Letter of Transmittal

Chairman

15 January 2013

Dr D Subbarao
Governor
Reserve Bank of India
Central Office
Mumbai

Respected Sir

Expert Committee to Examine Three-Tier
Short Term Cooperative Credit Structure (ST CCS)

The Reserve Bank of India had constituted the above Committee vide order D.O RPCD.CO.RCBD.593/07.06.000/2012-13 dated 23 July 2012.

I am happy to place the report containing the analysis, conclusions and recommendations of the Committee for your kind perusal and consideration.

Yours faithfully,

Prakash Bakshi
Chairman of the Committee

Summary and Recommendations

1. The Expert Committee was constituted by RBI to have a relook at the functioning of the short-term cooperative credit structure (ST CCS) from the point of view of the role played by ST CCS in providing agricultural credit, to identify central cooperative banks (CCBs) and state cooperative banks (StCBs) which may not remain sustainable, and to suggest appropriate mechanisms for consolidation or delayering of the ST CCS and make recommendations for action to be taken by various stakeholders. The analysis, conclusions drawn, and recommendations made by the Committee are indicated below.

2. The Committee noted that the share of ST CCS in providing agricultural credit has fallen to a mere 17% at the aggregate level although there are small pockets where its share is more than 50%. The Committee is of the opinion that ST CCS, which was primarily constituted for provision of agricultural credit must provide at least 15% of the agriculture credit requirements in its operational area, gradually increasing to at least 30%.

(para: 3.14)

3. The Committee also noted that almost 40% of the loans provided by PACS and almost half the loans provided by CCBs are for non-agricultural purposes, although the share of many of these PACS and CCBs in agricultural credit was less than 30% in their operational area. The Committee noted with concern that these PACS and CCBs were not performing the role for which they were constituted. The Committee therefore recommends that CCB should strive to provide at least 70% of their loan portfolio for agriculture. The Committee also recommends that if a CCB or StCB consistently underperforms and provides less than 15% share of agricultural credit in the operational area, then that bank should be declared and treated as an urban co-operative bank. The Committee also noted that StCBs in the NER region as well as smaller states and union territories like Delhi, Goa, Chandigarh, etc. provide insignificant credit to agriculture and are catering to the requirements of only the urban population and may therefore be declared and treated as urban cooperative banks. Necessary amendments in the State Cooperative Societies Acts, Rules and byelaws of these banks may have to be carried out for this purpose.

(paras: 3.14, 3.15 & 3.17 )

4. As deposits made by members with PACS are not covered by DICGC, and not being part of the banking system PACS will not be in a position to issue kisan credit cards (KCC) transactable/working on ATMs and POS devices, it would be most appropriate for CCBs to provide these services directly by using PACS as their business correspondents (BCs). All the depositors and borrowers of PACS therefore would become normal shareholding members of the CCB with voting rights for all "active" members. Definition of active members with reference to deposits and loans may be provided by RBI or an agency authorised by it. Necessary amendments in the State Cooperative Societies Act, Rules and bye-laws will be necessary in each state.

(paras: 6.39 & 5.26)

5. Almost two thirds of the deposits with StCBs are deposits made by CCBs in the form of term deposits for maintenance of their SLR and CRR requirements. However, StCBs lend far higher amounts to the same CCBs and also invest in loans which had generally resulted in higher NPAs, thus actually putting the SLR and CRR deposits made by CCBs to risk. While StCBs should definitely try to diversify their lending portfolio, ways to keep these investments safe need to be found. The Committee recommends that StCBs (and CCBs) may as a possible measure, be given a higher share in the food consortium credit.

(para: 4.17)

6. To the extent StCBs are able to mobilise deposits from individuals, cooperatives other than CCBs and other entities, and also function as aggregators of refinance requirements on part of CCBs, they would continue to conduct the important function of providing liquidity support to affiliated CCBs, although technically each CCB can receive such liquidity support directly from any other bank or financial institution also.

(para: 7.4)

7. Division of a state into two or more independent states should not be a compelling reason for the division of a well-functioning StCB and the possibility of converting such StCB into a multistate federal cooperative bank must be explored. Necessary amendments in the Multistate Cooperative Societies Act, BR Act, and NABARD Act would have to be carried out for this purpose.

(para: 7.7)

8. About 238 CCBs already have a CRAR of 7% or more, and 2/3 of them would be able to meet additional capital requirements and sustain CRAR of at least 7% by 2014-15 and of 9% by 2016-17. However, a large number of CCBs and some StCBs do not have adequate capital to meet even the relaxed licensing norm of 4% CRAR. The Committee recommends that 31 March 2013 may be set as the deadline for these banks to mobilise the required capital either internally or from any other external source so as to achieve 4% CRAR failing which RBI should take the necessary regulatory action.

(para: 6.11)

9. To assess the additional capital requirements, the Committee used four scenarios: Model 1 with fixed growth rates for different parameters, Model 2 with continued past trend, and Models 3 and 4 with accelerated growth for different parameters.

(paras: 5.16,5.23 & 6.15)

10. The Committee estimated that 209 CCBs of the 370 CCBs will have to mobilise, as an aggregate, ` 4,024 crore by 2014-15 and ` 6,498 crore by 2016-17 to achieve CRAR of 7% and 9% respectively. Bank-wise, these amounts range from as low as ` 1.84 lakh to ` 282 crore. The Committee has estimated that about 151 CCBs should be able to mobilise the required capital from their members¹ by asking the members to contribute amounts ranging from ` 2 to ` 4000 over a period of 4 years.

(paras: 5.16,5.23 & 6.15)

11. The Committee also recommends the following to help CCBs augment their capital.

a. CCBs may be permitted by RBI to issue fixed interest bearing deposits of 10 years or more with a lock-in period of five years for its members and to treat such deposits as tier 1 capital. These deposits could be converted into regular shares after the CCB achieves the required CRAR.

(para: 5.30)

b. CCBs may be permitted to issue perpetual bonds or debt instruments to be contributed by states, individuals and other entities, and the same to be treated as tier 1 capital.

(paras: 5.31 & 5.32)

c. Share capital deposits with PACS created through releases of GoI and the state shares may be transferred to the concerned CCBs if not eroded due to the losses.

(para 5.27)

d. CCBs may increase the percentage of share linking for all the loans provided by them

(para 5.28)

e. RBI may permit tier 2 capital to be treated as tier 1 capital to an extent of 150% of tier 1 capital fund for a period of five years.

(para 5.33)

12. The Committee has also estimated that about 58 CCBs would generally not be able to mobilise the required capital, or their business sizes are so small that they would not be sustainable in the long run and would have to be therefore consolidated with other CCB(s). The Committee has worked out illustrative examples of such possible consolidations and recommends that a working group may be constituted in each state for working out details of such possible consolidations in dialogue with the concerned stakeholders and preparing an action plan. The Committee recommends that broad parameters for attempting such consolidations should be a minimum business level Rs 200 crore for the consolidated CCB and achieving CRAR of 7% by 2014-15 and 9% by 2016-17 with a concrete action plan for contributing any additional capital that may be required. Contiguity of operational area may be given preference.

(paras 6.21 to 6.37)

13. Most of the CCBs and StCBs will also have to take concrete steps to improve their internal systems, human resources, and technology adoption. The Committee has also recommended various steps for improving the governance and management in StCBs and CCBs on the lines of recommendations of the Vaidyanathan Task Force.

(para 7.9)

14. An autonomous cooperative election authority may conduct elections for StCBs and CCBs and amendments may be made in the Cooperative Societies Act of each state ensuring that any director on the Board of these banks removed or superseded by RBI for any financial irregularity or if the bank incurs losses in any three years during their term of five years may be barred from contesting elections to any CCB or StCB for a period of five years.

(para:7.9 i)

15. BR Act may be amended to give direct and overriding authority to RBI over any other law for superseding the Board or removing any director on the board of StCB or CCB and to prescribe the number of professionals, each from a different specialisation, to be elected, or co-opted within three months of the election, on the board of StCB or CCB.

(para:7.9 ii & ii)

16. The panel of statutory auditors for StCB or CCB, being a banking entity, to be prescribed by RBI or an agency authorised by RBI although the recent Constitutional amendment requires the state government to prescribe the same.

(para:7.9 iv)

17. RBI to modify banking licence of any CCB to include additional operational area from which a PACS could work as BC of a CCB.

(para: 7.9 v)

18. State Cooperative Societies Acts to be amended so as to provide the authority to StCBs and CCBs in taking business decisions such as percentage of share linkage, making investments, paying dividends etc within the directions and guidelines prescribed by RBI.

(para: 7.9 vi)

19. 30 September 2013 to be set as deadline for all StCBs and CCBs to be fully operational on CBS and providing RTGS, NEFT, ATM and POS device based services.

(para: 7.10)

20. StCBs and CCBs to be fully included in the financial inclusion and EBT drive. Deposits of governments and government agencies to be also made in StCBs and CCBs which have achieved 7% CRAR and are on CBS.

(para: 7.11)

21. CCBs and StCBs to be covered by the banking Ombudsman or a similar mechanism that may be developed by RBI with NABARD.

(para: 7.12)

22. A working group to be set up to make recommendations on the human resources requirements following the transition of StCBs and CCBs on CBS and other ICT platforms.

(para: 7.13)

23. GoI may consider giving income tax exemption to StCBs and CCBs up to 2016-17 for incentivizing them to achieve 9% CRAR.

(para: 7.14)

24. RBI may consider graded CRAR norms for CCBs and StCBs of different business sizes.

(para: 7.15)

25. An independent organisation may be set up by CCBs and StCB in each state for providing support services.

(Para 7.8)

^{___________
1} All depositors and borrowers, presently of PACS, would become direct customers of CCBs once PACS started functioning as BCs and would have to become shareholding members of CCBs. Their loan-linked shares would also stand transferred to the CCBs.

Chapter 1
Background and Introduction

1.1 The Committee on Financial Sector Assessment (CFSA)¹ had looked into the financial health of banks including the cooperative banks and made several recommendations for improving the financial health and systems for attaining and maintaining financial stability. The CFSA had reviewed the cooperative and rural banking sector as well and made the following recommendations, among others, relating to cooperative banks:

a. The prevalence of the three-tiered structure leads to an increase in transaction cost that diminish profit margins. Also, there is considerable interference by the elected board in the day-to-day management of these banks, which ordinarily should be the responsibility of the Chief Executive Officer (CEO). Further, officials from the state government deputed to these banks may have neither the professional skills nor the requisite experience to run the banks, though recent initiatives of incorporating fit-and-proper criteria for the CEO and directors in the MoU is expected to alleviate this problem.

b. The suggestion by the Vaidyanathan Committee to introduce a risk weightbased capital requirement of 7 per cent should be implemented.

c. Rural co-operative banks, which fail to obtain a licence by end-March 2012, should not be allowed to operate.

1.2 In the last two years, RBI and NABARD implemented a roadmap for issue of licences to unlicensed state co-operative banks (StCBs) and central co-operative banks (CCBs) in a non-disruptive manner, with an intention to complete the licensing agenda by end of March 2012. After considering NABARD’s recommendations for issuance of licences based on inspection or quick scrutiny, 41 out of 370 CCBs were found to be unable to meet the licensing criteria by end-March 2012. RBI, therefore, allowed time upto 30 September 2012 for concrete steps to be taken by these 41 banks and the respective state governments for meeting the licensing parameters. Based on the capital infusion and other support provided by the states, NABARD recommended for issuance of licence to 15 banks and the balance 26 CCBs, however, did not meet the criteria by the set date, i.e., 30 September 2012. Further, 6 StCBs and 23 CCBs which had been granted licence by RBI earlier were found to be not able to maintain the 4% CRAR as on 31 March 2012. It is in such a background that RBI decided to have a relook at the working of the three tier rural cooperative banking structure, and constituted an Expert Committee (please see Annexure-1 for the RBI notification) under the Chairmanship of Dr. Prakash Bakshi, Chairman, NABARD and with representatives from GoI, RBI, State Govt., StCB and other experts as members with the following Terms of Reference (ToR):

I. To assess the role played by State & District Central Cooperative Banks in fulfilling the requirement of agriculture credit, the primary purpose for which they were set up.

II. To identify Cooperative Banks that may not be sustainable in the long run even if some of them have met the diluted licensing criteria for the time being.

III. To suggest appropriate mechanism for consolidation by way of amalgamation, merger, takeover, liquidation and delayering.

IV. To suggest pro-active measures that need to be taken in this direction by the Cooperative Banks themselves, GoI, State Govts, RBI and NABARD.

V. Any other issues and concerns relevant to the subject matter.

The Committee comprised the following members:

Approach

1.3 Basic premise of the Committee for analysing the business and financials, to arrive at conclusions and making recommendations was that ST CCS has been primarily set up for agricultural lending. In order to fulfil this obligation, a minimum of 15% market share in agricultural credit should be attained by the CCBs in their operational area and the percentage of agricultural lending should be at least 70% in their total loans outstanding. Attainment of CRAR at the designated level and maintaining the same and achieving higher CRAR within a time frame is of paramount importance and indicator of sustainable viability of the banks. Additional capital should be mobilised primarily through members’ contribution and supplemented from other sources.

Methodology

1.4 Chairman of the Committee had an initial discussion with Dr K C Chakrabarty, Deputy Governor, RBI, for setting the broad contours and framework for the working of the committee, given the short span of about three months in which the Committee was required to submit its report. The Committee decided to obtain feedback from representatives of all the three tiers through formal and informal meetings, and held discussions with select representatives of cooperative banks and PACS, NAFSCOB members and officials, state govt. officials, eminent experts, and All India Cooperative Bank Employees Federation (AICBEF). Further, the ToR of the Committee was uploaded on the website of NABARD for soliciting comments and suggestions from interested persons and stakeholders. State governments and cooperative banks were also advised to give their views and suggestions on the TOR for consideration of the Committee. The Committee members also met several times in formal and informal meetings to discuss and finalise the analysis and contents of the report. (Details are furnished in Appendix 1,2 and 3). Dr Shylendra, member of the Committee took up a special study of the roles played by the StCB and CCBs in Gujarat (Appendix 4).

1.5 The Committee obtained available data on ground level credit flow to agriculture by CCBs and by all other agencies in the operational areas of CCBs alongwith the financial data and balance sheets of StCBs and CCBs as on 31 March 2012. Data and other relevant information from PLPs, State Focus Paper, inspection reports of NABARD, agenda notes of SLBC, etc. alongwith data available from NAFSCOB, RBI, NABARD, and reports of various Committees was used. Given the weak database and MIS of the cooperative credit structure, the Committee made all possible efforts to verify and sanitise the data as far as possible before its use.

The report has captured changing scenario of rural banking (Chapter 2), the role of ST CCS in agricultural credit flow (Chapter 3), detailed analysis of financial performance of the entire ST CCS (Chapter 4), assessment of additional capital under different growth scenarios for achieving 7% CRAR by 2014-15 and 9% by 2016-17(Chapter 5), strategies for attaining higher CRAR and consolidation/ liquidation measures wherever necessary (Chapter 6) and various policy measures and initiatives required for strengthening the ST CCS (Chapter 7).

1.6 The Committee would like to place on record its appreciation for the inputs received from the Chairmen and Presidents, MDs and CEOs of all StCBs/ CCBs, officials of state governments, members and CEO of NAFSCOB, eminent experts, members of AICBEF and other interested people, who have provided valuable suggestions and comments. The entire analysis of the financials of ST CCS including conceptualisation of various growth scenarios and developing the analysis matrices on which the conclusions and recommendations of the Committee are based was carried out by Dr. U.S. Saha, General Manager, Shri A.V. Joshi, AGM and Smt. S. Vijayalakshmi, AGM who were ably supported by S/Shri A K Parhi, DGM, J Suresh, AGM, Smt Y Nagalatha Rani, AGM, S M Sule, Manager, Rajendar Perna, AM, Ramesh Kumbhare, AM and A P Chandrahasan, AM in compilation and cleansing of data as well as data analysis. Shri Manoj Raiwad, SDA, Shri Vaibhav Wadkar, DA and Smt Vedanti Khandalkar, DA-WP provided competent logistical support to this team. The Committee would like to record its appreciation for the indepth analysis of such voluminous data by this team in such a short period. The valuable inputs and suggestions received from S/Shri K V Rao, CGM, P B Subramanian, AGM and other colleagues in departments of Supervision and Institutional Development in NABARD are also duly acknowledged. The Committee also thanks all the Regional Offices of NABARD for providing information and organising various formal and informal meetings from time to time.

1.7 The Expert Committee is grateful to RBI for the opportunities given to the Committee and guidance provided. The Committee has made concerted efforts in analyzing the financials of cooperatives and made suggestions with the best of the knowledge of the Committee.

Chapter 2
Rural Cooperative Banking and Reforms

2.1 Rural credit cooperatives were born more than 100 years ago, and developed into two distinct streams of agricultural credit, one basically meeting the crop loan requirements of farmers, and the other supporting farmer level capital investments in agriculture. The structure which primarily meets the crop loan requirements is a three-tier structure in most of the states with primary agricultural credit cooperative societies (PACS) with farmers as their members at the base level, central cooperative banks (CCBs) as the intermediate federal structure with PACS as principal affiliated members, and the state cooperative bank (StCB) at the apex state level with CCBs and other cooperatives as its principal members. This three-tier cooperative credit structure is popularly known as the short-term cooperative credit structure (ST CCS).

2.2 The ST CCS functions as a three-tier structure in 16 states; while in 13 smaller states & union territories, PACS are directly affiliated to the StCB and the ST CCS functions as a two tier structure. In 3 states, a mixed structure, i.e., two tier in some districts, and three-tier in the other districts operates.

2.3 In principle, PACS was expected to mobilise deposits from its members, and use the same for providing crop loans to the needy members who need it. However, as deposits in PACS may not be enough to meet the loan requirements of all its farmer borrowing members, PACS draw support from the federal structure, viz., the CCB/StCB. The CCB was therefore constituted as a small bank working in small towns to mobilise deposits from public and provide the same for supporting the credit needs of PACS and its members. As part of the federal structure, the CCB was expected to also provide guidance and handholding support to PACS. StCB was set up in each state not only to mobilise deposits and thereby provide the required liquidity support to CCBs and PACS, but to also provide the required technical assistance, guidance and support to CCBs and PACS in fulfilling their obligations towards their farmer members. Wherever required, the StCB was also expected to mobilise liquidity and refinance support from the higher financing institutions like NABARD for supporting the crop loan operations of CCBs and PACS affiliated to it. Over time, ST CCS has also been providing medium term loans for investments in agriculture and for the rural sector, often with refinance support of NABARD.

2.4 As on 31 March 2012, the ST CCS comprised about 93,000 PACS, 370 CCBs and 32 StCBs.

2.5 The ST CCS was the only institutional arrangement for providing agricultural credit until 1969. However, after nationalisation, commercial banks (CBs), and later, the regional rural banks (RRBs) which were established from 1975 onwards, also started catering to the needs of agriculture and rural development sectors.

2.6 The banking scenario is changing constantly and significantly due to rapid and radical reforms taking place in Indian banks since 1993. Application of prudential banking norms including norms for income recognition and asset classification (IRAC) and capital adequacy based on the risk (CRAR) to make them stronger and competitive was followed by capitalisation of public sector commercial banks and RRBs. Although IRAC norms were gradually applied to the StCBs and CCBs, the risk based capital norms were not applied to them for a variety of reasons.

2.7 In the meanwhile, the Committee on Financial Sector Assessment (CFSA), set up by GoI in September 2006 under the Chairmanship of Dr Rakesh Mohan looked into the financial health of all banks including the cooperative banks and made recommendations for improvement of financial health and systems for attaining/maintaining financial stability. A major recommendation of the Committee was to prohibit unlicensed banks from functioning beyond March 2012.

Reforms in ST CCS

2.8 The poor financial health of the ST CCS had been a cause of concern during the past five decades, and several committees had, in the past, been constituted to look into the problems that plague the sector and make recommendations. The latest was the Task Force chaired by Prof. A Vaidyanathan (2004-05) which suggested wide-ranging reforms in the governance and management of ST CCS including crucial amendments to the respective State Cooperative Societies Acts which were to precede the recommended one-time capitalisation jointly by the Central government and the state governments (with certain contribution required to be coughed up by the ST CCS of the state itself).

2.9 Based on the recommendations of the Vaidyanathan Task Force, the GoI announced a package for revival of the ST CCS in 2006, which sought:

• legal and institutional restructuring to make PACS, CCBs and StCBs democratic, member driven, autonomous and self-reliant institutions,

• radical changes in the legal framework to empower the RBI to take action directly in matters deemed appropriate for prudent financial management of banks,

• one-time financial assistance to wipe out accumulated losses and strengthen the capital base of each assisted institution to ensure CRAR of 7%, and

• qualitative improvement in personnel in all tiers and at all levels through capacity building and other interventions, leading to an increase in overall efficiency.

Status of implementation

2.10 The status of implementation of the Revival Package, as on 31 December 2012 is as under:

• Twenty-five state governments signed the MoU with GoI and NABARD to participate in and implement the package, and 21 States amended the respective State Cooperative Societies Acts.

• An amount of ` 9,002 crore was released by NABARD as GoI share, while the state govts. released ` 856 crore as their share for recapitalisation of 53,202 eligible PACS in 17 States. Recapitalisation assistance could not be released in many cases as the states did not complete all the necessary benchmark activities within the stipulated period.

Impact of the Revival Package

2.11 Impact studies conducted in 13 States showed positive and visible impact of the implementation of the revival package in certain areas like:

• Institutional and legal reforms including amendments to Cooperative Societies Acts, Rules, and Byelaws, thus creating the basis for autonomy to the banks and PACS.

• Release of recap assistance leading to improve liquidity of PACS which enabled them to re-commence lending and restore cash flow and income streams.

• The assisted PACS could attain CRAR of 7% after recapitalisation and many of them were able to maintain the same.

2.12 Post implementation of the revival package, financial indicators have shown varying degrees of improvement in all the three tiers of CCS. Loans disbursed by PACS during the period 2006-07 to 2009-10 registered a growth of 73% in Uttar Pradesh, 53% in Madhya Pradesh and 23% in Odisha. The annual average growth rate during the period 2003-04 to 2009-10 ranged from 62% in Odisha to 38% in Haryana. Small and marginal farmer coverage was a priority with the CCS and continued to be around 70% during the period 2006-07 to 2009-10 in Madhya Pradesh & Uttar Pradesh.

Chapter 3
Role of ST CCS in providing agricultural credit

Credit flow to Agriculture – Macro Analysis

3.1 The predominance of the cooperatives as the key credit provider of agricultural credit continued till mid-nineties when it was still meeting about 50% of agricultural credit provided by the entire banking system to farmers. But, with commercial banks stepping up their agricultural financing from 2001 onwards, and especially from 2003-04 onwards when the "doubling the agricultural credit" campaign started, commercial banks today provide almost three fourths of the total agricultural credit in the country with RRBs providing another 10% or so. The net result is that despite a modest growth of about 20% per year in its agricultural credit dispensation during the last five years, and having a rural penetration of over 93,000 PACS as compared to only about 50,000 rural and semi-urban branches of CBs and RRBs, the share of the cooperatives in agricultural credit has fallen to about 17% in 2011-12 (as shown in table below).

3.2 Although cooperatives are providing only 17% of agriculture credit, the share of cooperatives in total number of agricultural accounts held by the banking system is substantial. Cooperatives provided agricultural credit to 3.09 crore farmers during 2011-12 compared to only 2.55 crore farmers by commercial banks and 82 lakh by the RRBs. In fact, cooperatives financed 67 lakh new farmers during 2011-12 compared to 21 lakh new farmers by commercial banks and only 9 lakh new farmers by RRBs (as shown in table below).

3.3 The success of cooperatives in reaching out to new farmers or those who had gone out of the active credit fold of the banking system is the real impact of the implementation of the Vaidyanathan revival package and implementation of the agricultural debt waiver and debt relief scheme in its true spirit.

3.4 Such high penetration by the cooperatives despite having a low share in the total agricultural credit flow has the immediate implication of per account loan at ` 28,467 (2011-12) being provided by cooperatives as compared to ` 66,000 per account by RRBs and almost ` 1.5 lakh per account by commercial banks (as shown in table below). This trend has been prevailing in the past also.

3.5 Given the increasing trend in fragmentation of holdings and growing preponderance of small and marginal farmers who would require much smaller quantities of loans as compared to medium and large farmers, an inference could perhaps be drawn that cooperatives are increasingly supporting the neglected or sidelined category of small and marginal farmers. Although this is a positive sign, the fact cannot be overlooked that almost 55% of the agricultural loan accounts of commercial banks and almost 72% of the agricultural loan accounts of RRBs also pertain to small and marginal farmers (as shown in table below).

3.6 It is therefore, not that cooperatives alone finance small and marginal farmers, while other banks finance only large farmers, as is often made out. At the same time, as has been mentioned elsewhere, cooperatives are severely constrained in terms of resources for lending, due to which PACS in almost all the states have prescribed individual maximum borrowing power (IMBP) as an outer ceiling for any individual loan to their members. Although there is no documented evidence, given the fact that the proportion of small and marginal farmers financed by RRBs is much higher than by cooperatives, and the per loan account amount provided by RRBs is almost 2½ times that provided by cooperatives, the possibility of fairly large number of borrowers from cooperatives being underfinanced and not getting adequate loan to meet their requirements and some members not getting any loans at all cannot be ruled out. The resources position as well as the other than agricultural³ credit business of the ST CCS therefore, needs to be looked in greater detail.

Agricultural Credit by different Tiers of ST CCS⁴

Role of PACS

3.7 84,327 PACS affiliated to 366 CCBs⁵ issued agricultural loans aggregating ` 67,531 crore, which constituted 92% of the total agricultural credit of ` 73,313 crore disbursed by CCBs (Annexure 3.1). In other words, only about 10% of the agricultural loans issued the PACS were supported through deposits mobilised by PACS and the rest 90% had to be provided by CCBs either through their own resources or through borrowings.

3.8 Agricultural loans issued by PACS constituted 59% of the total loans issued by PACS at ` 1.14 lakh crore. In other words, almost 41% of loans provided by PACS, either through internal resources or through borrowings from CCBs, were for non-agricultural purposes. The aggregated data at all India level however, gets distorted due to the high proportion of nonagricultural loans issued by PACS in four states like Kerala, Tamil Nadu, Karnataka & Uttar Pradesh where this proportion was as high as 76% of total non-agriculture loans. The PACS in these 4 States disbursed ` 42,611 crore, which constituted 91% of the total non-agriculture loans.

3.9 The average loan size of PACS worked out to ` 27,405 per account and varied hugely between less than ` 1,000 in Jammu and Kashmir (J&K) to over ` 60,500 in Punjab. The average agricultural loan per account also varied similarly from less than ` 1,000 to almost ` 80,000 in the same states. The average agricultural loan per account was however lower than the average loan per account. The detailed analysis showed that the size of agri loans was much higher than the size of non-agriculture loans in states like Punjab, Haryana, Uttarakhand etc. while the reverse is true in states like Kerala.

3.10 An area of concern however is the fact that only a little more than 4 crore members availed loans from PACS out of the total membership of over 9 crores signifying that the majority of the members do not avail of loan services from their cooperative; there are reasons to believe that most of such members did not become members for availing of the services of the PACS. Such a large proportion of inactive members also has its negative impact on the governance of the PACS.

Role of CCBs

3.11 As per the available data, 366 CCBs had disbursed agricultural loans aggregating ` 73,313 crore (average of last three years), while the year-wise agricultural loans had actually increased from ` 58,772 crore to ` 88,517 crore during the period. The three year average of crop loans issued by the CCBs stood at ` 67,406 crore constituting 92% of the total agricultural loans issued by CCBs (Annexure 3.2). In other words, the CCBs were found to be performing the principal task of supporting PACS for providing crop loans so far as their agricultural loan portfolio is concerned.

Share of agricultural loans

3.12 The share of agricultural loans to total loans issued by the CCBs, as an aggregate, was only 57%, although the actual shares range from as low as 12% in Jharkhand to 100% in Bihar. CCBs in 13 states had more than 50% share of agricultural loans to their total loans (Annexures 3.3 & 3.4).

3.13 As seen earlier, the aggregate share of agricultural loans by CCBs was about 22% in their operational area⁶; state-wise it ranged from as low as 1% in Jharkhand to almost 50% in the states like Maharashtra and Odisha. The share of CCBs in crop loans disbursed by all agencies ranged from a low of 1% in Jharkhand to 63% in Chhattisgarh.

3.14 The role played by 366 CCBs in their operational areas in providing agricultural credit is presented in the table below. It would be seen that more than one third of CCBs supported less than 15% the total agriculture credit flow in the operational area. In fact, only one third of the CCBs supported more than 30% of the agricultural credit in their operational areas, and two thirds of the CCBs were failing to provide even 30% support to the agricultural credit flow in their operational area, the principal purpose for which the CCBs and the entire set up of ST CCS was created. The Committee is of the opinion that ST CCS, which was primarily constituted for provision of agricultural credit must provide at least 15% of the agriculture credit requirements in its operational area, gradually increasing it to at least 30%. The Committee also recommends that if a CCB or StCB consistently underperforms and provides less than 15% share of agricultural credit in the operational area, then that bank should be declared and treated as an urban co-operative bank.

3.15 The Committee also noted that almost 40% of the loans provided by PACS and almost half the loans provided by CCBs are for non-agricultural purposes, although the share of many of these PACS and CCBs in agricultural credit was less than 30% in their operational area. The Committee noted with concern that these PACS and CCBs were not performing the role for which they were constituted. The Committee therefore recommends that CCB should strive to provide at least 70% of their loan portfolio for agriculture.

Role of ST CCS in NER and UTs

3.16 As mentioned earlier, PACS and other cooperatives are directly affiliated to StCBs in the small and north-eastern states (NER) and union territories (UTs). The 8 NER StCBs, including in Assam, have 231 branches and about 3,000 PACS are affiliated to them. However, the ST CCS provides not more than 4% of the agricultural credit provided in these states by the banking system. In other words, these ST CCS are not playing the primary role of providing agricultural credit in these states. In other smaller states like Goa, Pondicherry and Delhi as well as union territory like Chandigarh, there is practically no agriculture being practised in their operational areas of these StCBs, and even the agri-loans issued by these StCBs are actually for supply and distribution of inputs etc. These StCBs therefore actually cater to the deposit and loan requirements of the urban population. In fact, the Chandigarh StCB has formally written to the committee that they would like to function as an urban co-operative bank as most of the agricultural land in the UT has been acquired for non-agricultural purposes and as a result the PACS have become non-viable.

3.17 The Committee therefore recommends that StCBs in the NER region as well as smaller states and union territories like Delhi, Goa, Chandigarh etc which provide insignificant credit to agriculture and are catering to the requirements of only the urban population may therefore be declared and treated as urban co-operative banks. Necessary amendments in the State Cooperative Societies Acts, Rules and byelaws of these banks may have to be carried out for this purpose.

Chapter 4
Financial performance of ST CCS - an Overview

4.1 Financial performance of ST CCS comprising 31 StCBs, 370 CCBs and over 93,000 PACS in terms of business and profitability parameters is analysed for 2007-08 and 2011-12 in this chapter (detailed data presented in Annexures 4.1, 4.2 and 4.3). It would be seen that although these banks have a common nomenclature as StCBs and CCBs, they differ significantly from one another on almost all financial parameters.

Performance of Three and Mixed Tier ST CCS

4.2 As on 31 March 2012, this segment of ST CCS comprised 18 StCBs⁷, 370 CCBs and about 89,700 PACS constituting more than 90 per cent of the PACS in the country.

State Cooperative Banks (StCBs)

Sources of Funds

Owned Funds

4.3 Three StCBs, viz., Tamil Nadu, Andhra Pradesh and Maharashtra⁸, each with more than ` 1,000 crore of owned funds accounted for almost 40% of the total owned funds of the 18 StCBs which aggregated ` 9,578 crore. In fact, 11 StCBs had owned funds of less than ` 500 crore each out of which 2 StCBs did not have owned funds of even ` 100 crore.

4.4 Owned funds are most critical to CRAR, and it is seen that each of the three StCBs with less than 4% CRAR, viz., Assam, West Bengal and Kerala, had less than ` 200 crore owned funds.

Deposits

4.5 Deposits constituted about 60% of the resources of StCBs. Aggregate deposits of 18 StCBs stood at ` 78,270 crore and had grown at about 9% during the last 5 years. In comparison, the deposits of the rural and semiurban branches of scheduled commercial banks and RRBs had recorded growth rates of about 18% and 17% respectively. In fact, the growth of deposits of scheduled commercial banks in rural and semi-urban areas was higher than their aggregate deposit growth.

4.6 Geographical distribution of deposits showed that five StCBs, viz., Himachal Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra, each with deposits of over ` 5,000 crore accounted for more than 50% of the aggregate deposits of StCBs. Maharashtra StCB, with a deposit base of ` 15,862 crore, alone accounted for almost 20% of the aggregate deposits of StCBs.

Types of Deposits

4.7 Further analysis showed that almost 90% of the total deposits of StCBs were term deposits (please see Table below). This large proportion of term deposits had its negative impact on cost of funds.

4.8 The disaggregated analysis showed that only Himachal StCB among the large StCBs had more than 30% CASA deposits, while smaller StCBs like Bihar and J&K had CASA deposits of 46% and 35% respectively. In 15 StCBs, CASA deposits accounted for less than 20% of their total deposits (Annexure 4.4).

Sources of Deposits

4.9 Almost 79% of the deposits with StCBs were from the affiliated cooperatives themselves, with CCBs accounting for ` 53,414 crore or 68% of the total deposits of the StCBs (please see table below). The deposits from CCBs were in the form of term deposits for CRR and SLR purposes⁹. As most of the StCBs have branches only in the state capital or its neighbourhood, an attempt was made to see whether deposits mobilised from individuals by the StCBs and the branches of the CCBs in the capital district of the state varied significantly. It was seen that in most of the states, branches of both StCBs as well as the CCBs in the capital districts were equally important in mobilising deposits from individuals. In one sense therefore, the branches of StCB competed with those of the CCB in mobilising deposits from individuals in the capital region, which could have generally been held as the logical business area of the CCB.

Borrowings

4.10 Borrowings constituted about 25% of total resources of the StCBs with almost 90% borrowings coming from NABARD (please see Table below).

As almost the entire borrowing from NABARD was refinance for crop loans, it was provided at the subvented interest rate of 4%¹⁰. Due to such subvented borrowings, the average financial cost of borrowings worked out to 5.5% for StCBs. Availability of subvented refinance was also to some extent responsible for the StCBs not mobilizing CASA deposits aggressively.

Uses of Funds

Loans Outstanding

4.11 The total loans outstanding of the 18 StCBs as on 31 March 2012 was ` 73,978 crore, of which agricultural loans outstanding was ` 43,399 crore constituting 58.7% (Please see Table below). The short term agricultural loans outstanding stood at ` 39,418 crore constituting 53.3% of the total loans and formed about 91% of total agricultural loans provided by StCBs. As regards the growth in loans other than agriculture purpose, there was no uniform pattern in year-to- year growth.

4.12 The above table shows that StCBs had substantial non agricultural portfolio to the extent of 41% of total loan outstanding as on 31 March 2012. In general, the performance of StCBs under non-agricultural (other than agricultural) portfolio was not good and gross NPA level was quite high as observed in a number of cases. For example, gross NPA in Maharashtra StCB was about 34% for non-agricultural loans, and the proportion of nonagricultural loan was also high at around 64% of total loans outstanding. It was also observed in case of some StCBs that their gross NPA level was reasonable, e.g., Punjab StCB at 2.6% with 21% non-agricultural loan and West Bengal StCB at 4.3% with 27.5% share of non agricultural loan. A few examples of performance of StCBs are given in Annexure 4.5. StCBs, therefore, need to be cautious while financing non-agricultural projects and risk factors need to be factored in judiciously.

4.13 The proportion of agricultural loans to total loans outstanding ranges from 89% in Rajasthan to 5% in J&K StCB. Agricultural loans of 8 StCBs constituted more than 70% of their total loans outstanding (AP, Haryana, Karnataka, MP, Orissa, Punjab, Rajasthan & Uttaranchal).

4.14 Further, a broad assessment indicated that StCBs used 74% of own lendable resources¹² of ` 64,288 crore to support their total lending (` 73,978 crore) and borrowing was used for the remaining portion of lending¹³. Thus, about one fourth of the lendable resources which could have been deployed for lending were in fact utilised by StCBs for making non-SLR investments.

4.15 The proportion of agricultural loans outstanding to their own lendable resources was 67.5%. NABARD provided resources to the extent of 59% for agriculture and related eligible activities. In other words, StCBs depended heavily on NABARD for financing agriculture, their principal business, even when they had their own resources for the same. A major reason for such large borrowing, especially for crop loan purposes is the subvented nature of refinance when compared to the cost of their own lendable resources.

Investments

4.16 The total investments of the StCBs as on 31 March 2012 which stood at ` 52,837 crore had increased by 74% over the 2008 position. SLR investments constituted 48% of the total investments.

Regulatory Issue

4.17 It is seen that CCBs deposited ` 53,414 crore with StCBs as CRR/SLR deposits, while the StCBs had loans outstanding of ` 73,978 crore to the same CCBs. The CRR/SLR deposits are kept with StCB for "safety" associated with such statutory deposits and lending a large portion of it back to the CCBs seems to go against the very spirit of CRR/SLR deposits. However, it may not appear to be so if the capital, reserves and borrowings of the StCBs are also taken into account. However, if that is done, the CRR/SLR deposits of CCBs kept with the StCBs would seem to be used for lending to other cooperatives and individuals for non-agricultural purposes which are even more riskier if their data on NPAs on such loans are taken into account. It may therefore become necessary to prescribe safe investments for the statutory deposits of CCBs kept with StCBs. The Committee recommends that StCBs (and CCBs) may be given a higher share in the food consortium credit as one possible measure.

Central Cooperative Banks (CCBs)

4.18 The overall performance of 368 CCBs¹⁴, based on available data is as follows:

Sources of funds - Owned Funds

4.19 The owned funds of the 368 CCBs comprising share capital, free reserves and other reserves stood at ` 22,262 crore as on March 2012 as against ` 15,166 crore as on March 2008. The owned fund status of CCBs was highly skewed with 235 CCBs (64%) having owned funds of less than ` 50 crore. While 53 CCBs have owned funds between ` 100 and ` 500 crore, another 79 CCBs have owned funds between ` 50 crore and ` 100 crore. One CCB, viz., Kangra is the only CCB to have owned funds in excess of ` 500 crore.

Deposits

4.20 Aggregate deposits of the 368 CCBs increased since March 2008 at an average rate of around 12% during the last five years as compared to about 18% and 17% for rural and semi-urban branches of scheduled commercial banks and RRBs. The deposits status was also highly skewed. While 2 CCBs had deposits of more than ` 5,000 crore each, 42 CCBs between ` 1,000 and ` 5,000 crore, and 58 CCBs between ` 1,000 and ` 500 crore. As many as 266 CCBs (72%) had mobilised deposits of less than ` 500 crore, out of which 45 CCBs had mobilised even less than ` 100 crore (Annexure 4.6).

Deposits by Source

4.21 Unlike the case of StCBs, the CCBs had a significantly higher proportion of individual deposits (65%) in 2011-12 (please see table below); and deposits from the cooperative system worked out to around 28% of the total deposits. This showed that branch network had helped in mobilising deposits from individuals.

Deposits by type

4.22 Term deposits constituted the major part (around 58%) of the total deposits mobilised by these CCBs (please see table below). This pattern remained consistent over the years, and CASA deposits continued at about 42% of the total deposits of CCBs. While CASA deposits of 142 CCBs (38%) was less than the all India average of 42%, of which 76 CCBs had CASA of about 30%, and 6 CCBs from Andhra Pradesh and one from Kerala had less than 14% of their total deposits as CASA. At the aggregate level, deposits mobilised by the CCBs were more than deposits mobilised by RRBs. The difference however was that in the case of RRBs, term deposits constituted only 42% of the aggregate deposits while in case of CCBs this was 58% in 2011-12. This reversal of proportions of CASA and term deposits between CCBs and RRBs has a telling effect on the cost of funds of these institutions.

4.23 Deposit mobilisation by CCBs and StCBs of the two-tier structure focuses on rural and semi-urban areas. It is interesting, therefore, to compare their performance with deposit mobilisation by rural and semiurban branches of commercial banks and RRBs as on 31 March 2011. It is seen that the share of term deposits was about 10% higher for cooperatives as compared to commercial banks and about 17% higher than RRBs. While commercial banks and RRBs mobilised CASA deposits to an extent of 54% & 62% to total deposits respectively, the comparable share for cooperatives was 45% (please see table below). Because of such composition of deposits, the cost of deposits of the cooperatives worked out to 5.9%, while the cost of deposits of the RRBs was 5.0%. This difference of about 1% in cost of funds had an adverse impact on the profitability of the cooperatives.

Borrowings

4.24 Total borrowings which stood at ` 53,863 crore constituted about 18% of the total resources of the CCBs. Borrowings from the higher tier/ NABARD constituted 78 % of the total borrowings (please see Table below).

Uses of funds

Loans Outstanding

4.25 Aggregate outstanding loans of the 368 CCBs which stood at ` 1,57,028 crore showed an increase of 53% over 2008. The year to year growth was however, uneven. During 2008-09 there was negative growth, whereas during 2010-11 the growth was over 20%. There was also no uniformity in the growth of ST and MT loans. Short term loans constituted around 70% of the total loans outstanding. Loans to agriculture constituted around 51% of the total loans outstanding.

4.26 A sample study of 28 CCBs showed that 23% CCBs had more than 10% gross NPA level under non-agriculture loan portfolio. The range of NPA varied from 10% (Khammam CCB with about 26% share in non-agri. loans) to 67% (Kolhapur CCB with 60% share in non-agri. loans). Some of the CCBs, such as Karimnagar (about 61% non agri share) had NPA level of 3.4% as on 31.3.2012. The details of the samples are given in the Annexure 4.7. The conclusion is that CCBs should not expand the loan portfolio to non agricultural purposes indiscriminately without considering the risk factors.

4.27 Further analysis showed that about 79% of the own lendable resources of CCBs were deployed in lending. The total owned funds of CCBs stood at ` 17,604 crore and deposits, net of SLR and CRR investments, available for lending stood at ` 1,31,357 crore. Thus, the total internal resources of the CCBs available for lending work out to ` 1,48,961 crore. Since CCBs had net borrowings of ` 53,863 crore, an amount of ` 1,03,165 crore were loans outstanding net of borrowings. In other words, the CCBs had made investments of about ` 45,000 crore even beyond their SLR and CRR deposits which could have been very well used for expanding their loan portfolio.

Investments

4.28 Nearly 32% of the resources of the CCBs were kept as investments, and investments at ` 94,769 crore constituted 51% of the deposits. The return on investments worked out to 8.1%.

CCBs in Profit and Losses

4.29 As may be seen from the table below, the number of CCBs making current profits improved substantially by 2011-12 as compared to 2007-08, with about two thirds of the loss-making CCBs in 2007-08 making current profits in 2011-12. Only about 13% of the CCBs are now making losses. This was the result of the loan defaults of PACS being cleared due to implementation of the Vaidyanathan package as well as the agricultural debt waiver and debt relief scheme. The loss amounts however ranged widely from ` 10 lakh in Lalitpur CCB to ` 51 crore in Bolangir CCB.

4.30 During 2011-12, Kolhapur CCB¹⁵ had reported the highest profit amount of ` 79.61 crore, mainly on account of ploughing back of excess provision of ` 62.80 crore. While 36 CCBs earned profit of above ` 10 crore each, 54 CCBs earned profit between ` 5 and ` 10 crore. However, 236 CCBs, or almost two third of the CCBs, earned profits of less than ` 5 crore, and as many as 92 CCBs (25%) earned current profit of less than ` 1 crore.

4.31 116 CCBs still carry accumulated losses of ` 4,334 crore, ranging from as less as ` 16 lakh to ` 199 crore. Twelve CCBs carry losses of above ` 100 crore each.

Costs and Margins

4.32 The costs and margins of CCBs in comparison with RRBs during 2007- 08 and 2011-12 are given in the table below

4.33 While the cost of deposits of the RRBs (5.0% in 2011-12) was lower than that of the CCBs (5.9% in 2011-12), the cost of borrowings of RRBs was significantly higher in 2011-12 (6.3%) as compared to (5.3%) of CCBs. Although, the share of non agri loans of CCBs (49%) was slightly higher in terms of percentage as compared to RRBs (45%), yield on loans of RRBs was higher (9.6%) as compared to CCBs (8.9%). The staff cost of CCBs (1.2%) was significantly lower than that of the RRBs (1.8%). As a result, the operating cost of the CCBs was much lower (1.9%) as compared to RRBs (2.5%).

4.34 The higher financial margin of the RRBs ensured that their net margin remain positive and higher than that of the CCBs (0.4% as against 0.8% of RRBs).

4.35 It can be inferred from the above analysis that the earnings of the CCBs was lower primarily on account of higher cost of deposits.

PACS

4.36 The owned funds of about 90,000 PACS under the three tier and mixed tier structures stood at ` 14,368 crore as on 31 March 2011. The average owned funds per PACS works out to ` 0.16 crore.

4.37 Total deposits of the PACS which were around ` 25,225 crore as on 31 March 2008 increased to ` 37,062 crore as on 31 March 2011 registering an average growth of 15%. The average deposits per PACS, however, works out to ` 0.41 crore only, and excluding the deposits in the three southern states, the average deposits per PACS worked out to only ` 11 lakh.

4.38 Total borrowings of PACS which were around ` 47,375 crore as on 31 March 2008, increased to ` 53,892 crore as on 31 March 2011. The loans outstanding which stood at ` 64,998 crore as on 31 March 2008 increased to ` 87,625 crore as on 31 March 2011. The share of ST loans ranged between 65% to 72% over the period.

Profitability

4.39 Of the total number of 93,000+ PACS, data on profitability for 2010-11 is available for 80,858 PACS. During 2010-11, 54% of the PACS, i.e., 43,850 PACS earned profit of ` 1,756 crore while 46%, i.e., 37,008 PACS incurred loss of ` 1,926 crore.

Performance of Two tier ST CCS

4.40 As on 31 March 2012, the Two tier ST CCS consists of 13 StCBs and 3,668 PACS spread across 13 States/UTs inclusive of 8 NER States, and smaller states like Delhi and Goa. This structure comprises less than 5% of the total outlets of the ST CCS.

State Cooperative Banks (StCBs)

Sources of funds

Owned Funds

4.41 The owned funds of the 13 StCBs comprising share capital, free reserves and other reserves stood at ` 834 crore as on 31 March 2012 as against ` 645 crore as on 31 March 2008. Only 3 StCBs, viz., Arunachal Pradesh, Delhi, and Goa, out of the 13 StCBs have own funds of more than ` 100 crore each.

Deposits

4.42 Deposits at ` 8,160 crore in March 2012 constituted about 77% of the total resources of the StCBs. Aggregate deposits of the 13 StCBs have increased since March 2008 at an average growth rate of around 16% during the last five years. While 4 StCBs had deposits of more than ` 1,000 crore each, 2 StCBs had deposits above `500 crore, 5 StCBs had deposits between ` 100 and ` 500 crore, and 2 StCBs had deposits of ` 95 crore each only.

Deposits by type

4.43 As these StCBs primarily cater to the requirements of town population, they are able to tap CASA deposits of around 57%. In fact, although the StCBs in the two tier structures have CASA deposits of above 50% at the aggregate, CASA deposits in seven StCBs constituted more than 60% of the total deposits.

4.44 Also, in a significant departure from the trend observed so far, around 83% of the total deposits were collected from individuals, around 10% from affiliated cooperatives and the balance of around 7% from local bodies and other institutions.

4.45 A significantly higher share of CASA deposits has resulted in a low average cost of deposits at 5.2%.

Borrowings

4.46 Borrowings of the 13 StCBs stood at only ` 472 crore as on 31 March 2012. Borrowings from NABARD constituted 39% of the total borrowings while borrowings from State Govts and other financial institutions worked out to 30% each. The primary reason for low borrowings is the extremely low share of agricultural business in these states.

Uses of funds

Loans Outstanding

4.47 Loans outstanding of the StCBs in two tier structure which was ` 2,174 crore as on 31 March 2008, increased to ` 3,666 crore as on 31 March 2012. During the period, growth in loans outstanding was around 69%. Short term loans constituted around 23% of the total loans outstanding. Loans to agriculture constituted around 11% of the total loans outstanding. With such low share of agricultural loans and almost all loans being directly provided to clients in urban areas, these StCBs were practically working as urban cooperative banks.

Investments

4.48 Total investments of the StCBs increased from ` 2,800 crore as on 31 March 2008 to ` 5,043 crore as on 31 March 2012. Investments which stood at 64% of the total deposits as on 31 March 2008 declined to 62% of the total deposits as on 31 March 2012.

Profitability

4.49 Eleven of the 13 StCBs earned profit during 2011-12 (please see Table below). During this year, 4 StCBs earned profit of above ` 10 crore each.

The aggregate accumulated losses of 5 StCBs totalled ` 220 crore with Arunachal Pradesh carrying the highest accumulated loss of ` 129 crore.

Costs and Margins

4.50 Cost, margin and financial ratios of StCBs in three and mixed tier vis-avis two tier structures are given in table below (state-wise details given at Annexures 4.1 and 4.3)

4.51 In comparison with the StCBs in the three and mixed tier structures, higher yield on loans which are for non-agricultural purposes and investments have resulted in significantly higher financial margin for the StCBs in two tier structure (3.3% as against 1.2% in three tier StCBs in 2011-12). However, on account of higher staff cost (1.8% as against 0.4% in StCBs in three and mixed tier in 2011-12), the net margin of these StCBs has declined to 0.8%, but still higher than that of the three tier structure at 0.4%

PACS

4.52 Of the 93,000 and odd PACS at in the country, only about 3,700 PACS operate in the two tier structure. These PACS are however in poor financial health in respect of all parameters ranging from paid-up capital to deposits and loans outstanding. Their deposits actually declined from ` 225 crore in 2007 to ` 176 crore in 2011, and loans outstanding also declined from ` 668 crore to ` 142 crore during the same period. Most of these PACS are either defunct or engaged in non-agricultural activities like providing public distribution and other such services.

4.53 As per available data, during 2007-08, 776 PACS earned profit of ` 80 crore and 908 PACS incurred loss of ` 113 crore. During 2010-11, 704 PACS earned profit of ` 85 crore and 958 PACS incurred loss of ` 120 crore. Data in respect of remaining PACS (2,047 PACS for 2006-07 and 2,006 PACS for 2010-11) is not available readily.

4.54 The foregoing analysis shows that conclusions cannot be drawn on operational efficiencies between StCBs in three tier and two tier CCS merely on the basis of structures as these two structures are not comparable as most of the StCBs in two tier system are either located in NER/ backward/ disturbed areas or are urban in character.

Chapter 5
Financial Sustainability of ST CCS

5.1 The terms of reference of the committee included, inter alia, "to identify cooperative banks that may not be sustainable in the long run even if some of them have met the diluted licensing criteria for the time being". Both CCBs and StCBs are federal structures and their sustainability very largely depends on the sustainability of the lower tiers. It is this logic that was the backbone of the Vaidyanathan Task Force recommendations, and the GoI package subsequently designed on its recommendations also followed a bottom-up approach.

5.2 Therefore, a look at the functioning of PACS in greater detail and assessing their sustainability and future role in the light of developments that are taking place in the rural banking sector is needed before the sustainability of CCBs is looked into.

Sustainability and Future Role of PACS

5.3 As mentioned in chapter 2, an essential ingredient of grass roots financial cooperatives is mobilisation of deposits and providing loans from these aggregated deposits, although its resources could be supplemented through borrowings if the deposits are not enough for meeting the requirements of the members. The governance structure of PACS is therefore built around this cooperative principle.

5.4 PACS in 25 states had mobilised an amount of ` 37,238 crore as on 31 March 2011. The aggregate loans disbursed by PACS stood at ` 91,304 crore, or about 2½ times the deposits, suggesting significant requirement of liquidity support from CCBs for meeting the credit needs of the members of the PACS. The aggregated figures however hide the fact that ` 28,210 crore, or almost 80% of the deposits emanated in PACS of only three states, viz., Kerala, Karnataka, and Tamil Nadu, with ` 21,140 crore only in Kerala. Excluding these three states, PACS in the rest of the country had mobilised only about ` 7,000 crore as deposits whereas they had provided loans aggregating ` 47,000 crore which was more than 6 times the deposits mobilised signifying even more acute requirement of funds to be supplemented by CCBs.

5.5 It was obvious therefore, that deposit collection by PACS had to be given importance. The Vaidyanathan Task Force therefore recommended voting rights to be given to all depositors of PACS to enable them to have a say in the governance structure and also suggested that an Institutional protection and Deposit Safety Scheme may be devised to protect the deposits of PACS as they are not covered by DICGC. While steps have been initiated on these recommendations, the ground level banking scenario is not only changing significantly, but changing at a very fast pace, due to the financial inclusion drive as well as the program to transfer all the government benefits directly to the ‘Aadhaar enabled savings accounts’ of the beneficiaries as a national agenda. With the spread of business correspondents of commercial banks and RRBs already covering over 73,000 habitats with population of more than 2,000 in addition to opening of ultra-small and brick and mortar branches of these banks in larger habitats, and introducing similar initiatives in habitats with population of more than 1,000 during the next year, almost all rural households will very soon have savings bank accounts of the banking system where the deposits are protected by DICGC.

5.6 In the light of these developments, the probability of PACS increasing their deposit base significantly when these deposits are not covered by DICGC is not very high. In fact, a flight of deposits from PACS to savings bank accounts of commercial banks and RRBs, even when they are serviced through ultra-small branches or business correspondents, cannot be ruled out. While PACS are expected to play increasing role in provision of agricultural credit, their resource base is not likely to grow, or in fact may become smaller, and the need for their resources to be supplemented by CCBs would further increase, creating not only issues of prudential borrowing but also of corporate governance.

5.7 The principal business of PACS is provision of agricultural credit. The new guidelines for provision of agricultural credit by the banking system require banks to issue ATM and POS device enabled kisan credit cards (KCC) with a combination of distinguishable credit limits for crop production, agricultural investments, working capital for allied activities, and an element of consumption loan. This would require the issuing entity to be on core banking platform with connectivity to ATM switch etc. The possibility of PACS having this facility even in the distant future is remote.

5.8 These developments therefore, require a change in the business model of the PACS as well as the CCBs to which they are affiliated. The RBI guidelines already permit PACS to become business correspondents of commercial banks and RRBs. As and when the CCBs migrate to the core banking platform, it would be ideal for the PACS affiliated to the CCB to become its business correspondent so that all deposits made at PACS level are accounted directly in the books of the CCB and therefore are covered by the DICGC protection, and also major clients of the PACS - the farmers members - are able to get and operate ATM and POS enabled KCCs. The methodology for such transformation in the organisational design and functioning of PACS and CCBs is discussed in chapter 6.

Sustainability of CCBs

5.9 As on 31 March 2011, 149 CCBs had not received banking licence from the RBI. As per NABARD’s latest available inspection reports, 41 unlicensed CCBs did not have CRAR of 4% (in addition to eight CCBs which are already licensed but did not have 4% CRAR), and were thus not eligible to be issued licence by the RBI by 31 March 2012. The RBI therefore, gave time up to 30 September 2012 to enable the banks and the concerned state governments to take steps, primarily through capital infusion, to attain a CRAR of 4%. Many state governments took proactive steps and provided capital in one or the other form to enable some of these banks to have CRAR of 4%, thus enabling NABARD to recommend their cases to RBI for grant of licence. By 30 September 2012, with capital infusion of ` 266 crore in 14 CCBs, and one CCB attaining the 4% CRAR norm on its own, NABARD could recommend these 15 CCBs to RBI for grant of licence.

5.10 As on 30 September 2012, 187 out of 370 CCBs had CRAR of 9% or higher, thus matching the requirements of the banking sector in general. However, 49 CCBs did not have even the diluted norm of 4% CRAR; 26 of these CCBs are unlicensed - 16 in Uttar Pradesh, 6 in Maharashtra, 3 in J&K, and one in West Bengal.

5.11 In other words, 23 CCBs, which had already received licence now, do not comply with even the diluted CRAR norm of 4%. In fact, seven of these CCBs do not comply even with the minimum net worth norm of ` 1 lakh.

5.12 The above analysis means that at least 130 CCBs, or about one third of the total number, need to take serious action for attaining at least 7% CRAR in the next two years, and then to move on to at least 9% CRAR within the next five years.

CRAR of CCBs and their Market Share in Agricultural Credit

5.13 The Working Group on agricultural credit for the 12th Plan had estimated, about three years ago, the total agricultural credit requirement from all the agencies to be in the range of ` 40 - 42 lakh crore during the Plan period 2012-17, with the share of cooperatives estimated at around ` 9 lakh crore during the Plan period. Year-wise, the share of cooperatives was expected to increase from about ` 68,000 crore in 2012-13 to about ` 1 lakh crore in 2016-17. However, as has been seen earlier, agricultural credit from cooperatives has picked up substantially during the past two years, and with increasing refinance support from NABARD has already touched about ` 87,000 crore in 2011-12, an estimate they were expected to reach only by 2015-16. Given this trend, the cooperatives should be able to continue their growth path.

5.14 However, as CCBs are expected to primarily focus on agricultural credit, the effect that such an expansion will have on their CRAR needs to be analysed. The table below presents CRAR and the share of CCBs in agricultural credit in the operational areas for 366 CCBs for which detailed data was available. It is seen that 82 CCBs (71%) out of 115 CCBs, which had 30% or more share in agricultural credit, had CRAR of 7% or above. This goes on to suggest that increasing agricultural lending does not necessarily translate into riskier portfolio so as to have negative impact on CRAR. In fact, it is seen that the non–agricultural portfolio is riskier than the agricultural portfolio. Of the 49 CCBs with CRAR of less than 4%, 38 have less than 30% share in agricultural credit. Low CRAR therefore seems to be a manifestation of poor governance and management rather than the nature of portfolio.

5.15 It is imperative that even if the RBI had diluted the criteria for licensing to 4% CRAR, CCBs and StCBs cannot continue to operate in the banking environment with such a low capital base. These banks would need to take concerted steps to reach the general banking norms in the foreseeable future and a five-year time-frame, i.e., by March 2017 for achieving at least 9% CRAR with an intermediate target of achieving 7% CRAR by March 2015 seems logical. Not only do we need to estimate the additional capital that may be required by these banks, but also how it can be contributed. The unlicensed banks, which do not achieve the CRAR of at least 4% by March 2013, may be debarred from undertaking any banking operations and their agri lending portfolio may be taken over by the neighbouring CCB or the StCB. For assessing the likely capital requirement, the Committee has used 4 different models as described hereunder:

Model 1

5.16 A simple analysis presuming a flat growth rate in all CCBs¹⁶ shows that 209 CCBs¹⁷ spread over 15 states would require an infusion of a little over ` 4,000 crore by March 2015 to attain CRAR of at least 7%, and an additional ` 2,500 crore by March 2017 to achieve CRAR of at least 9%. Although this estimate gives a fair idea of the capital infusion that would be required, the analysis suffers from the fact that a flat growth is assumed for all CCBs irrespective of their past performance and growth capacities.

Model 2

5.17 Another attempt was therefore made to see the capital requirements for achieving these CRAR levels if the present trend of business in the CCBs continues. Due to paucity of data and time, however, this analysis was restricted to a random sample of CCBs. An analysis of 20 CCBs spread over 5 states which presently have a CRAR of less than 4% and most of which are unlicensed, showed that they would require infusion of about ` 2,112 crore for achieving CRAR of at least 9% by March 2017 if they continue to grow at the same pace as at present. The comparable estimate for these 20 CCBs under Model 1 would be ` 1,453 crore ( as given in Annexure 5.1).

5.18 For a sample of 10 CCBs in 5 states (including two unlicensed CCBs recommended for granting license), which have a CRAR between 4% and 7%, capital infusion ` 126 crore would be required if they continue with the present business trends, and would require ` 225 crore under Model 1. As some of the CCBs may have business trends upwards of 15%, restricting their business growth to 15% in fact would put more pressure on them as they would receive lower amounts of loan linked share capital.

5.19 A similar analysis of 5 CCBs across 5 states which already have a CRAR of 7% or above reveals that capital infusion of about ` 29 crore would be required under Model 1 while no additional capital would be required if they continue their business on the same trends as of now.

Model 3

5.20 It is obvious from the above analysis that continuation of the present trend of business is not adequate enough, especially for CCBs with CRAR of less than 7%. It was also seen that many CCBs had less than 15% share in agricultural credit. It could be normally expected that such a situation will prevail in case of CCBs whose own agriculture portfolio was less than 50% of their total loan portfolio. However, surprisingly, this included even CCBs whose agricultural lending constituted more than 50% of their total loan business, and even 100%, as in absolute terms their total business was itself very small. Another attempt was therefore made to estimate the capital requirement if the agricultural credit portfolio was to expand to cover at least 15% of the agricultural credit disbursement in their operational area. An analysis of 16 such randomly selected CCBs spread over 8 states showed that CCBs which already had CRAR of more than 7%, would not require additional capital infusion even if their agricultural credit portfolio is expanded to cover at least 15% of the agricultural credit flow in the operational areas. However, CCBs with lower CRAR would need additional capital ranging from about ` 1 crore to ` 12 crore in addition to the capital required by them under Model 2 for achieving 9% CRAR by March 2017.

Model 4

5.21 Model 4 assumes a high growth trajectory covering both agricultural and non-agricultural credit business for the CCBs. It was obvious that cooperatives need to have, especially in view of their long history of agricultural financing, a meaningful share in the agricultural credit flow in their operational areas, which, in the long run should not be less than 30% if they have to remain an agricultural credit disbursing entity which can influence the credit flow in the region. However, as the national average itself is a paltry 17% at the moment, and almost one third of the CCBs have a less than 15% share in agriculture credit disbursement in their operational areas, the first target needs to be achieving a minimum of 15% share in agricultural credit within the next two years, and then accelerate agricultural credit disbursements to reach at least 30% share in about five years. It would also be necessary to increase loan linked share contribution to atleast 5% in those CCBs where it is lower than 5% and to a maximum of 10% for all kinds of loans and members depending on additional capital requirement of a particular CCB. The aggregate repayment rate of agricultural loans of cooperatives is about 76%, which needs to be stepped up to atleast 90% within five years through better credit appraisal and intensive monitoring. It has been seen that for some of the CCBs almost the entire credit portfolio is agricultural credit. Even this is not conducive to their growth. Such CCBs would have to build up capacities for providing non-agricultural loans and gradually have a share of 20% to 30% of their credit portfolio as nonagricultural loans. These efforts would lead to higher incomes making contributions to reserves possible.

5.22 Model 4 takes into account the above aspects, and the analysis needs to be bank specific based on potential and financials for bringing in such change in the CCBs in the next five years. Due to time constraints, this analysis was limited to a random sample of 16 CCBs. Ten of the 16 CCBs would need about ` 671 crore as additional capital for attaining CRAR of at least 9% by 2017. This means, an additional amount of around ` 224 crore over and above the additional capital needed under Model 3 (Annexure 5.2).

5.23 Based on the exercise carried out under the 4 models, 209 CCBs would require additional capital ranging from around ` 2 lakh to ` 282 crore under model 1. However, the number of CCBs and additional capital requirement would vary when the financial and business parameters are moderated under other models. CCBs with less than 4% CRAR and less than 15% of market share in agricultural credit would need substantial additional capital while CCBs already having 7% or more CRAR but with less than 15% agricultural credit share would generally not require additional capital for sustaining CRAR at 9%. While banks with CRAR of 4-9% and less than 15% agricultural credit share would need additional capital (model 3), most banks with 7-9% CRAR may not need any additional capital. As mentioned earlier, bank specific exercise would be required under models 3 and 4 to assess capital requirements for higher CRAR and higher agricultural credit share.

Strategies and Sources of Capital Mobilisation

5.24 StCBs and CCBs, being cooperative banks, can mobilise their capital only from their members who are also their owners. The same is true for PACS. Capital can be contributed by members in the form of direct share purchase or through share linked loans as has been the practice. The latter however effectively makes the loan costlier to the member and is technically a detrimental step. However, if the cooperative is run well and makes profits, it can disburse dividend against such shares and bring the effective cost of loan down. In fact, this needs to be the strategy that the cooperatives should adopt.

5.25 Certain strategies and measures are suggested below for enabling StCBs and CCBs to raise capital to attain the required higher CRAR.

Share Capital from Members

5.26 As PACS become BCs of CCBs, the entire client base of PACS will become direct clients of CCBs. It would be necessary for CCBs, therefore, to ensure that a depositor or borrower who transacts business at the PACS now operating as BC is a shareholding member of the CCB. The present 4.2 crore borrowing members at the level of PACS, as also depositors, will therefore have to take shares of CCBs while they continue to be members of PACS for availing other services. In tune with this requirement, all the depositors and borrowers of CCBs therefore would become normal shareholding members of the CCB with voting rights for “active members”¹⁸. This transition would allow mobilisation of additional share capital of CCBs by about ` 500 crore on an assumption that atleast one crore new members and converting non-borrowing members to borrower members will subscribe at the rate of ` 500 per member. All the active members who are obtaining other services from the CCBs, viz., benefit of higher interest rate on deposits, fertilizer and other services etc may also be required to contribute additional share capital. Presently, they are nominal members. This measure would help improve the capital and help attain the sustainable CRAR faster.

Transfer of Share Capital Deposit of Vaidyanathan Package

5.27 53,202 PACS were provided ` 8,521 crore by the GoI and ` 825 crore by the concerned state governments as share capital deposits under the Vaidyanathan package for revival of ST CCS. Of this, an amount of about ` 102 crore has been released for attaining of CRAR of 7% as on 31 March 2004 for the PACS concerned. As all agricultural loans including existing loans outstanding at the level of PACS would have to be transferred onto the books of the CCBs, it would be logical that the share capital deposit made with the PACS against agricultural credit losses and improving CRAR be transferred to the respective CCBs unless the same have been eroded.

Enhancing Share Linkage Percentage

5.28 The share linkage (in terms of a percentage to incremental loan outstanding) is observed to be varying from state to state from 1% to 10% depending on the type of loan and the type of borrower. In some cases, a monetary ceiling is prescribed. The share linkage has to be at a higher percentage, since this is ‘the most‘ important source of capital augmentation in terms of volumes and percentage. The cooperatives would need to mobilise additional 2% to 5% through share linking (with a maximum of 10% so that it does not become counterproductive) to help generate additional core capital (Tier I). A quick analysis indicates that the CCBs as a lot would be able to mobilise about ` 6,500 crore through this method. The concerned cooperatives may have to amend their bye-laws for taking this step.

5.29 The following steps are suggested for consideration of RBI as these will help the StCBs and CCBs significantly in augmenting their capital base.

Introduction of Interest bearing Capital Deposits

5.30 A new instrument in the form of Share Capital Deposit from members could be approved by RBI to be treated as Tier-I Capital. This instrument may have options to give a special dividend in the form of a fixed interest being paid. The individual banks could stipulate such capital deposits with a lock-in period of atleast 5 years and maturity period of 10 years or more. After attaining sustainable CRAR level, banks could convert these deposits into regular shares eligible for payment of dividend.

Introduction of Perpetual Long-Term Bonds

5.31 RBI may allow StCBs and CCBs to float such Bonds on the line of perpetual long-term bonds¹⁹. These may be permitted as Tier-I Capital for CRAR calculation for atleast 10 years or till attaining the sustainable CRAR level. Both Central and state governments may consider contributing to such bonds.

Long term debt

5.32 State government may keep deposits with StCBs/CCBs as long term debt for a period of 10-20 years without any interest or with nominal interest. Such debt may be kept with cooperative banks as share capital deposit for helping banks to attain higher CRAR²⁰ and the same may be reckoned as Tier I capital till the bank sustains CRAR of 9% (say at least 5-7 years). Such debts will have moratorium period of at least 5 years.

Reckoning of Tier II Capital

5.33 In a few banks, it is observed that Tier II Capital is more than Tier I. As per the existing stipulations of RBI, the Tier II capital can be counted upto a maximum extent of Tier I. RBI may consider giving a relaxation for 5 years to treat Tier II capital up to at least 150 % of Tier I towards CRAR compliance.

Chapter 6
Strategies for higher CRAR and Consolidation

6.1 As per ToR 2, sustainability of banks was assessed for higher CRAR and additional capital requirement of banks was estimated wherever needed under different models. The findings of analysis and a few strategies for capital mobilisation were discussed in Chapter 5. As observed, 209 CCBs would need additional capital under various models for CRAR of 7% by 2014- 15 and 9% by 2016-17.

6.2 In this chapter, an attempt is made for assessing feasibility of mobilising additional capital for 209 banks for attaining CRAR of 7% by 2014-15 and 9% by 2016-17 and sustaining the same. As per the assessment indicated earlier, total additional capital requirement was estimated at about ` 4,000 crore to ` 6,500 crore under different models. Bank wise requirement would vary widely depending on each bank’s financials and business. Further, it was attempted to identify the banks, which will not be able to mobilise required capital by using either one or all the strategies and may have to eventually go for consolidation or closure. The results of consolidation and future 5 years’ financial position was also assessed for a few sets of banks to examine their sustainability.

6.3 As mentioned earlier, the additional capital requirement would undergo change if higher growth in business and in agri credit were applied (Model 4).

6.4 It was observed that 58 CCBs with CRAR of less than 7% were very sensitive and would not be able to attain 7% CRAR by 2014-15 without external fund support. Further, these banks may not sustain CRAR of 7% and 9%, even with increased growth in business and agri-credit and a higher market share. These include 26 CCBs which are unlicensed, 21 CCBs licensed but not having CRAR of 4% and a set of 11 other CCBs including CCBs which have received capital infusion for achieving CRAR of 4%.

6.5 Various possible measures for different categories of CCBs were applied to examine the sustainability of CCBs and to find out suitable measures specifically for certain categories of banks. This approach was needed, as a uniform prescription of actions would not help all types of banks.

Measures for different categories of CCBs

6.6 As per Model 1 assessment, the likely total additional capital requirement for CCBs worked out to ` 4,024 crore for 7% CRAR and ` 6,498 crore for 9% CRAR to be mobilised by 209 banks during the next five years. The likely additional capital requirement varied widely from ` 1.84 lakh (Jabalpur CCB) to ` 282 crore (Solapur CCB). The feasibility of mobilising additional capital is discussed hereunder for different groups of banks.

6.7 Out of 41 unlicensed CCBs as on 31 March 2012, 26 remained unlicensed and 15 could attain CRAR of atleast 4%. Another 23 CCBs were licensed but had CRAR of less than 4%. These banks are discussed separately in the following paragraphs.

Unlicensed CCBs

6.8 A decision on the continuation of these 26 unlicensed banks is under consideration of RBI since some State Governments (such as Maharashtra) are in the process of firming up their decision on infusion of capital. The fund requirements of the 26 unlicensed CCBs is likely to be around ` 2,114 crore for 4% CRAR (relaxed norm for license) at the first stage. Further, the likely additional capital requirement of these would be around ` 2,263 crore for 7% CRAR by 2014-15 and ` 2,391 crore for 9% CRAR by 2016-17 (Annexure 6.1).

Licensed Banks with CRAR of less than 4%

6.9 Under this category, 21 of 23 CCBs having CRAR of less than 4% are likely to require additional fund of about ` 912 crore for 7% CRAR by 2014-15 and about ` 1,373 crore for 9% CRAR by 2016-17. The capital requirement varied from ` 7 crore (Nawadha CCB) to ` 275 crore (Kolhapur CCB). Bank-wise requirement is given in Annexure 6.2. The balance two banks, viz., Sangli CCB and Kottayam CCB will not need any additional capital and would sustain on their own for 9% CRAR by 2017.

Unlicensed Banks recommended for licence in 2012-13

6.10 15 CCBs may get licence from RBI in 2012-13 which had attained 4% CRAR on receipt of government funds of about ` 286 crore (by 14 CCBs) and 1 CCB (Aurangabad in Bihar) on its own and NABARD has recommended to RBI for issuance of licence to these CCBs. However, 5 of these banks would be required to mobilise additional capital of ` 6.77 crore for a 7% CRAR by 2014-15 and 7 banks would require additional capital of ` 29.3 crore for 9% CRAR by 2016-17 (Annexure 6.3).

6.11 The Committee recommends that 31 March 2013 may be set as the deadline for these banks to mobilise the required capital either internally or from any other external source so as to achieve 4% CRAR failing which RBI should take the necessary regulatory action.

CCBs with 4% to 7% CRAR

6.12 Under this category, there are 77 banks, of which 66 banks require additional capital. 16 banks would not require any additional capital for 7% CRAR by 2014-15 while the remaining 61 banks would require capital to the extent of ` 805 crore. For attaining 9% CRAR by 2016-17, 66 banks would require an additional amount of ` 1,923 crore (please see table below). The banks are spread across states and the requirements varied from bank to bank, as given in Annexure 6.4.

Banks with CRAR of 7% and above

6.13 There are 229 banks under this category, of which only 18 banks would require additional capital of ` 37.2 crore for maintaining 7% CRAR by 2014-15, while 88 banks would require additional capital of about ` 781 crore for 9% CRAR by 2016-17 (please see the table below). The amount of additional capital to be mobilised would be in the range from ` 7.00 lakh (Etah CCB) to ` 82 crore (Mumbai CCB). Bank-wise requirement is given at Annexure 6.5.

Feasibility of mobilisation of additional capital

6.14 193²¹ of 209 CCBs were taken up for detailed analysis for finding out feasibility of mobilising additional capital from borrowing and other members of PACS and identify CCBs which would not be able to mobilise funds from members for meeting additional capital requirement for CRAR of 9%.

6.15 CCB-wise analysis was carried out for assessing the feasibility of mobilising additional capital requirement which ranged from ` 1.84 lakh to ` 282 crore. The frequency distribution of capital requirement of 193 CCBs is presented below in the table.

As seen, 9 CCBs require additional capital of less than ` 1 crore (ranging from `1.84 lakh to less than `1 crore), while 29 CCBs would require additional capital of above `50 crore (ranging from `50 crore to `282 crore).

Per PACS basis

6.16 It was observed that 151 CCBs would require additional capital upto ` 25 lakh per PACS which varied from a low of ` 2,000 to a high of ` 25 lakh. Another set of 41 CCBs would require additional capital of ` 5 crore to above ` 50 crore. However, the average per PACS works out to less than ` 25 lakh for 30 CCBs and upto ` 1 crore per PACS for another 2 CCBs. Only 1 CCB (Thiruvananthapuram) requires ` 140.50 crore which works to ` 1.34 crore per PACS. Considering the limitations of capital mobilisation by CCBs from sources other than the members, it is felt that ` 25 lakh per PACS can be taken as a probable and achievable limit to be mobilised by each CCB in accordance with its requirement over the next 4 year period (2013-14 to 2016-17) as additional capital for 9% CRAR. However, 42 of the 151 CCBs may find it difficult to mobilise the regular capital for attaining and maintaining CRAR level of 9% by 2016-17.

Per Borrowing Member basis

6.17 However, as capital has to be contributed technically only by members, further analysis was done to assess the feasibility of capital mobilisation on per borrowing member basis for 193 of 209 CCBs.

Category A

6.18 Of the 151 banks required to mobilise upto ` 25 lakh per PACS, 127 would be able to do so if they mobilise upto ` 4,000 per borrowing member over 4 year period (as shown in table below). It would perhaps be feasible to mobilise capital as interest bearing capital deposits²². 24 of 151 CCBs would however require mobilising more than ` 4,000 to even beyond ` 10,000 per borrowing member, which appears to be not feasible under most circumstances. However, each CCB can assess its capital requirement and the feasibility in mobilisation for deciding its own road map for additional capital mobilisation.

Categories B and C

6.19 Out of the 42 CCBs required to mobilise more than ` 25 lakh per PACS, 24 CCBs would need to mobilise from PACS’ borrowing members amounts upto ` 4,000/- which seems quite feasible although the absolute amounts per CCB are large. In all, therefore, a total of 151 CCBs (127+24) should be able to mobilise required additional capital if members contribute upto ` 4,000 per member (Annexure 6.6). In this process of additional capital mobilisation, per borrowing member contribution would be upto ` 500 (51 CCBs), ` 500 to ` 1,000 (28 CCBs), ` 1,000 to ` 2,000 (38 CCBs) and ` 2,000 to ` 4,000 (34 CCBs). The remaining 42 CCBs of 193 may not be in a position to mobilise adequate capital from borrowing members of the PACS.

6.20 Efforts therefore need to be initiated by CCBs to convert more non-borrowing members as borrowing members and also enrol additional members. CCBs can strive to mobilise capital additionally from other non-borrowing members and other members availing services as well. In this process, they may mobilise required funds to the extent of about ` 500 crore (@ ` 500 for additional 1 crore such members, as mentioned in chapter 5)

6.21 It may therefore be concluded that 151 CCBs should be able to mobilise the required additional capital. These CCBs should prepare the Sustainable Business Plans (SBPs) after assessing exact requirement of additional capital based on performance as on March 2013 for attaining CRAR of 9% by 2016-17 under Models 2 to 4 from the borrowing members or in combination of other efforts. NABARD and RBI would need to monitor the implementation of SBPs on a regular basis.

6.22 Remaining 58 CCBs would not be able to easily attain CRAR of 9% for sustainability since per borrowing member contribution would be beyond `4,000 and above ` 10,000 in some cases, which is considered to be very high for a farmer to contribute over a period of 4 years. However, individual banks would have to strive to mobilise the required amounts for survival.

6.23 In case any CCB fails to mobilise the additional capital either from members or from any other source, there would be no alternative but to adopt the following two options:

1. Consolidation of banks wherever feasible, and

2. If consolidation fails, closure or liquidation.

Consolidation

6.24 The primary objective of consolidation is to make the CCBs sustainable by combining 2 to 4 CCBs so that the combined unit can sustain the CRAR level of at least 9% with a small amount by way of additional capital, which is possible to be generated by the bank from its own operations and additional member contributions.

6.25 There are also small banks with limited business and functional areas as their branch network is limited, or they are functioning in smaller and remote areas. CCBs also became smaller as a consequence of division of districts in various states. Right-sizing of operations of such CCBs is also required²³. Many CCBs are having CRAR of above 9% at present²⁴ but have less than ` 200 crore business (deposits+loan outstanding). Such small CCBs would not be able to sustain in the long run, even though some of them presently have 9% CRAR. Hence, consolidation is necessary (Annexure 6.7).

Methodology

6.26 An exercise of consolidation is attempted taking into account both financial and non financial parameters:

a) Consolidation in contiguous geographical areas, where 2 to 4 banks can consolidate with each other with the primary objective of having bigger operational areas, economy of scale, profitability and sustainability.

b) Minimum business level should be at least ` 200 crore.

c) Consolidation would primarily be with CCBs and in case it is not feasible to get desired results, then consolidation with StCBs can be attempted.

d) Where consolidation is not feasible (banks being in isolated areas etc), the weaker banks will have to go for liquidation.

Expected results

6.27 The following results are expected as outcome of consolidation:

• Have at least 70% of loan business for agriculture and allied activities including both short term and medium term loans.

• Enhance business level and attain at least 15% market share of agri- credit and further increase this share to about 30%.

• Adopt technology with appropriate software for MIS generation and also issue AADHAR enabled KCC, and provide ATMs, remittance services, etc. through technological upgradation.

• Increase the level of branch and staff productivity and profitability.

Process and issues

6.28 The general bodies of the CCBs, which may be consolidated, will have to take appropriate decisions as required in the Cooperative Societies Act of the State.

6.29 HR issues such as, seniority, posting, transfer etc., would also arise and may be resolved as has been done in the case of amalgamation of RRBs. In some cases, voluntarily retirement plan may also have to be designed in the interest of the bank and the employees.

Legal framework

6.30 The Cooperative Societies Act has provisions for amalgamation of a CCB with two or more such CCBs and assets and liabilities can be transferred from the existing unit to the amalgamated bank. Provisions in the Societies Act in UP are not explicitly clear of this option and in a few other States (AP, Gujarat, Karnataka) have limited power for amalgamation. Hence, necessary amendments may be required in the respective Cooperative Societies Acts.

Requirements for Implementation

6.31 A Working Group may be constituted in each state where such an exercise is required to look into various aspects such as

a. Study the legal framework of the state and suggest required amendments.

b. Assess the need for consolidation of CCBs which would be unable to mobilize additional capital and identify the neighbouring CCBs for consolidation after having detailed discussions with all stakeholders;

c. Prepare a projected business and financial plan (as per Models 2 and 4) for ascertaining the attainment of CRAR level of 9% by 2017 and also its sustainability.

d. Assess the need for additional capital and mobilization ability for attaining and ensuring sustainability of 9% CRAR.

e. Assess the feasibility of mobilizing such capital from members and other stakeholders including state government.

f. Address any other matters related to the amalgamation.

Analysis of consolidation

6.32 To assess the feasibility of proposed consolidation, an exercise was carried out, wherein latest financial position of such CCBs identified for consolidation, likely status of the CCBs on consolidation and projected financials including likely CRAR of the consolidated CCBs over next five years was worked out. For projecting the financial position of the consolidated CCB, assumptions / methodology for Model 1 discussed in Chapter 5 were adopted as an initial assessment to examine the possibility of attaining CRAR of 9% by 2017.

Illustrations

6.33 Based on the latest financial position, 37 combinations (5 in West Bengal, 1 in Kerala, 5 in Punjab, 10 in Rajasthan, 9 in Bihar, 4 in Maharashtra and 3 in Odisha) involving 90 CCBs, having contiguous geographical locations were identified for an illustrative exercise and should not be quoted as a prescription of the Committee. These CCBs in Punjab had CRAR ranging from 0.56% to 42.35%, CCBs in Rajasthan with CRAR from 0.12% to 19.91%; CCBs in Bihar with CRAR from -11.14% to 55.10% and so on (as given in Annexure 6.7). Business level of the CCBs in Punjab, Rajasthan and Bihar was ranging from ` 215 crore to ` 1,056 crore, from ` 164 crore to ` 788 crore and from ` 33 crore to about ` 250 crore respectively. Combination of Thiruvananthapuram CCB with the highest amount of business of ` 4206 crore with Kollam CCB was also taken up. It was observed from the combinations that uniformly consolidating the financials (balance sheet as on 31 March 2012) of 2 banks²⁵ would not help in all the cases to arrive at CRAR of 4%. Hence, 3 or more banks may have to be taken depending on the financial conditions of weak and strong banks.

Results of a few samples

6.34 Some possible combinations have been made in 5 states by combining 2 to 4 banks and tested for sustainable CRAR. A few of these combinations are given in table below. It may be seen that the consolidated bank will have sustainable CRAR with some capital infusion in some cases. These 12 consolidated banks were taken for further testing as per Models 1 and 2 for assessing sustainability (as given in Annexure 6.8). It is observed that combined banks still need additional capital (4 out of 5 combinations) under Model 1.

6.35 Further testing under Model 2 showed that 3 combinations (as shown in table above) would not require any additional capital, whereas 2 combinations, i.e., 1 in Odisha - Bolangir and Bhawanipatna need ` 2 crore in 2014-15 for 7% CRAR while the other combination in Rajasthan, i.e., Alwar, Bharatpur and Dausa CCBs may need ` 8.5 crore in 2016-17 for 9% CRAR.

6.36 The illustrative examples mentioned above clearly indicate that there is a need for assessing additional capital requirement for each of the banks as also for the consolidated banks for actually working out the CRAR level of 9% by 2016-17 on the basis of the Model 2 to 4 (since uniform growth rate in business and profitability as assumed in Model 1 will not work for all the banks).

6.37 It is observed that for CCBs which required huge sums of additional capital for 9% CRAR, such as Solapur (` 282 crore), Kolhapur (` 275 crore), Deoria Kasia DCB (` 174 crore), Jammu CCB (` 201 crore) and Nagpur CCB (` 151 crore), it would not be feasible to take them up for consolidation without any external capital infusion either from the members or from any external source. Many of such banks have actually incurred huge losses not due to their agricultural lending portfolio but because of other business and investments. It would therefore be logical that such banks are taken up for closure/ liquidation after taking out their agricultural credit portfolio and consolidating only that part with other CCBs.

PACS as Business Correspondents (BC)

6.38 The need for PACS to function as BCs of CCBs has been articulated in para 5.8 of Chapter 5.

6.39 Functionally, while working as BCs, the loaning operations as also deposits collection will be carried out by PACS on behalf of CCBs and will be on the books of the CCBs, hence imbalances between the PACS and CCBs would not arise. While PACS will carry out their traditional operations on behalf of CCBs²⁶ and earn agency fees without any risk, a proper mechanism needs to be developed in this regard. This will also enable PACS to increasingly provide other agricultural and non-agricultural services to the members who would now be members of both the PACS as well as of CCB.

6.40 NABARD has taken a lead for creating a common CBS system in over 200 CCBs and StCBs across the country. It is also creating the required ICT support infrastructure in the form of POS terminals and ATM card, as well as arranging required capacity building in CCBs. This will help CCBs to provide doorstep banking facilities using the services of PACS as BCs. This will also enable the member clients of CCBs and PACS to connect to the national payment system and avail all types of financial services. This can be implemented in any CCB or StCB having stabilized CBS branches. The Committee also proposes that a deadline of 30 September 2013 may be prescribed by RBI for all CCBs and StCBs to be fully operational on CBS and also to be part of the payment gateway through RTGS and NEFT and connectivity to the ATM or switch either directly or through a sponsor bank.

Chapter 7
Policy Measures and other Initiatives Required

7.1 The Committee observed that while mobilisation of the required capital by the concerned CCBs may help meet the CRAR requirements, the CCBs and StCBs will have to take many other steps in improving internal systems, adoption of technology, and improvement of human resources if they have to survive and function as an efficient banking institutions. PACS will also have to undergo a structural transformation while working as BCs and aim at providing multiple financial and non-financial services to member farmers and other rural population. These would require various policy measures and initiatives to be undertaken not only by the ST CCS, but also by the concerned state governments, RBI, Central Government and others. These measures and initiatives are indicated in the paragraphs below.

Membership of CCBs

7.2 At present, the CCB is a federal structure with PACS and other cooperatives being the principal members and having voting rights for the purpose of electing the Board of Directors of the CCB. However, as indicated earlier, when the CCBs start providing deposit and loan products to the rural population with PACS acting only as business correspondents, these depositors and borrowers will become direct clients of CCBs. In order to ensure good governance, it would be necessary that these depositors and borrowers become voting members of the CCB, subject to their being defined as “active members” as per the recent Constitutional amendment for cooperatives. It would be necessary to define “active member” in terms of amount of deposit and period for which the deposit is kept so far as depositors are concerned, and similarly in terms of amount of loan taken and the status of such a loan in terms of default, in the case of borrowers. That authority to prescribe parameters of deposits and loans for defining active members shall vest with RBI or an agency authorised by RBI.

7.3 These initiatives would require suitable amendments in the respective State Cooperative Societies Act with necessary changes in Rules and Byelaws. PACS will have to enter into a suitable agreement with the CCB for which it acts as business correspondent for payment of service fees. The members of PACS will then be farmers and others who avail of services directly provided by the PACS which would include services like sale of farm inputs, leasing out of equipments, provision of warehousing space to member farmers, provision of services like payment of electricity bills, insurance premium etc. as well as many other non-financial services like sale of household goods etc. If the PACS is in a position to also work as an extension centre for member farmers in collaboration with an appropriate technology service provider, such services would also be included and farmers availing of such services would need to become members of PACS. However, PACS not being any longer borrowing entities of CCBs, would not be having voting rights for elections to the Board of Directors of the CCB. Necessary amendments to the respective State Cooperative Societies Act with necessary changes in Rules and Byelaws would have to be carried out.

Role, Status and Functions of StCBs

7.4 To the extent the StCBs are able to mobilise deposits from individuals, cooperatives other than CCBs and governmental institutions and agencies, they would continue to provide a useful service to CCBs in terms of supplementing the liquidity of CCBs which need it. StCBs could also continue to act as aggregators of refinance requirements on behalf of member CCBs and take necessary action for borrowing and disbursing the same to the CCBs although, technically, CCBs being independent banks can avail of such refinance directly from higher financing institutions, and there needs to be an enabling provision to this effect irrespective of their federal relationship with the StCB.

7.5 It has been mentioned in earlier chapters that the StCBs and CCBs need to move towards providing about 70% of their loans for agriculture inclusive of crop loans and term loans for making capital investment in farms, and about 30% of their loan portfolio should be diversified as a risk mitigating measure. To facilitate such diversification in a safe manner, the Committee recommends a higher allocation to StCBs (and CCBs led by the concerned StCB) in the food consortium advances by the banking system for a period of at least 10 years.

7.6 It has been mentioned earlier that CCBs place their SLR and CRR deposits with StCBs and a regulatory issue arises when the same StCB disburses loans to the concerned CCBs or to others, thus placing the SLR and CRR deposits of CCBs to risk. Opportunities, direction and guidance for making safe investments of such deposits therefore need to be provided to StCBs by the RBI.

7.7 At present, there is a single StCB in each state although there are enabling provisions for more than one StCB in a single state²⁷. The Committee has noted that states have been divided in the past due to a variety of reasons. Following such divisions, division of StCBs has also been done in many cases. The Committee feels that division of a business entity only due to division of administrative boundaries may not necessarily result in efficient and profitable divided entities. The Committee therefore recommends that if a state is divided the possibility of the existing StCB functioning as a multistate cooperative bank should not be overlooked. Necessary amendments in the Multistate Cooperative Societies Act, BR Act, and NABARD Act would therefore be required to enable the functioning of a Multi-state apex cooperative bank which is federal in character.

7.8 At present, the StCB is not only a banking entity for the affiliated CCBs, it is also expected to provide guidance, technical support, support in human resource development through training and other such initiatives, and handholding support for many other activities. The Committee notes that quite often business and banking decisions of the StCBs which are bottom line oriented could be in conflict with development initiatives which the StCBs are expected to take as these are in the nature of expenditure. The Committee therefore recommends that CCBs and other cooperatives should either avail the services through other professional entities or financially support the formation and operations of a separate federal cooperative for providing only non-financial services to the member CCBs²⁸.

Governance and Management of StCBs and CCBs

7.9 The Vaidyanathan Task Force had recommended various measures for improving governance and management in StCBs and CCBs. The present Committee endorses the same and makes following recommendations to further improve the governance and management in StCBs and CCBs.

i. An autonomous cooperative election authority to be set up in each state as per the requirements of the Constitutional amendments would conduct elections for StCBs and CCBs also. On lines of the conditions of the Vaidyanathan Task Force for election to PACS, the Committee recommends an amendment in the respective State Cooperative Societies Act to provide that any director on the board of CCB or StCB removed or superseded by RBI for any financial irregularity or if the bank incurred losses in any three years during their term of five years may be barred from contesting elections in that CCB or StCB or any other CCB for a period of five years.

ii. Being banking institutions, the authority to remove the boards of StCBs and CCBs needs to be solely vested with RBI. Necessary amendments in the BR Act and the State Cooperative Societies Act would have to be carried out to ensure overriding powers of RBI vis-à-vis any other law.

iii. The Fit and Proper criteria presently prescribed by RBI for election of professionals to the boards of CCBs and StCBs stipulates three professionals to be either elected or to be co-opted with voting rights in case such number does not get elected. The recent Constitutional amendment puts the number of such professionals in cooperatives at two. Suitable amendment in the BR Act giving RBI overriding powers to prescribe the number of professionals generally for StCBs and CCBs, as well as specifically for a particular StCB or CCB as part of regulatory action, needs to be made. A modification in the present RBI order on Fit and Proper criteria for Board of Directors is also required to specify that each such professional should be of a separate specialisation. Such professional directors, if required to be co-opted, also should be co-opted within three months of the constitution of the board of the CCB or StCB failing which RBI should be free to take any necessary regulatory action.

iv. The Constitutional amendment prescribes that the panel of statutory auditors would be recommended by the state. However, CCBs and StCBs being banking institutions, the authority for appointing statutory auditors needs to be vested with the RBI or an agency authorised by RBI.

v. In order to provide better and more efficient financial services to the farmers and other rural population, if any PACS wishes to function as the BC of a CCB registered in a district other than in which the PACS is located and the CCB is in agreement to provide financial services in the operational area of that PACS by taking up that PACS as its BC, it should be free to do so. In such an event, the RBI would be required to modify the banking licence provided to the CCB for expanding its operational area to that district where such a PACS is located.

vi. At present, some of the State Cooperative Societies Acts²⁹ contain provisions which restrict the flexibility of StCBs and CCBs in taking business decisions like prescribing the percentage of share linkage on loans, making investments, payment of dividend, etc. Necessary amendments in the State Cooperatives Societies Acts would be required which give complete freedom to the CCBs and StCBs to take such business decisions within the directions and guidelines prescribed by RBI.

Other recommendations

7.10 The Committee recommends that 30 September 2013 may be set as the deadline for all the StCBs and CCBs to be not only fully operational on CBS but also be part of the payment system through RTGS and NEFT, and also provide transactions through any ATM and POS devices which may be placed with PACS, input suppliers etc.

7.11 State and Central governments may take required steps to involve StCBs and CCBs in the financial inclusion drive and electronic benefit transfers (EBTs). The governments may also consider placing deposits of governmental agencies and entities with StCBs and CCBs which have achieved 7% sustainable CRAR and are already on core banking platform.

7.12 The depositors and borrowers of CCBs and StCBs also need to be part of a grievance redressal mechanism in the nature of Ombudsman instituted by RBI and the Committee recommends that all licensed CCBs and StCBs may be covered by the Ombudsman or a similar mechanism that may be developed by RBI with NABARD.

7.13 With the CCBs and StCBs moving onto the CBS and other ICT platforms, their human resource requirements would no longer be governed by the Mitra Committee recommendations made as a follow-up of the implementation of the Vaidyanathan package. RBI may like to constitute a working group to look into these issues and make suitable recommendations.

7.14 As a large number of CCBs and StCBs are required to augment their capital, the Committee recommends that the Government of India may consider providing income tax exemption to CCBs and StCBs up to 2016-17 for incentivizing them to achieve CRAR of 9%.

7.15 RBI may consider graded CRAR norms for CCBs and StCBs of different businesses sizes.

ANNEXURES AND APPENDICES

Annexure 1.1

Chief General Manager
DO RPCD.CO.RCBD. 593 /07.06.000/2012-13

July 23, 2012

Dear Dr. Prakash Bakshi

Expert Committee to examine Three-Tier-
Short Term Cooperative Credit Structure (STCCS)

i) To assess role played by State & District Central Cooperative Banks in fulfilling the requirement of agriculture credit, the primary purpose for which they were set up

ii) To identify Cooperative Banks that may not be sustainable in the long run even if some of them have met the diluted licensing criteria for the time being

iii) To suggest appropriate mechanism for consolidation by way of amalgamation, merger, takeover, liquidation and delayering

iv) To suggest pro-active measures that need to be taken in this direction by the cooperative banks themselves, GOI, State Governments, RBI and NABARD

v) Any other issues and concerns relevant to the subject matter.

2. It gives me great pleasure to inform that you have been nominated Chairman of the Expert Committee, which is as under;

3. The Committee is required to submit its report within three months of the date of its first meeting.

With best regards,

Annexure 3.1

Annexure 3.2

Annexure 3.3

Annexure 3.4

Annexure 3.5

Annexure 4.1

Annexure 4.2