000 as against the target of 20 lakh cards fixed for the entire year. The Union Budget 2000-2001 has announced a target of an additional 75 lakh KCCs for 2000-2001 by the banking system comprising all co-operative banks, RRBs and commercial banks. The loans disbursed under KCC scheme were also brought under the Rashtriya Krishi Bima Yojna of the General Insurance Corporation.

3.50 The interest rates on term loan refinance (other than for minor irrigation) were reduced during 1999-2000 and 2000-01 so far, in the context of the reduction of the Bank Rate and consequent reduction in the PLR of commercial banks and financial institutions. The interest rate on term-loan refinance for loan size of over Rs.2 lakh in respect of StCBs/SCARDBs and RRBs was reduced by 0.5 percentage point to 11 per cent per annum on May 3, 1999 and further to 10.5 per cent, effective May 1, 2000. Further, the interest rate on term-loan refinance to scheduled commercial banks (SCBs) for loans exceeding Rs.2 lakh was reduced in two stages from a minimum of 11.5 per cent to a fixed rate of 10.5 per cent, effective May 1, 2000 (Table III.16).

3.51 The interest rate on refinance for minor irrigation investment was kept unchanged at 6.5 per cent for loans up to Rs.25,000 and 8.5 per cent for loans above Rs.25,000 in respect of RRBs, StCBs and SCARDBs. A uniform rate of 8.5 per cent, irrespective of loan size, is charged to the commercial banks.

3.52 The rates of interest on the short-term refinance to StCBs/CCBs and RRBs for SAO were revised upwards, effective October 1, 1999 in line with the upward revision of 1.5 percentage points in interest rates effected by the Reserve Bank from the same date on GLC I, which is the source for the NABARD for its short-term refinance support to cooperatives and RRBs.

3.53 The NABARD’s refinance policy on short-term SAO for co-operative banks and RRBs for 1999-2000 laid emphasis on augmentation of the ground level credit flow through the adoption of region-specific strategies and rationalisation of the lending policies and procedures. To enable the CCBs to augment their lending to agriculture through increased efforts at recycling of funds, NABARD raised the minimum recovery norm for the banks by 5 percentage points and correspondingly reduced the permissible level of NPAs by 5 percentage points, whichever was beneficial to the bank concerned.

3.54 The policy of sanctioning special line of credit at concessional rates of interest for exclusively financing the tribals and with relaxation of norms relating to ceiling on credit was continued. The existing concessions in the rate of interest, reduced minimum involvement level, non-insistence on minimum recovery norms, etc., which were applicable for short-term SAO in the North-Eastern Region, were extended to the Sikkim StCB during 1999-2000. NABARD announced a special package of relief measures for Orissa in the aftermath of the severe cyclone that hit the State during the year. The Reserve Bank provided to the NABARD an additional General Line of Credit limit of Rs.400 crore for meeting the short-term refinance requirements of StCBs/CCBs and RRBs in Orissa.

3.55 NABARD has been working as a catalyst in promoting and linking more and more SHGs to the banking system. In addition, awareness creation on SHGs, implementing special programmes and formulating appropriate development policies were other policy measures adopted by NABARD.

3.56 During the year 1999-2000, 81,780 additional SHGs were credit-linked to the banks, which far exceeded the target of 50,000 SHGs envisaged in the Union Budget 1999-2000. The cumulative number of SHGs credit-linked to banks and refinanced by NABARD aggregated, 1,14,775 and 94,645 respectively, as at end-March 2000.

3.57 The significant increase in the number of SHGs linked during the year was rendered possible because of the active involvement of 718 NGOs, 266 banks and many other agencies, including developmental agencies of different State Governments. This was further facilitated by the Reserve Bank guidelines in February 2000 bringing micro credit on par with other vital segments of bank credit and reckoning it as priority sector lending. Out of the 40 commercial banks which provided credit to SHGs, 13 were private sector banks. The credit-linking programme covered 362 districts in 24 States and Union Territories. A notable feature of the same was that more than 85 per cent of the groups formed were exclusively of women members. The repayment of bank loans issued to the SHGs was above 95 per cent of total loans issued during 1999-2000.

3.58 NABARD continued to provide 100 per cent refinance assistance to banks at an interest rate of 6.5 per cent per annum for financing SHGs. During the year, Rs.135.91 crore was disbursed to SHGs by various banking institutions. NABARD’s refinance support was to the tune of Rs.98.07 crore. Cumulatively till March 31, 2000, the bank loans disbursed to the SHGs aggregated Rs.192.98 crore while NABARD’s refinance availed of by the banks aggregated Rs.150.13 crore. (Table III.17).

3.59 NABARD has also been providing grant on a selective basis for capacity building of NGOs. Such assistance supplemented own resources of these NGOs for taking up credit linking activities as also for training of SHG members. NABARD sanctioned grant assistance of Rs.98.19 lakh to 40 such NGOs during 1999-2000. With this, the cumulative grant assistance sanctioned till March 31, 2000 for promotion and linkage of SHGs aggregated to Rs.2.48 crore, covering 72 NGOs and 16,911 SHGs. Additionally, NABARD continued to provide financial and other types of support for training of bank staff, NGOs and government agencies engaged in the field of micro-finance.

3.60 With a view to providing co-operative banks with more freedom and discretion to operate in an increasingly liberalized and competitive banking environment, NABARD, in consultation with the Reserve Bank, decided to replace the Credit Authorisation Scheme (CAS) with the Credit Monitoring Arrangement (CMA) with effect from the year 2000-2001. The banks will, however, have to follow prudence and exposure norms and have to satisfy themselves about the technical feasibility and financial viability of the proposals, credit-worthiness of borrowers, risk management, margin, security requirements, etc.

3.61 NABARD had issued operational instructions to RRBs and co-operative banks with regard to implementation of Swarnajayanti Gram Swarozgar Yojana (SGSY) on similar lines as was issued by the Reserve Bank for commercial banks. Policy guidelines for refinance support under SGSY were also issued to all financing banks. Banks have been, inter alia, advised to evolve suitable norms for grading of SGSY groups at different stages of financing on the illustrative parameters indicated by NABARD.

3.62 The Co-operative Development Fund (CDF) was set up by NABARD in 1993 with the objective of strengthening the co-operative credit institutions in the areas of organisational structure, human resource development, resource mobilisation, recovery position etc. The assistance is provided to StCBs/ SCARDBs/CCBs/PCARDBs by way of a grant or a soft loan or both. The soft loan is given at a maximum interest rate of 3 per cent. The utilization of resources available under the CDF was higher during the year 1999-2000. Cumulative grants/soft loan assistance amounting to Rs.33.63 crore was sanctioned from CDF as at the end of March 2000 for various purposes, while the disbursals amounted to Rs.24.00 crore.

3.63 The performance of the co-operative banking sector has been a cause of concern in recent years in the context of financial sector reforms. Financial and managerial weaknesses of co-operatives have been in evidence. It has been, therefore, felt essential to extend the essential spirit of the regulatory and supervisory measures adopted for the commercial banks to the co-operative banks as well, with necessary adaptations to suit the circumstances in which co-operative banks operate (Box III.1).

3.64 The Central Government and other concerned authorities including the Reserve Bank and NABARD are making continuous efforts to identify major issues having a bearing on the performance and strength of the co-operative sector. To facilitate this, a number of expert groups have been appointed to identify the issues / problems and suggest measures for ensuring financial soundness of this sector as well as to ensure that these institutions meet the desired objectives.

The co-operative banking system is an important segment of the banking sector in India, characterised by a relatively comprehensive network extending to the grassroots level. What distinguishes the cooperative banking sector from the commercial banking sector is the focus of the former on the local population and micro-banking among middle and low income strata of the society. Further, the element of heterogeneity and the large number of such banks vis-à-vis the commercial banking sector raises important supervisory issues. As compared to the 298 scheduled commercial banks, inclusive of RRBs, there were 2050 PCBs in the urban co-operative sector and over 90,000 primary agricultural credit societies (PACS) in the rural co-operative sector as on March 31, 2000.

As regards rural co-operative banks, NABARD is responsible for conducting inspections of StCBs and CCBs. Besides, NABARD has also been conducting periodic inspection of state level institutions like the SCARDBs on a voluntary basis. The Narasimham Committee (1998) suggested that all its recommendations relating to the regulation and supervision of commercial banks were to be adopted mutatis mutandis by NABARD after taking into account the special characteristics of the rural credit institutions under its supervisory jurisdiction. The Committee, however, noted that NABARD’s supervisory and regulatory responsibilities should be ultimately vested with the proposed Board for Financial Regulation and Supervision.

While advocating the adoption of the CAMELS approach to the co-operative banks, the Expert Committee to Review the Supervisory Role of NABARD (Chairman: Shri U.K.Sharma) had emphasised the need for adoption of timely and adequate compliance to inspection reports as a criterion for judging the performance of banks. Accordingly, it recommended the CAMELSC (Capital Adequacy, Asset Quality, Management, Earning Capacity, Liquidity, Systems and Controls and Compliance) approach. Some of the recommendations which have already been implemented are: revisions of guidelines for on-site supervision of co-operative banks/RRBs, introduction of an Off-site Surveillance System for continuous monitoring, supplementary appraisals to complement the on-site inspections, setting up of the Board of Supervision in NABARD (for StCBs, CCBs and RRBs). Recommendation on extending capital adequacy norms to co-operative banks and RRBs are being examined in consultation with the Reserve Bank. To supplement the on-site inspection of these banks, the Expert Committee also recommended the introduction of certain additional instruments like systems study, portfolio inspection, commissioned audit and monitoring visits. Necessary guidelines have been developed to undertake such supplementary appraisals. As regards the recommendation relating to constitution of state level audit committees to bring about improvement in the quality and content of the audit, NABARD is pursuing the matter with the State Governments. Further, to make the system of supervision meaningful and effective, NABARD is laying necessary emphasis on the timely and adequate compliance of the inspection findings by the institutions concerned.

The Board of Supervision, set up in NABARD in November 1999 as an Internal Committee of the Board of Directors, is entrusted with, inter alia, the work of framing policy guidelines on matters relating to supervision and inspection, reviewing the inspection findings on co-operative banks and RRBs, and suggesting appropriate measures, identifying the emerging issues in the functioning of these cooperative banks and suggesting measures for strengthening the supervisory system in NABARD. The Board also decided to meet frequently to review the working of banks especially those whose owned funds have been eroded due to high level of accumulated losses, provision for NPAs, etc. With a view to giving special focus on the co-operative banking structure in individual states, the Board of Supervision has decided to make a state-wise review of the working of the co-operative banks for identifying the State’s specific problems and taking up the matter with the concerned State Governments.

As per the recommendations of the Expert Committee, the on-site inspections of StCBs and SCARDBs hitherto carried out by the Head Office of the Department of Supervision, are being decentralised in a phased manner. In the first phase, the inspection of five StCBs and SCARDBs that were due in 1999-2000, was entrusted to the respective Regional Offices. During 1999-2000, in all 283 banks (14 StCBs, 4 SCARDBs, 175 CCBs 90 RRBs) and 2 apex institutions were inspected by NABARD. Major deficiencies observed related to high level of loan delinquencies, lack of operational flexibility and autonomy, non-viability, etc. Poor resource base, high transaction cost, inefficient loan appraisal procedures and poor loan supervision, inadequate internal corrective mechanism, excessive bureaucratization, etc. have contributed to the deteriorating financial health of co-operative banks.

In one area, where most of the co-operative banks are found to be deficient is in respect of internal control system. Thus, NABARD has laid special emphasis on strengthening the internal control systems in banks, particularly the inspection of branches and affiliates and on effecting reconciliation of long pending entries and balancing of books. The banks have also been advised to introduce/update operational manuals for improving the internal checks and control systems. Exhaustive guidelines have been provided by NABARD to the co-operative banks and RRBs on proper record maintenance. As internal audit and external audit are interrelated, bank managements were advised to strengthen their audit systems. To facilitate this, NABARD has been organising the conference of Chief Co-operative Audit officers of the State Governments every year. The conference discusses arrangements for audit of co-operative credit institutions, measures needed for improving the audit systems and strategies for ensuring compliance to audit findings.

3.65 Since the submission of Marathe Committee report in May 1992, which reviewed the licensing policy of the Reserve Bank in regard to new PCBs and related issues, various developments have taken place in the financial sector, which impacted on the PCBs as well. In order to make a comprehensive review of activities and regulatory framework pertaining to PCBs, a High Power Committee was constituted by the Reserve Bank in May 1999 (Chairman: Shri K.Madhava Rao), to focus on the following issues: (i) to evolve objective criteria to determine the need and potential for organising urban co-operative banks; review the existing entry point norms and examine the relevance of special dispensation for less/least developed areas; (ii) to review the existing policy pertaining to branch licensing and area of operation of urban co-operative banks; (iii) to consider measures for determining the future set up of weak/ unlicensed banks; (iv) to examine the feasibility of introducing capital adequacy norms for urban co-operative banks; (v) to examine the need for conversion of cooperative credit societies into primary cooperative banks; and (vi) to suggest necessary legislative amendments to B. R. Act and Co-operative Societies Acts of various states for strengthening the urban banking movement.

3.66 The Committee submitted its report in November 1999 in which very useful recommendations have been made with regard to revision of licensing policy for new PCBs, branch licensing policy, extension of areas of operation, dealing with unlicensed and weak PCBs, application of capital adequacy norms, conversion of co-operative societies into PCBs and reforms in State Co-operative Societies Acts, Multi-State Co-operative Societies Act and B.R.Act (Box III.2). The recommendations were aimed at: (a) reducing systemic risks to the financial system; (b) putting in place strong regulatory norms at the entry level so as to sustain and improve the operational efficiency of urban co-operative banks in a competitive environment; (c) evolving measures to strengthen the existing structure, particularly in the context of ever increasing number of weak banks; and (d) aligning the PCB sector with the other segments of the banking sector in the context of application of prudential norms and removing the irritants of dual control regime. The recommendations of the Committee are under examination of the Reserve Bank.

The major recommendations of the High Power Committee on Urban Co-operation Banks are as under:

3.67 Another issue of concern regarding UCBs is the non-availability of comprehensive and up-to-date information on account of delay and non-submission of returns within the stipulated time-frame. In particular, PCBs are required to submit two types of returns (statutory returns and control returns) to the Reserve Bank with a view to exercising supervision and control over them. Unfortunately, there is often a serious delay/ non-submission of these returns by individual banks, in spite of the stringent penal provisions in existence for non-submission of returns.

3.68 Co-operative credit institutions play a significant role in the deployment of credit for agriculture and rural sector and account for 45 per cent of the total credit for the rural sector. These institutions, however, lack professionalism, sound management system and autonomy in decision making. Low volume of business/low resource base, low borrowing membership, high incidence of overdues, and dual control have adversely affected the health of co-operative credit institutions. In addition, poor recovery performance has affected the ability of these institutions to cater to the credit needs of new and non-defaulting members and resulted in low paid-up share capital. The vital link in the short-term cooperative credit system viz., the PACS at the grassroots level is weak. Their size is small and uneconomical and many of them are dormant. Co-operatives need to augment their resource base, especially the capital base and pay greater attention to specialisation and diversification of loan business, non-fund business, efficient financial intermediation, risk management and reduction in NPAs. In recognition of the importance of co-operative banks in the development process of the rural economy and the need for its revitalisation so as to make them efficient and cost effective instruments for delivery of rural credit, a Task Force (Chairman: Shri Jagdish Capoor) was constituted in April 1999 to study the co-operative credit system and suggest measures for its strengthening. The terms of reference of the Task Force were (i) to review the functioning of the co-operative credit structure and suggest measures to rationalise and improve and to make co-operatives as member-driven and professional business enterprises; (ii) to study aspects relating to costs, spreads and effectiveness at various tiers of co-operative credit structure; (iii) to study the financial performance of the cooperative banks with a view to improving their financial health so that they can become efficient and cost effective in the delivery of rural credit; and (iv) to review the existing supervisory and regulatory mechanism for cooperative credit institutions and suggest measures for strengthening the arrangements. The Task Force submitted its report to the Central Government on July 24, 2000. The major recommendations of the Task Force are given in Box III.3. The implementation of these recommendations will go a long way towards re-energising the co-operative sector.

The Central Government constituted a Task Force in April 1999 (Chairman: Shri Jagdish Capoor) to study the functioning of rural co-operative credit institutions and to suggest a package of measures for their strengthening. A summary of the recommendations contained in the report submitted to the Central Government on July 24, 2000 is provided below.

3.69 As mentioned in the last year’s Report, a high-powered Task Force was set up by NABARD in November 1998 under the chairmanship of the Managing Director, NABARD to examine the critical issues involved in the orderly growth of the micro finance sector in the country and formulate supportive policy and regulatory framework.

3.70 The Task Force was of the view that the National Policy on micro finance should emphasise on (i) encouraging initiatives and participation of different types of institutions in micro finance; (ii) bringing the micro finance activities, irrespective of the type of institutions, within the framework of regulation and supervision by competent authorities; (iii) creating policy environment for closer linkages of the micro finance sector with the formal banking channels; and (iv) making available equity, start-up capital and capacity building funds for the existing and emerging institutions engaged in micro finance. Towards this end, the Task Force has defined micro finance as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards" and "microfinance institutions (mFIs) as those which provide thrift, credit and other financial services and products for the above".

3.71 During the year, certain modifications in the crop loan system were made applicable to the RRBs as well which were earlier introduced for StCBs/CCBs (in 1994-95 and modified in 1998-99), based on the recommendations of the Committee on Crop Loan System. The modification ps, such as, granting flexibility to credit institutions to disburse entire crop loans in cash and to fix due dates for repayment of crop loans, taking into account local factors and peak marketing season, are expected to streamline the crop loan system and improve the borrowers’ access to credit.

3.72 The exercise of preparing Development Action Plans (DAPs) and entering into Memoranda of Understanding (MoU) by the co-operative banks with NABARD, higher financing institutions and the State Governments are in operation since 1994-95. As there is still a wide scope in improving the financial health of co-operatives banks, fresh MoU were entered into during 1999-2000 by the co-operative banks.

3.73 NABARD has been formulating state-specific reform packages for co-operative banks since 1997-98 in order to help identify the problem areas in the reform process of cooperative banks and tackle them in a phased manner. Preparation and implementation of reform package envisage prioritsation of the agreed reforms with a committed time-frame. The formulation of the state reform package since 1997-98 has been completed in all States. To begin with, efforts will be concentrated in the States of Andhra Pradesh, Karnataka, Orissa, Madhya Pradesh, Gujarat and Rajasthan where the reform package has already been prepared and steps initiated for its implementation. NABARD has been urging co-operative banks and State Governments to expedite the implementation of the reforms package.