The co-operative banking system has served a useful role of spreading banking habits throughout the country. However, a majority of co-operative banks is yet to achieve financial viability on a sustainable basis despite their long years of existence and hence attention is being paid to the reforms in both rural and urban co-operative credit system. In respect of the rural co-operatives, the Central Government constituted a Task Force in April 1999 under the chairmanship of Shri Jagdish Capoor, Deputy Governor of the Reserve Bank, to study the functioning of these institutions and to suggest a package for their revival/ restructuring. The Committee submitted its recommendations to the Central Government in July 2000. With a view to strengthening the primary (urban) co-operative banking sector, the Reserve Bank had constituted a High Power Committee in May 1999 under the chairmanship of Shri K. Madhava Rao, former Chief Secretary, Government of Andhra Pradesh, which submitted its Report in November 1999. The recommendations of the Committee are being examined by the Reserve Bank/Central Government. Based on the recommendations of the Committee, the Reserve Bank has revised the entry point norms (EPNs) of PCBs.

3.2 A number of policy initiatives have been undertaken in recent years to improve the financial strength of co-operative banks – both rural and urban. NABARD continued to bestow its focused attention in improving the rural credit delivery system. The ongoing Kisan Credit Card Scheme and the scheme of credit-linking the Self-Help Groups (SHGs) were pursued vigorously in 1999-2000. Several other initiatives were undertaken to augment the flow of credit to rural farm and non-farm sectors. Concerned with the financial weaknesses in the co-operative banks, NABARD also took several measures to sharpen its supervisory tools and laid stress on strengthening the audit process in these banks.

3.3 The Central Government, through the Union Budget 2000-01, has also announced a number of measures which would help in meeting the credit requirements of the rural sector. Important among them are : (i) creation of Micro Finance Development Fund in the NABARD with an initial contribution of Rs.100 crore from the Reserve Bank, NABARD, banks and other financial institutions, (ii) creation of Rural Infrastructure Development Fund-VI with a corpus of Rs.4,500 crore and reduction in the rate of interest on loans out of this fund, (iii) setting up of target coverage of one lakh SHGs by NABARD and SIDBI during 2000-01, (iv) creation of a fund in the NABARD for promoting genuine co-operative institutions, and (v) setting up of a target of issuing additional 75 lakh Kisan Credit Cards by the banking system during 2000-01.

3.4 The co-operative banking system in India is structured as follows: the urban areas are served by the Primary (Urban) Co-operative Banks (PCBs/UCBs) which includes salary earners’ banks, whereas the rural areas are largely served by two sets of institutions dispensing short-term and long-term credit, respectively. The former group has a three-tier structure with the State Co-operative Banks (StCBs) at the apex level, the District Central Co-operative Banks (CCBs) at the intermediate level and the Primary Agricultural Credit Societies (PACS) at the grass root level. Under the long-term credit structure, State Co-operative Agriculture and Rural Development Banks (SCARDBs) are at the apex level and the Primary Co-operative Agriculture and Rural Development Banks (PCARDBs) are at the base level. Against this backdrop, this chapter reviews the progress of various segments of co-operative banking system in terms of their business growth and financial performance on the basis of the latest available data. The chapter also highlights the role of the NABARD in improving cooperative banking system.

3.5 Establishment of urban co-operative banks was perhaps the first ever attempt at micro-credit dispensation in semi-urban and urban areas. Initially, the State Governments under the provisions of their respective State Co-operative Societies Acts regulated/ monitored these co-operative banks. However, as the operations of the urban co-operative banks and their volume of deposits increased significantly, the need for regulating their activities in order to ensure their soundness as well as to protect the interests of depositors has been receiving increasing focus.

3.6 The norms relating to asset classification and provisioning, valuation of investments, credit exposure ceilings, which were prescribed for commercial banks were also extended in respect of Primary (Urban) Co-operative Banks (PCBs) during 1999-2000. Further, the ambit of priority sector advances was widened in line with that of commercial banks.

3.7 There was a significant rise in the number of licensed PCBs during the year 1999-2000. Out of the total 2,050 PCBs, the number of licensed PCBs stood at 1,849 as at the end of March 2000 as against 1,692 as at the end of March 1999. During the year, 114 new banks and 43 existing unlicensed banks were issued license under Section 22 of the B.R.Act, 1949 (as applicable to cooperative societies) (AACS).

3.8 The on-site financial inspection carried out under Section 35 of the B.R.Act 1949 (AACS), at annual intervals in respect of scheduled PCBs and weak banks and once in two years in respect of all other PCBs, is one of the main instruments of supervision over PCBs. During 1999-2000 (July-June), the Reserve Bank carried out statutory inspections of 828 PCBs, as against 636 PCBs during the corresponding period of the previous year.

3.9 Based on the recommendations of the High Power Committee on Urban Co-operative Banks (Chairman: Shri K. Madhava Rao), the Reserve Bank has revised the licensing policy of new PCBs. The main thrust of the policy is on strong capital and corporate governance. The Reserve Bank has revised the EPNs and prescribed four categories of EPNs based on population criteria. As per the new norms, PCBs should have share capital of Rs. 4 crore and membership of at least 3,000, if the population is over 10 lakh. A share capital of Rs. 2 crore and membership of at least 2,000 are required for population of 5-10 lakh, Rs. 1 crore and membership of at least 1,500 for population of 1-5 lakh and Rs. 25 lakh and membership of at least 500 for population of less than 1 lakh. The new PCBs will be required to achieve the prescribed share capital and membership before license is issued to them. PCBs which will remain unit banks have been prescribed a 50 per cent relaxation in the entry point capital. Norms for special category of banks will continue to be relaxed. Promoters cannot, however, seek multiple relaxation in EPNs on the grounds of special category and unit banks. As regards corporate governance, there should be at least two directors with suitable banking experience or persons with relevant professional qualifications.

3.10 The Reserve Bank continued to extend refinance facilities in respect of advances granted by PCBs to tiny/cottage industrial units covered under 22 broad groups of industries at the Bank Rate. During 1999-2000, refinance facilities were sanctioned to the extent of Rs.4.0 crore to three PCBs, as against Rs.3.1 crore during 1998-99.

3.11 Data on priority sector lending for the period ended March 1999 were available only in respect of the 1,410 PCBs. The above data showed that 1,191 banks (84.5 per cent) achieved the stipulated target (60 per cent of their total advances) of priority sector lending and 963 (68.3 per cent) banks fulfilled the required level (25 per cent of total advances) of lending to weaker sections under priority sector.

3.12 In order to have effective monitoring of the PCBs, they are classified as weak banks or strong banks based on certain performance criteria. The number of PCBs classified under weak category showed a marginal rise and stood at 261 as on March 31, 2000 as against 250 as at end March 1999. During 1999-2000, 104 weak banks could not comply with the requirement of Section 11(1) of B.R.Act 1949 (AACs).

3.13 During the period July 1, 1999 to June 30, 2000, 1,255 complaints and 219 cases of frauds were reported. All the complaint and fraud cases were investigated or taken up with the concerned banks and the Registrar of Cooperative Societies (RCS), wherever required for necessary action.

3.14 The number of PCBs stood at 2,050 as at the end of March 2000¹ , inclusive of 90 salary earners’ banks. Out of these, 2 salary earners’ banks and 57 other PCBs were under liquidation as at end-March 2000. The latest available data on major banking aggregates pertaining to end-June 1999 are available only for 1,645 PCBs. The aggregate deposits of these PCBs increased by Rs.3,680 crore during the first quarter of 1999-2000 to Rs.56,297 crore as at end-June 1999 (Appendix Table III.1). The growth rate of deposits in the first quarter of 1999-2000 (7.0 per cent) was slightly lower than that recorded in the first quarter of the previous year (7.4 per cent)² . The outstanding advances of PCBs went up by Rs.1,442 crore and recorded a growth of 4.2 per cent to Rs.35,614 crore during the same period which was much higher than that of 0.9 per cent in the corresponding period of the previous year (Table III.1). Continuing the trend of the previous few years, the credit-deposit ratio of the PCBs fell further from 64.9 per cent as at end-March 1999 to 63.3 per cent as at end-June 1999.

3.15 The latest available data on financial results of PCBs pertaining to 1998-99 are available in respect of 1,629 PCBs³ . The percentage of PCBs earning net profits showed some improvement during the year. While 1,408 (86 per cent) of the above PCBs made profits during 1998-99, the remaining 221 (14 per cent) banks made losses. Notwithstanding the improvement in profit performance, the problem of non-performing assets continued to be a major issue concerning the operations of the PCBs. The gross non-performing assets (NPAs), which are available for 1,748 PCBs, aggregated Rs.4,534.60 crore as at the end of March 1999 constituting 12.2 per cent of their total advances. This was marginally higher than the figure of 11.7 per cent observed at the end of previous year (Table III.2).

3.16 As on March 31, 1999, there were 29 scheduled PCBs. Twenty-two PCBs were added to the list during the year ended March 31, 2000, raising the total number of scheduled PCBs to 51. Of these, 34 are located in Maharashtra, 11 in Gujarat, 3 in Andhra Pradesh, 2 in Goa and 1 in Karnataka. Total deposits and advances of scheduled PCBs as at end-March 2000 aggregated Rs.28,182 crore and Rs.17,286 crore, respectively (Table III.3).

3.17 During the year ended March 2000, the composition of assets and liabilities of scheduled PCBs did not undergo much change. Deposits formed 76.8 per cent of the total liabilities of the scheduled PCBs as at the end of March 2000, which was marginally lower than 77.1 per cent observed as at end-March 1999. Based on the data reported in the balance sheets, deposit growth of scheduled PCBs at 23.3 per cent during 1999-2000 was somewhat lower than that of 26.9 per cent in the previous year. Capital and reserves constituted 8.4 per cent of the liabilities and was marginally lower than that of 8.6 per cent for March 1999 (Table III.3). Borrowings showed a sharp rise of Rs.299.73 crore during 1999-2000 and amounted to Rs.673.93 crore as at the end of March 2000. Analysis of the asset portfolio of scheduled PCBs indicate that loans and advances constituted 47.1 per cent of the total, higher than 46.5 per cent recorded as at end-March 1999. The share of investments at 26.3 per cent as at end-March 2000 was also higher than 25.9 per cent recorded in the preceding year. The growth rate of loans and advances at 25.4 per cent during the year was higher than that of 21.4 per cent in 1998-99. The total assets of scheduled PCBs grew at a rate of 23.9 per cent over the year.

3.18 The total income of the scheduled PCBs increased by 24.7 per cent to Rs.4,163 crore during 1999-2000 (Table III.4) as compared with that of 23.7 per cent recorded in the previous year. A significant portion of total income came from interest income (93.5 per cent). The total expenditure of scheduled PCBs increased by 23.5 per cent during 1999-2000 to Rs.3,810 crore as compared with that of 21.9 per cent during 1998-99. Of the total expenditure, interest expenditure accounted for 72.1 per cent, higher than 71.0 per cent recorded in the previous year. Interest expenses and operating expenses increased by Rs.559.2 crore (25.6 per cent) and Rs.130.5 crore (20.9 per cent), respectively. The provisioning requirements of the scheduled PCBs increased from Rs. 270.3 crore in 1998-99 to Rs.305.6 crore in 1999-2000. The higher order of growth in income as against that of expenditure enabled the scheduled PCBs to post a higher net profits of Rs.353.3 crore during 1999-2000 as compared with that of Rs.255 crore in the previous year. The operating profits at Rs.658.9 crore recorded an increase of 25.4 per cent in 1999-2000.

3.19 As a percentage to total assets, interest income of scheduled PCBs increased marginally by five basis points to 10.61 per cent in 1999-2000 while interest expenses rose by 10 basis points to 7.49 per cent. The decline in operating expenses by five basis points (partly due to a decline in wage bill by two basis points), inter alia, enabled scheduled PCBs to record a marginally higher operating profits at 1.79 per cent during 1999-2000 as against 1.77 per cent during 1998-99. An eight basis point decline in provisions, however, enabled the scheduled PCBs to post a 10 basis point rise in net profits from 0.86 per cent during 1998-99 to 0.96 per cent during 1999-2000.

3.20 The outstanding deposits of State Cooperative Banks (StCBs) at Rs.29,475 crore as at the end of March 2000, posted a lower growth of 14.3 per cent as compared with the growth of 16.2 per cent in the previous year (Chart III.1 and Appendix Table III.1). The growth rate in their borrowings decelerated to 8.8 per cent from 14.2 per cent in the preceding year. Loans extended by the StCBs in 1999-2000 increased sharply by 15.6 per cent to Rs.34,552 crore. However, the outstanding credit of StCBs at Rs. 24,119 crore recorded a lower growth of 10.1 per cent as compared with that of 11.8 per cent recorded in the previous year. The credit-deposit ratio of StCBs declined to 81.8 per cent as at end-March 2000 from 84.9 per cent as at end-March 1999. The recovery performance of StCBs (as percentage to demand) declined from 86 per cent in June 1997 to 84 per cent in June 1998 and further to 81 per cent in June 1999 (Appendix Table III.2). The continued deterioration in recovery performance is likely to adversely impact on the recycling of credit and on the financial health of the StCBs.

3.21 Detailed data on the components of assets and liabilities of the StCBs are available only up to 1998-99. As at the end of March 1999, share capital and reserves constituted 10.8 per cent of the total liabilities of the StCBs, while deposits and borrowings had shares of 61.8 per cent and 23.3 per cent, respectively (Table III.5). Loans and advances together with the investments formed more than 80 per cent of the assets of StCBs. During the year 1998-99, the share of loans and advances declined further from 54.1 per cent to 52.5 per cent and that of investments also declined marginally from 32.6 per cent to 31.2 per cent. Total assets with the StCBs grew by 15.2 per cent to Rs.41,731 crore as at the end of March 1999.

3.22 The total income of StCBs increased by 15.0 per cent to Rs.4,194 crore during the year 1998-99 as against 22.8 per cent witnessed during 1997-98 (Table III.6). Interest income accounted for 96.1 per cent of the total income. Interest and other operating expenses together grew at a much higher rate of 19.9 per cent to Rs.3,744 crore during the year. Thus, the operating profits of StCBs declined by 14.4 per cent from Rs.526 crore in 1997-98 to Rs.450 crore in 1998-99. The provisioning requirements of StCBs in 1998-99 were also much lower at Rs.554 crore as compared with Rs.655 crore in the previous year. StCBs as a group posted net losses for the second consecutive year; the net losses during 1998-99 amounted to Rs.104 crore, which was, however, lower than that of Rs.129 crore during 1997-98.

3.23 As a proportion of total assets, the total income of StCBs declined from 10.07 per cent as at end-March 1998 to 10.05 per cent as at end-March 1999. On the expenditure front, interest expenses increased by 47 basis points to 8.21 per cent during while the operating expenses declined by 10 basis points to 0.77 per cent. Thus, the operating profits declined from 1.45 per cent in 1997-98 to 1.08 per cent in 1998-99. The net profits of StCBs formed (-) 0.25 per cent of the assets in 1998-99 as compared to (-) 0.36 per cent in the previous year.

3.24 Deposits constitute a major component of sources of funds of the CCBs. The total deposits of CCBs at Rs.53,319 crore as at end-March 2000 exhibited a lower rate of growth of 17.1 per cent as against 23.8 per cent during the previous year (Appendix Table III.1). The borrowings of CCBs at Rs.14,646 crore as at end-March 2000 recorded a growth of 14.7 per cent as against 10.4 per cent recorded in 1998-99. On the assets side, loans extended by CCBs declined by 1.8 per cent to Rs.39,367 crore as at end-March 2000. Loans outstanding at Rs.43,215 crore recorded a growth of 15.9 per cent during 1999-2000 as against that of 18.1 per cent in 1998-99 (Chart III.2). As per the latest available data pertaining to June 1999, the recovery performance (percentage to demand) of CCBs remained unchanged at the previous year’s level of 70 per cent during 1998-99 (Appendix Table III.2).

3.25 Complete data on assets and liabilities of the CCBs are available only up to 1998-99, which indicate that as at the end of March 1999, deposits and borrowings accounted for 63.3 and 17.8 per cent, respectively, in the total liabilities of CCBs (Table III.7). Capital and reserves formed another 12.1 per cent. Loans and advances constituted 51.9 per cent of the assets. The share of investments in the total assets increased from 24.5 per cent as at the end of previous year to 28.1 per cent as at end-March 1999. Total assets with the CCBs grew at the rate of 20.7 per cent during 1998-99, as against 17.7 per cent observed in 1997-98.

3.26 There was a turnaround in the performance of CCBs during the year reflecting an improvement in income and a decline in provisions and contingencies. The total income of CCBs grew by 19.0 per cent to Rs.7,954 crore during the year 1998-99 as against 14.4 per cent in 1997-98 (Table III.8). Interest income accounted for 93.9 per cent of the total income. On the expenditure side, the total of interest and other operating expenses grew by 18.0 per cent to Rs.6,802 crore during the year and accounted for 86 per cent of the total expenditure. The operating profits of CCBs during 1998-99 amounted to Rs.1,152 crore and recorded a growth of 25.8 per cent. The provisioning requirements of the CCBs amounted to Rs.1,109 crore. Thus, the CCBs, as a group, posted net profits of Rs.44 crore during 1998-99 as against net losses of Rs.207 crore in the previous year.

3.27 As a proportion of total assets, the total income of CCBs decreased from 11.22 per cent during 1997-98 to 11.07 per cent during 1998-99. However, interest expenses also declined by 24 basis points to 7.28 per cent while the operating expenses went up marginally to 2.18 per cent. Thus, the CCBs were left with operating profits at 1.60 per cent of their assets in 1998-99, which were higher than that of 1.54 per cent in 1997-98. In respect of net profits, the CCBs could convert their net loss position (-0.35 per cent in 1997-98) to a marginally positive figure of 0.06 per cent in 1998-99. However, the spread remained unchanged at 3.11 per cent in 1998-99.

3.28 There were around 92,450 Primary Agricultural Credit Societies (PACS) operating in the country as of end-March 1999, with the total membership of these PACS aggregating 1,016 lakh, and borrowing members at 440 lakh constituting around 43 per cent. The high level of overdues in many States has made a large number of members ineligible for fresh borrowings. Resource mobilisation continued to be a major area of weakness of the PACS. As at end-March 1998, deposits of PACS amounted to Rs.6,518 crore, representing a growth of 15 per cent over the previous year. Two States accounted for 71.3 per cent of these deposits. A majority of PACS depend on borrowings from higher financing agencies to fund their operations and have not yet been able to become self-reliant in respect of resources through deposit mobilisation, share linkage and share capital. Where the higher tier agencies themselves are weak, the PACS are starved of finance which affect their functioning. The outstanding amount of borrowings of all PACS stood at Rs.17,073 crore as at the end of March 1998. The loans issued amounted to Rs.16,081 crore, while the loans outstanding amounted to Rs.18,175 crore as at end-March 1998.

3.29 In contrast to the short-term credit structure, the deposit resources of long-term credit institutions are meagre. With a view to strengthening the resource base of the State Cooperative Agriculture and Rural Development Banks (SCARDBs), they have been permitted to mobilise fixed deposits for terms of not less than 12 months, subject to the limit that outstanding aggregate deposits should not exceed their net owned funds as revealed in the latest balance sheet. However, the scheme has not yet taken off in many States as most of the State Governments are yet to decide about providing any guarantee to the depositors of SCARDBs. As at the end of 1999-2000, the outstanding deposits of SCARDBs increased to Rs.374 crore from Rs.240 crore as at the end of the previous year. Borrowings which constituted the major resource of SCARDBs at Rs.12,359 crore at the end of March 2000, rose by 11.4 per cent during 1999-2000 as against 13.4 per cent during 1998-99 (Appendix Table III.1). These borrowings were mainly financed by NABARD through subscription to the debentures floated by the SCARDBs.

3.30 On the assets side, the loans issued by SCARDBs during 1999-2000 at Rs.2,524 crore recorded a lower increase of 3.6 per cent than that of 6.2 per cent during the previous year. Loans outstanding at Rs.11,669 crore as at the end of March 2000 also registered a lower increase of 11.8 per cent as compared with 13.7 per cent during 1998-99.

3.31 During 1998-99, out of 19 SCARDBs, 9 SCARDBs were in profit , while 10 incurred losses. The losses partly reflected the implementation of prudential norms. The accumulated losses in SCARDBs amounted to Rs.569 crore as at end-March 1999. The recovery performance of SCARDBs (as percentage to demand) improved from 61 per cent in end-June 1998 to 62 per cent in end-June 1999.

3.32 Primary Co-operative Agriculture and Rural Development Banks (PCARDBs) are at the bottom layer of the long-term structure of co-operative credit institutions. The own resource base of these banks is weak. The resources for their operations are raised through borrowings from NABARD, NHB and other institutional investors, supplemented by owned funds comprising share capital, reserves and a small amount of deposits.

3.33 Deposits of PCARDBs rose from Rs.152 crore at the end of 1998-99 to Rs.179 crore at the end of 1999-2000 (Appendix Table III.1). Borrowings of PCARDBs as at the end of March 2000 at Rs.7,453 crore increased by 8.8 per cent as compared with an increase of 16.3 per cent during the previous year.

3.34 Loans extended by PCARDBs during 1999-2000 declined by 2.7 per cent to Rs.1,646 crore. Outstanding loans grew by 6.7 per cent to Rs.7,273 crore at the end of 1999-2000. The recovery performance of PCARDBs (as percentage to demand) improved from 55 per cent in end-June 1998 to 60 per cent in end June 1999.