3.

NABARD and its Role in Rural Credit

3.31 The National Bank for Agriculture and Rural Development (NABARD) as the apex institution purveying the field of rural credit plays a vital role of policy planning and provides refinancing facility to rural financial institutions to augment their resource base. In order to strengthen the functioning of NABARD, its capital base was raised progressively. As part of this strategy the Government of India and the Reserve Bank have been contributing annually Rs.100 crore and Rs.400 crore respectively for the last 3 years i.e. since 1996-97. Pending amendment of the relevant provision of NABARD Act, 1981, these amounts are being treated as advances towards the capital of NABARD. With these contributions, the effective capital base of NABARD as at the end of March 1999 rose to Rs.2,000 crore.

Table III.11: A Comparative Performance of Co-operative Banks and Scheduled Commercial Banks

(Per cent)

Financial Ratios

1997-98

1998-99

SCBs

Scheduled

StCBs

SCBs

Scheduled

StCBs

PCBs

PCBs

1

2

3

4

5

6

7

Spread (Net Interest Income)

2.95

3.78

2.01

2.78

3.24

N.A.

Operating Expenses

2.63

2.35

0.85

2.65

2.09

N.A.

Other Income

1.52

0.59

0.31

1.34

0.53

N.A.

Operating Profit

1.84

2.03

1.47

1.47

1.68

N.A.

Net Profit

0.82

0.46

-0.34

0.49

0.60

N.A.

Note: Financial ratios are as percentage of total assets.

A. Resources Mobilised by NABARD

3.32 Including the above mentioned contribution of Rs.500 crore made by the Government of India and the Reserve Bank as advances towards its capital, the total (net) resources mobilised by NABARD amounted to Rs.3,778 crore during 1998-99. This is substantially higher by 43.3 per cent as compared to Rs.2,636 crore mobilised during the previous year (Table III.12). Rural Infrastructure Development Fund (RIDF) deposits contributed about one-third (Rs.1,209 crore) to the total resources. Accretion in NRC(LTO) Fund and NRC (Stabilisation) Fund were of the order of Rs.833 crore and Rs.101 crore, respectively. Higher contribution to the NRC (LTO) Fund out of their own income, resulted in lower accretion of Rs.89 crore to the general reserves of NABARD during 1998-99. Under Section 17(4E) of the RBI Act, 1934, the Reserve Bank has been providing General Line of Credit (GLC) to NABARD to enable it to meet the short-term requirements of cooperatives and RRBs. For the year 1998-99 (July–June), the Reserve Bank renewed a credit limit of Rs.5,700 crore sanctioned in the previous year. This credit limit consists of Rs.4,850 crore under GLC I³ (for seasonal agricultural operations) and Rs.850 crore under GLC II (for various other approved short term purposes ). Drawals under GLC increased by Rs.678 crore during the year. Besides, outstanding market borrowings through the issue of bonds and debentures increased by Rs.263 crore as compared with the increase of Rs.125 crore in the previous year. The significant increase in other liabilities of NABARD was largely on account of interest accrued on RIDF deposits.

B. Refinance from NABARD

3.33 The aggregate credit limits sanctioned by NABARD to StCBs increased to Rs.7,275.3 crore as at end-June 1999 from Rs.6,230.6 crore as at end-June 1998 (Table III.13). A major part of this credit was for short-term purpose. Drawals by StCBs at Rs.7,989.7 crore during 1998-99 (July-June) were also higher than the corresponding amount of Rs.6,916.1 crore during the previous year. As a result, the total outstanding credit to StCBs increased to Rs.4,543.0 crore as at end-June 1999 from Rs.3,673.4 crore as at end-June 1998. The limits sanctioned (both short and medium terms) to RRBs also increased to Rs.1,285.8 crore at the end of June 1999 from Rs.1,083.2 crore at the end of June 1998. The drawals made by RRBs during the year were also higher at Rs.1,205.4 crore. Thus, the outstanding credit of NABARD to RRBs as at the end of June 1999 increased to Rs.1,237.2 crore from Rs.1,053.0 crore as at end-June 1998. The credit limit sanctioned by NABARD to State Governments declined to Rs.65.3 crore as at end-June 1999 from Rs.150.0 crore a year ago. Drawals by State Governments also declined from Rs.139.8 crore during 1997-98 to Rs.40.8 crore during 1998-99. As a result, the outstanding credit to State Governments as at-end June 1999 declined to Rs.499.3 crore from Rs.515.0 crore as at the end of previous year.

Table III.12: Net Accretion in the Resources of NABARD: 1997-98 and 1998-99 (April-March)

(Rs. crore)

Sr.

Type of Resource

1997-98

1998-99

No.

1

2

3

4

1.

Capital

500

500

2.

Reserves and Surplus

451

89

3.

NRC (LTO) Fund

551

833

4.

NRC (Stabilisation) Fund

101

101

5.

Deposits

-204

92

6.

Bonds and Debentures

125

263

7.

Borrowings from Central Government

-111

-56

8.

Borrowings from RBI

a. General Line of Credit

206

678

b. ARDR Scheme, 1990

-64

-46

9.

Foreign Currency Loans

64

34

10.

RIDF Deposits

1,007

1,209

11.

Other Liabilities

11

81

Total

2,636

3,778

Source: NABARD.

C. Rural Infrastructure Development Fund

3.34 RIDF-I was initially set up with a corpus of Rs.2,000 crore in 1995-96 with the 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) and RIDF-IV in 1998-99 (Rs.3,000 crore). As announced in the Union Budget for 1999-2000, RIDF-V is being set up with a corpus of Rs.3,500 crore. The corpus of these funds is contributed by the scheduled commercial banks to the extent of the shortfall the banks may post for meeting the priority sector lending targets. Till end-March 1999, Rs.3,737.3 crore has been mobilised under the various RIDF schemes (Table III.14). The cumulative sanctions and disbursements of loans under RIDF amounted to Rs.10,269.7 crore and Rs.3,796.9 crore, respectively.

Table III.13: NABARD's Credit to State Co-operative Banks, State Governments and Regional Rural Banks: 1997-98 and 1998-99 (July-June)

(Rs. crore)

Category

1997-98

1998-99(P)

Limits

Drawals

Repay-

Outstan-

Limits

Drawals

Repay-

Outstan-

ments

dings

ments

dings

1

2

3

4

5

6

7

8

9

1.

State Co-operative Banks

a.

Short-term

6,067.28

6,637.10

6,613.38

3,406.54

6,845.18

7,639.78

6,991.10

4,055.22

(12.8)

(15.1)

(5.7)

(19.0)

b.

Medium-term

163.28

278.96

92.00

266.81

430.12

349.92

128.98

487.75

(163.4)

(25.4)

(40.2)

(82.8)

Total (a+b)

6,230.56

6,916.06

6,705.38

3,673.35

7,275.30

7,989.70

7,120.08

4,542.97

(16.8)

(15.5)

(6.2)

(23.7)

2.

State Governments

a.

Long-term

149.95

139.80

43.31

514.96

65.33

40.84

56.52

499.28

(-56.4)

(-70.8)

(30.5)

(-3.0)

3.

Regional Rural Banks

a.

Short-term

1,072.60

955.94

871.95

952.62

1,238.11

1,161.93

978.02

1,136.53

(15.4)

(21.5)

(12.2)

(19.3)

b.

Medium-term

10.55

8.58

45.79

100.34

47.64

43.44

43.11

100.67

(351.6)

(406.3)

(-5.9)

(0.3)

Total (a+b)

1,083.15

964.52

917.74

1,052.96

1,285.75

1,205.37

1,021.13

1,237.20

(18.7)

(25.0)

(11.3)

(17.5)

Grand Total (1+2+3)

7,463.66

8,020.38

7,666.43

5,241.27

8,626.38

9,235.91

8,197.73

6,279.45

(15.6)

(15.2)

(6.9)

(19.8)

Note:

1. P - Provisional.

2. Figures in brackets are percentage changes over previous year.

Source:

NABARD.

3.35 A more detailed account of State-wise amount of financial assistance provided under RIDF-I, RIDF-II, RIDF-III and RIDF-IV till end-March 1999 is presented in Appendix Table III.4. Of the total sanctions of Rs.1,830.4 crore under RIDF-I, disbursements amounted to Rs.1,542.5 crore. The highest disbursement was in Uttar Pradesh (Rs.265.9 crore), followed by Andhra Pradesh (Rs.199.4 crore), Madhya Pradesh (Rs.156.3 crore) and Maharashtra (Rs.151.3 crore). Under RIDF-II, total sanctions amounted to Rs.2,614.5 crore, while disbursements were lower at Rs.1,436.4 crore. Uttar Pradesh again topped the list with a high disbursement of Rs.224.4 crore, followed by Andhra Pradesh (Rs.181.8 crore) and Tamil Nadu (Rs.173.2 crore). Under RIDF-III, total sanctions amounted to Rs.2,679.2 crore and total disbursements to Rs.685.7 crore. Uttar Pradesh (Rs.96.5 crore) and Andhra Pradesh (Rs.73.1 crore) continued to occupy the first two places in respect of disbursement of RIDF-III funds as well. Under RIDF-IV, while total sanctions amounted to Rs.3,145.7 crore, only Rs.132.3 crore has been disbursed till end-March 1999.

Table III.14: Deposits Mobilised under RIDF

(Rs. crore)

Year

RIDF-I

RIDF-II

RIDF-III

RIDF-IV

Total

1

2

3

4

5

6

1995-96

350.00

-

-

-

350.00

1996-97

842.30

200.00

-

-

1,042.30

1997-98

187.64

670.00

149.40

-

1,007.04

1998-99

139.95

500.00

498.00

200.00

1,337.95

Total

1,519.89

1,370.00

647.40

200.00

3,737.29

Source: NABARD.

3.36 Loans under RIDF are given for various types of rural infrastructural improvements like irrigation projects, flood protection, watershed management, construction of rural roads and bridges, etc. Of the total amount sanctioned under RIDF schemes, about 47 per cent was accounted for by irrigation projects and another 48 per cent by construction of rural roads and bridges (Table III.15).

3.37 The utilisation of RIDF funds has been low in comparison to the sanctions, largely due to inadequate budget and flow of funds to the implementing departments and delays in, among others, completion of formalities relating to drawal of funds, preliminary work in respect of irrigation projects, land acquisition formalities, obtaining forest/environmental clearance from the Government of India, tendering formalities, etc. In order to speed up disbursal from RIDF funds, NABARD has advised State Governments to review their respective positions and initiate necessary steps to adhere to the time schedule. The repayment period of loans given to the State Governments is also extended from five to seven years under RIDF-V. The scope of RIDF-V is being widened to allow lending to Gram Panchayats, Self-Help Groups and other eligible organisations for implementing village level infrastructure projects.

Table III.15: Purpose-wise Amount Sanctioned under RIDF (up to March 31, 1999)

(Rs. crore)

Purpose

RIDF-I

RIDF-II

RIDF-III

RIDF-IV

Total

Percentage

share

1

2

3

4

5

6

7

Major Irrigation

227.73

412.50

223.88

321.80

1,185.91

11.5

Medium Irrigation

842.08

237.28

203.99

170.96

1,454.31

14.2

Minor Irrigation

643.15

581.15

512.68

453.68

2,190.66

21.3

Watershed Management

80.37

108.61

21.51

32.28

242.77

2.4

Flood Protection

7.56

-

96.47

48.63

152.66

1.5

Rural Bridges

26.09

378.13

385.34

548.23

1,337.79

13.0

Rural Roads

3.39

896.81

1,210.38

1,449.65

3,560.23

34.7

Others

-

-

24.93

120.42

145.35

1.4

Total

1,830.37

2,614.48

2,679.18

3,145.65

10,269.68

100.0

Source: NABARD.

D. Policy Initiatives by NABARD

3.38 Major thrust of NABARD during the year was on strengthening the rural credit delivery system to support the growing credit needs of the agricultural and rural sectors. Some of the important policy initiatives taken by NABARD during the year 1998-99 include (i) introduction of Kisan Credit Cards, (ii) augmenting flow of credit in the areas served by weaker co-operative banks, (iii) accelerating flow of credit to the handloom weavers through financing State Handloom Development Corporations, (iv) stimulating investment in minor irrigation and wasteland development, (v) lowering of interest rates on refinance, and (vi) giving special thrust on micro credit development. NABARD also liberalised the terms and conditions for providing long term loans to State Governments for contributing to the share capital of co-operative credit institutions.

3.39 The policy initiatives relating to the non-farm sector during the year included (i) enhancing the ceiling under automatic refinance facility (ARF) and integrated loan scheme (ILS), (ii) liberalising the small road transport operators' (SRTO) scheme, and (iii) enlarging the scope of soft loan assistance for margin money scheme.

(a) Kisan Credit Card Scheme

3.40 Pursuant to the announcement made in the Union Budget for 1998-99, NABARD formulated a model 'Kisan Credit Card' scheme in consultation with the Reserve Bank and major banks. The scheme aimed at providing ready credit facilities to the farmers covering their entire production credit needs for the full year plus an amount for ancillary activities related to crop production. The model scheme was circulated by the Reserve Bank to commercial banks and by NABARD to cooperative banks and RRBs in August 1998. RRBs and co-operative banks together issued 1.61 lakh cards covering credit facility of Rs.836.8 crore during the year 1998-99.

3.41 In addition, NABARD introduced a system of 'Flexi credit' on a pilot basis in three districts of Kerala to take care of the unique needs of the farmers in the State who raise a wide mix of crops in small holdings around their homes together with rearing of livestock.

(b) Increase in Quantity of Refinance

3.42 In order to augment the flow of credit at the ground-level, the ceiling for sanction of short-term credit limits by NABARD was enhanced for different categories (based on audit classification) of CCBs. While the policy of stipulating minimum levels of involvement (MLI) of own resources by StCBs and CCBs in short-term agricultural lending was continued, certain relaxations in the existing norms were made for those banks which had hardly any eligibility for concessional refinance from NABARD.

3.43 The stipulation of minimum coverage of small and marginal farmers was modified with a view to increasing credit flow to small and marginal farmers. Similarly, higher credit limits were provided to CCBs operating in tribal areas, with due weightage for loans provided for the consumption needs of tribals. Efforts have also been made to increase the flow of credit to Bihar, Jammu and Kashmir and the North-Eastern Region.

3.44 Considering the importance attached to the handloom sector, NABARD continued to lay special emphasis on meeting the credit requirements of 94 thrust districts spread over 23 States identified by the Government of India for special development. With a view to supplementing the efforts of Handloom Development Corporations set up by some of the State Governments, NABARD in consultation with the Reserve Bank, has decided to extend refinance support to commercial banks and StCBs in respect of their working capital limits to these Corporations.

3.45 In order to channelise larger flow of credit to priority sector under thrust area programmes, an upward revision in the quantum of refinance was made, inter alia, for dryland and wasteland development and minor irrigation schemes.

(c) Interest Rates on Refinance

Seasonal Agricultural Operations

3.46 During the year, there was no change in the rates of interest charged by NABARD on its refinance for short-term Seasonal Agricultural Operations (SAO). The rate of interest varied from 4 per cent to 6.5 per cent depending on the involvement of borrowing banks in such loans. However, the minimum rate of interest i.e. 4 per cent was charged on the borrowings by StCBs under the special line of credit for financing tribals under the Development of Tribal Population (DTP) programme irrespective of their level of borrowings. Similarly, the policy of providing refinance to all the co-operative banks in the North-Eastern Region at the minimum interest rate of 4 per cent was continued.

Schematic Refinance

3.47 The interest rates on term loan for three years and above for financing agriculture (other than minor irrigation), small scale industries and the small road transport operators owning up to 2 vehicles, were reduced with effect from December 15, 1998. The rates of interest on refinance before and after the revision are indicated in Table III.16.

Refinance for Minor Irrigation

3.48 To stimulate investment in minor irrigation, the interest rate on refinance for minor irrigation investment was reduced with effect from December 1,1998. Accordingly, for commercial banks a uniform rate has been fixed at 8.5 per cent per annum, irrespective of the loan size. Similarly, for RRBs and co-operative banks, the rate of interest varied in a narrow range of 6.5 per cent to 8.5 per cent as against the earlier rates which ranged between 6.5 per cent and 12 per cent.

(d) Micro-Finance Innovations

3.49 NABARD's efforts towards increasing the access of the rural poor to formal banking services through promotion and credit-linking of Self Help Groups (SHGs) of the rural poor, and other micro-finance initiatives gathered momentum during the last two years. As many as 18,678 additional SHGs were linked to banks as against the target of linking 10,000 SHGs as envisaged in the Union Budget, 1998-99. The amount of bank loan disbursed through SHGs amounted to Rs.33.3 crore. NABARD continued to provide 100 per cent refinance to banks at the rate of interest of 6.5 per cent per annum. Refinance assistance at Rs.30.7 crore under the programme during 1998-99 was much higher than that of Rs.10.7 crore during 1997-98. The cumulative progress made in linking SHGs to banks upto March 1999 is given in Table III.17.

Table III.16: Rates of Interest on NABARD's Schematic Refinance

(Per cent per annum)

Size of

StCBS, SCARDBs and RRBs

Commercial Banks

Loan/Limit

Before

After

Before

After

Revision

Revision

Revision

Revision

1

2

3

4

5

Upto

6.5

6.5

8.5

8.5

Rs.25,000

(No Change)

(No Change)

Over Rs.25,000 and

9.5

9.0

10.5

10.0

upto Rs.2 lakh

Over Rs.2 lakh

12.0

11.5

3% below the

3 % below the

rate fixed by

rate fixed by the

the bank

bank subject to a

minimum of 11.5

Source: NABARD.

3.50 During the year, 52 new banks joined the linkage programme. In all, 202 banks (comprising 38 commercial banks, 129 RRBs and 35 cooperative banks) are participating in the programme covering 24 States and Union Territories. As many as 550 non-government organisations (NGOs) are participating in the programme. As on March 31, 1999, women SHGs constituted about 84 per cent of the total groups linked. On the whole, the programme has benefited about 5,60,000 rural poor families in 280 districts of the country. NABARD is engaging select NGOs for providing training, awareness building and sensitisation of officials involved in promotion and linking of SHGs with banks.

Table III.17: Cumulative Progress in SHG Linkage Programme

(Rs. crore)

Year

Number of SHGs

Bank loan

Refinance

linked

assistance

1

2

3

4

1992-93

255

0.29

0.27

1993-94

620

0.65

0.46

1994-95

2,122

2.44

2.30

1995-96

4,757

6.06

5.66

1996-97

8,598

11.84

10.65

1997-98

14,317

23.76

21.39

1998-99

32,995

57.07

52.06

Source: NABARD.

3.51 In order to address the critical issues for a healthy and orderly growth of the micro-finance sector in the country, and to evolve supportive policy and regulatory framework, a high-powered Task Force with the Managing Director of NABARD as the Chairman, was set up. The Task Force has recently submitted the report. As announced in the Monetary and Credit Policy statement for the year 1999-2000, a special cell, manned by a senior official from the commercial banking sector with practical experience in this area, has been set up in the Reserve Bank to liaise with NABARD and other institutions for augmenting the flow of micro credit.

E. Other Developments

(a) Agricultural Development Finance Companies

3.52 With the prime objective of strengthening the flow of credit to hi-tech/high-value agriculture operations and associated infrastructure, NABARD took the initiative in establishing state level Agricultural Development Finance Companies (ADFCs) in Andhra Pradesh, Tamil Nadu and Karnataka with equity participation between public and private sectors in the ratio of 45:55. During 1998-99, seven schemes involving total financial assistance of Rs.7.7 crore and refinance support of Rs.5.8 crore to Agricultural Development Finance (Tamil Nadu) Ltd. (ADFT-Chennai) and eleven schemes involving loan assistance of Rs.6.9 crore and refinance assistance of Rs.5.1 crore to Agribusiness Finance (AP) Ltd. (ABFL-Hyderabad) were sanctioned by NABARD. While approving refinance proposals to these two ADFCs, priority was accorded to agro-processing ventures/commercial projects. Karnataka Agriculture Development Finance Company Ltd. (KADFC), which has received a few proposals during the year, is yet to sanction any scheme.

(b) Development Action Plans and Memoranda of Understanding

3.53 The exercise of preparing Development Action Plans (DAPs) and Memoranda of Understanding (MoU) is in operation since 1994-95. In order to make the performance obligations more realistic with changing environment, the system of annual MoU among the co-operative banks, State Government and NABARD was introduced from the year 1997-98. To facilitate effective internal monitoring of DAPs/MoU implementation, the StCBs, CCBs and SCARDBs were advised to constitute 'Institution Development Cells' (IDCs) in their banks. NABARD extends financial support to StCBs and SCARDBs for appointment of expert staff (Financial Analyst) to head these IDCs. So far, financial assistance was availed of by 8 banks under the scheme.

(c) Co-operative Development Fund

3.54 The Co-operative Development Fund (CDF) was set-up by NABARD in 1992-93 for providing assistance to the co-operative banks to improve their functional efficiency. Under the scheme, financial assistance is provided to various StCBs/SCARDBs/CCBs/PCARDBs for infrastructural development, building-up of Management Information System (MIS), hiring of outside agencies for conducting special studies/seminars, etc. and meeting the expenses in connection with performance awards given to co-operative banks based on their performance. Cumulative grants/soft loan assistance amounting to Rs.28.7 crore was sanctioned from CDF as at the end of March 1999, while the disbursals amounted to Rs.15.9 crore.

(d) Supervision of Banks

3.55 NABARD conducts inspections of StCBs, CCBs and RRBs under the provisions of the Banking Regulation Act, 1949. In addition, it has also been conducting periodic inspections of State level institutions such as SCARDBs, Apex Weavers' Societies, Marketing Federations, etc. on a voluntary basis. Such inspections help in assessing the financial and managerial strength of a bank so as to ensure the protection of the interests of depositors as well as the bank's compliance with statutory regulations.

3.56 A Technical Group constituted in 1996 to review the inspection strategy adopted by NABARD had recommended adoption of the CAMELS (Capital Adequacy, Asset Quality, Management, Earning Capacity, Liquidity, Systems and Controls) approach for a sharper focus of NABARD's inspections. In order to have a further refinement in the inspection strategy an Expert Committee to Review the Supervisory Role of NABARD (Chairman: Shri U.K. Sarma) was constituted in January 1998. The Committee submitted its report in April 1998.

3.57 The Expert Committee, while advocating the adoption of the CAMELS approach, emphasised the need for adoption of timely and adequate compliance to inspection reports also as a criteria for judging the performance of banks. Accordingly, it recommended CAMELSC (Capital Adequacy, Asset Quality, Management, Earning Capacity, Liquidity, Systems and Controls and Compliance) approach for inspections. As per these recommendations, the guidelines for on-site supervision of co-operative banks/RRBs were revised in August 1998. In order to effect continuous monitoring over banks, a system of off-site surveillance through a set of returns, both statutory and non-statutory, is being introduced.

3.58 Periodic on-site inspections may throw up the need for in-depth scrutiny of certain aspects of operations. The Expert Committee has, therefore, recommended the on-site examinations to be supplemented by additional instruments like systems study, portfolio inspection, commissioned audit and monitoring visits. Necessary guidelines were developed to undertake such supplementary appraisals.

3.

In view of the increase in sanction of credit limit by NABARD to co-operatives and RRBs, an additional limit of Rs.100 crore under GLC I was sanctioned in April 1999 on request by NABARD.

4.

Problems before the Co-operatives

3.59 The development initiatives of both the Reserve Bank and NABARD have facilitated the evolutionary process of the co-operative credit institutions. However, some inherent problems seem to have impeded the cooperatives from performing more efficiently. The factors affecting the financial health of the co-operatives are well known and these include inter alia, the poor resource base, high transaction costs with low margins, mounting overdues, lack of professional management and excessive state control. Inability of PACS to mobilise rural deposits and the consequent decline in their borrowing memberships has been affecting the volume of their business. Issues relating to reduction in the transaction costs, and improving the recovery performance are also equally important (Box III.1). With regard to recovery performance, in addition to the initiatives that need to be taken by the cooperative banks themselves, the government will have to improve the legal machinery for quick recovery of dues and ensure that across-the-board loan waivers which vitiates the recovery climate are not granted. The role of strong leadership in the success of co-operative system cannot be overemphasised. Thus, institution of democratically elected management and removal of excessive state control in the working of co-operatives can help in their effective functioning.

3.60 Another commonly cited problem with the co-operative banking system is lack of timely data and this masks most of their contemporary financial problems and impedes a proper assessment of their performance. While the reporting of basic data on assets and liabilities are streamlined in respect of the scheduled co-operative banks, the data in respect of non-scheduled co-operative banks are still available with a considerable time lag. The balance sheets of most of the co-operative banks are not finalised in time due to non-completion of the audit process (Box III.2). Beside availability of data, lack of standardisation of accounting procedures leads to inconsistency in data reported by different layers of co-operative credit institutions. Standardisation of balance sheet formats, on the lines of commercial banks, will be helpful in making proper comparison of the performance of co-operative banking sector with the commercial banks and other financial institutions.

Box III.1: Structural Reforms in Co-operative Banking

The rural financial institutions (RFIs) in India have played a catalytic role in mobilising rural savings and stimulating agricultural investment. The institutionalisation of rural credit started with the establishment of co-operatives following the enactment of Co-operative Societies Act in 1904. Efforts to develop the co-operatives were intensified following the recommendations of the Rural Credit Survey Committee (1954). Based on the Recommendations of the All India Rural Credit Review Committee (1969), a multi-agency approach to rural credit was adopted with the commercial banks supplementing the efforts of the co-operative banks. To further strengthen the rural credit system, a third channel to the RFIs was added by instituting Regional Rural Banks in 1975. While these RFIs made impressive gains in terms of branch expansion, deposit mobilisation and credit disbursements, the agricultural sector still suffers from inadequate institutional credit. The problem has been exacerbated by the emergence of a wide range of hi-tech and capital intensive segments in some pockets of the rural economy. Thus, there is an imperative need for rejuvenating the rural credit system so that it can meet the credit requirements of higher order across all sections of the rural economy.

Co-operative banks occupy a pivotal position in the supply of rural credit. As at the end of March 1997, these co-operatives constituted 41 per cent of the total outstanding direct agricultural finance of all institutional agencies. Thus the key to the success in revamping the rural credit delivery system lies in improving the effectiveness of the co-operative system.

Two major problems confronting the co-operative banking system are the high transaction costs and poor repayment performance. Organisational structure of the co-operative banking system in India is a contributory factor for their high transaction costs. Thus, some restructuring of the organisational set-up is considered as one option for improving the viability of the co-operative banking system.

Two alternatives in this regard can be (i) merger of the long-term and short-term structure and (ii) delayering of the short-term structure. As regards the poor recovery performance, linking Self Help Groups to the banks for delivery of rural credit is an innovative strategy which is gaining momentum. These aspects are discussed in details below.

Merger of the Long-term and the Short-term Structure

The co-operative banking system in India has a widespread and elaborate organisational structure. On the basis of a consensus opinion that short-term and long-term credit cannot be supplied by the same organisation, the co-operative banking system was developed with two arms. The short-term structure extending production credit has PACS at the grass root level, CCBs at the intermediate level and StCBs at the apex level. The long-term structure extending investment credit have PCARDBs at the base level which are affiliated to the SCARDBs at the State level. However, subsequently, a number of committees reviewing the performance of the rural credit delivery system recognised the problems associated with this structure and recommended single window system for providing agriculture credit. Finally in 1975, Reserve Bank appointed a Committee (ARDC, 1976), under the chairmanship of Dr. R.K. Hazari for studying the feasibility of integrating the two wings of the co-operative credit structure in the country. Noticing certain imbalances in the growth of the two wings of the credit structure, the Committee felt that the co-operative credit system can fully play its expected role if it is enabled to provide credit facilities in an integrated manner. Integration of the co-operative structure was also perceived to benefit the farmers providing them with one contact point. The Committee concluded that integration would prove to be beneficial from the angle of credit institutions also, as this will help them to improve the scale of their business and consequently their viability, which would in turn enable them to employ full-time paid secretaries and function effectively. Thus, the Committee recommended that the two wings of the co-operative credit structure should be integrated at all levels, viz., the primary, the intermediate (district) and the apex (state).

However, in spite of such unequivocal recommendations of various committees, Andhra Pradesh has remained to date the only State which has implemented the integration of short term and long term structure in 1986. A recent study (Satyasai and Vishwanathan, 1998), examining the impact of integration concluded that,

i)

the flow of short term and long term loans was higher during post-integration (1986-87 to 1994-95) than what would have been possible had there been no integration.

ii)

the management costs showed deceleration during the post-integration period.

iii)

bad debts of the co-operatives, in absolute terms and as proportions of working capital/loan outstanding, showed declining trend.

The results of the above study suggest that, integration of the short term and long term structure may have several beneficial impacts.

Delayering of the Co-operative System

Delayering of the co-operative system is considered as another alternative restructuring option to bring down the transaction costs. The mounting overdues of the co-operative institutions have severely restricted their capability of recycling funds for promoting faster agricultural growth. High overdues also make these institutions ineligible for availing of refinance facility from NABARD. In this context, the Second Narasimham Committee on Banking Sector Reforms (1998) urged that consideration be given to delayering of the co-operative credit system with a view to reducing the intermediation costs and providing the benefit of cheaper NABARD credit to the ultimate borrowers. As a first step, StCBs and CCBs could consider skipping one tier, and lend directly to the PACS and the ultimate borrowers where the intermediate level is weak. It may be necessary for these banks to open more branches and absorb the trained staff of the tier that will be skipped. This will improve the credit delivery system in two ways: there will be reduction in the interest rate for the ultimate borrower due to reduction in the level of intermediation and secondly, it will be possible for NABARD to provide refinance even in cases where one tier of the structure is not able to borrow on account of their ineligibility (due to high percentage of overdues).

Linking of Self Help Groups

Linking Self Help Groups (SHGs) and non-government organisations (NGOs) to banks in the rural credit delivery is considered to be another innovative mechanism, which may help in reducing transaction costs and also ensure better repayment performance. NABARD has been actively encouraging the concept since the launching of a Pilot Project in 1992. Under the scheme, NABARD provides policy support as also 100 percent refinancing to banks for financing the SHGs. As at the end of March 1999, a cumulative total of 32,995 SHGs has been linked covering 5.6 lakh families and involving Rs.57.1 crore of bank lending. In an evaluation study of SHGs in Tamil Nadu (NABARD,1997), it has been shown that the intermediation of NGOs and SHGs helped banks to reduce the transaction costs by 40 per cent initially and upto 60 per cent over a period of time, as the bank personnel gained experience. Similarly the recovery performance improved to 92 per cent. The intermediation also reduced the transaction costs of the borrowers due to elimination of cumbersome documentation procedure and time and cost incurred on repeated visits to banks. The field studies conducted by NABARD revealed that other encouraging features of this linkage programme are the shift in loaning pattern from non-income generating activities to production activities, gradual increase in income levels of members, social empowerment of members and the increase in savings levels etc.

References

Agricultural Refinance and Development Corporation (1976), 'Report of the Committee on Integration of Co-operative Credit Institutions' (Chairman: Dr. R.K. Hazari), Mumbai: Tata Press Limited.

National Bank fort Agriculture and Rural Development (1997), 'Evaluation Study of Self Help Groups in Tamil Nadu', Draft Report.

Satyasai K.J. and K.U. Vishwanathan (1998), 'Restructuring the Co-operative Credit System through Integration of Short Term and Long Term Structures', Indian Journal of Agricultural Economics, Vol.53, pp.478-487.

Box III.2: Statistics on Co-operative Banking

The need for a strong data base is well recognised in the empirical literature, as strength and relevance of empirical findings depend on the quality of the data used. While India has one of the better statistical systems in the developing world (Srinivasan, 1994), the data in respect of cooperatives remain relatively weak, with lagged availability. Improvement in timeliness of availability of these data is necessary both for empirical research as well as for policy making purposes. While the flow of information from the scheduled co-operative banks is timely (because of statutory provision), those from the non-scheduled segment (which formed 95 per cent of the total deposits of co-operative banks as at end-March 1996) are inordinately delayed.

As far as the published data in respect of cooperative banks are concerned, the Statistical Statements relating to Co-operative Movements in India brought out by the NABARD gives comprehensive coverage of the co-operative sector in terms of number, membership, liabilities and assets and operations of various types of credit and non-credit societies. As on date, the latest period for which data are available is 1994-95. Such an inordinate delay in availability of the information renders it ineffective for the policy formulation purposes.

In order to remove this deficiency and strengthen the data base of the co-operatives, NABARD has started bringing out, in the form of small brochures, a few key statistics in respect of the co-operative banks (except the PACS) within reasonable time span. Key Statistics on Co-operatives, covering both the short-term and long-term structure, are brought out within a few months from the closure of the financial year. The booklet covers state–wise position of deposits, borrowings, loans outstanding and loans issued as well as the recovery performance (as a percentage to demand) in respect of StCBs, CCBs, SCARDBs and PCARDBs. A more detailed coverage of the co-operative banks' data is made in Dossier on Co-operatives published subsequently. The recent edition of the booklet (1997-98) presented state-wise position of resources, investment, outreach, recovery performance, management, profitability, asset classification, erosion in assets and projections (for the next one year), in respect of different types of co-operative institutions. Finally, Financial Statements of Cooperative Banks present position of liabilities and assets, income and expenditure and demand, collection and balances for individual co-operative banks (separately for the short term and long term structure) based on their annual accounts. Firm data for financial year are made available after a considerable time lag of 18-20 months from the close of the year as compared with only 3-4 months lag in the case of commercial banks. One of the principal reasons for the delay in data availability is the delay in auditing of the annual accounts of the co-operative banks. Concerted efforts are, therefore, required to reduce the time lag in the availability of data on co-operatives, so as to be of help in policy making.

References

Srinivasan, T.N. (1994), 'Data Base for Development Analysis: an Overview', Journal of Development Economics, Vol.44, pp.3-27.

3.61 The financial sector reforms initiated since 1992 to improve the efficiency and productivity of banks were initially centred on the commercial banks. These reform measures were subsequently extended, in stages, to the co-operative banks as well. While the measures including interest rate deregulation, application of prudential norms relating to asset classification, income recognition and provisioning, etc. have been extended to the co-operative banks, the capital adequacy norms remain to be extended to the co-operative sector. Strengthening of the capital base of the co-operative banks in a phased manner would help in improving the soundness of these institutions.

3.62 In addition to the policy initiatives already being undertaken by the Reserve Bank and NABARD, the above measures can help to make the co-operative credit institutions more strong, efficient and viable.