Co-operative credit institutions occupy an important position in the financial system of the economy in terms of their reach, volume of operations and the purpose they serve. Rural co-operative banks play a pivotal role in the rural credit delivery system with credit co-operatives forming almost 70 per cent of the rural credit outlets. Rural co-operative banks account for around 30 per cent of rural deposits and 44 per cent of the outstanding loans and advances of the banking system for agriculture and rural development. About 55 per cent of the short-term production loans for the agriculture sector come from co-operative credit institutions. Urban co-operative banks (UCBs), on the other hand, aim at mobilisation of savings from the middle-and low-income urban groups and purvey credit towards the weaker sections. The majority of credit from UCBs is channelised towards priority sector segments. The organisational structure of co-operative credit institutions is given in Chart III.1.

3.2 In order to examine the functioning and the constraints being faced by co-operative banks and the rural credit system, a High Power Committee (HPC), a Task Force and an Expert Group were appointed in recent years. The objectives of setting up these Groups were to devise ways to improve the efficiency of the credit co-operatives and to make the credit delivery system of these credit institutions viable. Notwithstanding certain differences in their focus, the three Groups identified inter alia many common constraints being faced by different types of credit co-operatives and gave recommendations to improve the co-operative credit system (Box III.1). In line with the recommendations of these Groups, policy changes for the co-operative banks have been framed with a view to improving the credit delivery mechanism of co-operative banks and introducing various prudential measures for strengthening the financial health of these institutions.

3.4  Introduced in 1998-99, KCCs have been popular among both farmers and bankers. Recently, the National Bank for Agriculture and Rural Development (NABARD), in consultation with the Reserve Bank, has dispensed with the floor limit of Rs. 5,000 for the KCC. This would enable small and medium farmers to take advantage of the facility. The Union Budget 2001-02 proposed the introduction of accident benefit scheme for KCCs holders. The Budget further proposed to accelerate issue of KCCs by banks so as to bring all eligible farmers within its scope in the next three years, i.e., by March 31, 2004.

3.5 The RIDF has played an important role in the development of rural infrastructure, especially in the context of projects relating to irrigation and rural connectivity. In order to reduce the gap between the amounts sanctioned and disbursed under RIDF, the interest rate charged by NABARD on RIDF loans was reduced from 11.5 per cent to 10.5 per cent. A further allocation of Rs. 5,000 crore as net corpus of RIDF-VII was announced in the Union Budget 2001-02. It was proposed that during the current year, NABARD would link an additional 1 lakh SHGs to enable an additional 20 lakh families to access credit.

3.6  While NABARD has so far been extending refinance to the rural co-operative credit institutions, subject to certain conditions, the facility has been extended to scheduled UCBs also, against both farm and non-farm rural credit extended by these banks.

3.7  In the context of improving the health of the co-operative credit institutions, revised Entry Point Norms (EPNs) for UCBs were announced during August 2000. With an aim to align the prudential norms applicable to the urban co-operative banks with those prevailing for the commercial banks, UCBs have been advised to achieve capital to risk-weighted asset ratio (CRAR) at par with the levels applicable for commercial banks in a phased manner between 2002 and 2005.

3.8 In view of certain developments in the urban co-operative banking sector during March 2001, the monetary and credit policy for the first half of 2001-02 announced some reform measures relating to this sector (Box III.2). These measures included, inter alia, ban on lending by the UCBs to the equity market, limits on their access to borrowings from call/notice money markets, ban on UCBs in keeping term deposits with other UCBs and revision in the form in which UCBs can maintain their Statutory Liquidity Ratio (SLR) reserves. In response to representations received from UCBs and their federations, the Mid-term Review of October 2001 has proposed to allow UCBs to grant loans to individuals against security of shares, subject to certain conditions. The Policy also proposed to modify the time-frame for achieving the prescribed levels of SLR holding (Box I.1). The existing major differences between UCBs and commercial banks in terms of reserve requirements and funds deployment are given in Box III.3.

1. Progress of the Co-operative Banks

(a) Urban Co-operative Banks

3.9 Licensing policy for UCBs was revised in August 2000, in consonance with the recommendations of the HPC. The thrust of the new policy is on strong start-up capital, professionalisation of boards of management and corporate governance. The revised EPNs are based on population criterion. According to the new norms, UCBs should have minimum capital of Rs. 4 crore and membership of at least 3,000 if the population of the place where the UCB is being established is more than 10 lakh. For population between 5-10 lakh, the minimum share capital and membership requirements are Rs. 2 crore and 2,000, respectively. For population between 1-5 lakh the corresponding minimum requirements are Rs. 1 crore and 1,500, respectively. For towns with population less than 1 lakh, the corresponding minimum requirements are Rs. 25 lakh and 500, respectively. The number of licensed UCBs increased from 1,849 to 1,937 between end-March 2000 and end-March 2001. Between July 2000 and June 2001, licenses under Section 22 of the Banking Regulation (BR) Act, 1949 (As Applicable to Co-operative Societies (AACS)) were issued to 18 new banks and 17 existing unlicensed UCBs.

3.10 The Reserve Bank conducts on-site inspection of the UCBs under Section 35 of the BR Act, 1949 (AACS). The periodicity of inspection is one year for scheduled and weak UCBs. Well functioning non-scheduled UCBs would now be inspected once in three years and all other UCBs would be inspected once in two years. During 2000-01 (July-June), 877 UCBs were inspected as against 828 UCBs during the previous year.

Lending to Stock Market: It is important to point out that even before the policy changes were initiated in April 2001, co-operative banks were not permitted to invest directly in stock markets nor to lend to stock brokers. They could, however, lend to individuals against pledge of shares up to a certain limit. Available information revealed that a few UCBs ignored these guidelines and established a nexus with certain stockbrokers in order to operate in the stock market. In order to prevent any possible misuse in the future, Reserve Bank had put a stop on lending by UCBs directly or indirectly against also advised to unwind existing lending to stockbrokers or direct investment in shares on the contracted dates. In response to representations received from UCBs and their federations, the October 2001 Mid-term Review proposed to allow UCBs to grant loans to individuals against security of shares, subject to certain conditions (Box I.1).

Maintenance of SLR: UCBs are required to maintain their SLR equivalent to 25.0 per cent of net demand and time liabilities (NDTL). They can maintain it in the form of investments in government and other approved securities or as deposits with StCBs/CCBs. In the April 2001 policy statement, it was announced that with effect from April 1, 2003 all scheduled UCBs would need to maintain their entire SLR assets of 25.0 per cent of NDTL only in government and other approved securities and that compliance with CRR requirements on par with scheduled commercial banks would be prescribed in due course. All scheduled UCBs and non-scheduled UCBs with deposits of Rs. 25 crore and above now have to maintain investments in government securities only in Subsidiary General Ledger (SGL) Accounts with Reserve Bank or in constituent SGL Accounts with public sector banks, Primary Dealers (PDs), scheduled commercial banks,state co-operative banks and depositories. Non-scheduled UCBs with deposits of less than Rs. 25 crore would have the facility of maintaining government securities in physical or scrip form. The UCBs were required to achieve certain higher proportion of their SLR holding in the form of government and other approved securities as a percentage of their NDTL by March 31, 2002. In response to the representations received from UCBs and their federations it has been proposed to modify the time-frame for achieving the prescribed levels of SLR holding (Box I.1).

Apart from initiating the policy changes, the Reserve Bank has also addressed the issue of dual control of UCBs. At present, three authorities are involved in regulatory and promotional aspects concerning the UCBs - the Central Government (in case of banks having multi-State presence), State Governments and the Reserve Bank. Doing away of dual control entails amendments to the Constitution of India, which can be a long drawn legislative process. In view of this, the Reserve Bank felt that one of the options that deserves to be seriously considered is setting up of a new apex supervisory body which can take over the entire inspection/supervisory functions in relation to scheduled and non-scheduled UCBs. This apex body could be under the control of a separate high-level supervisory board consisting of representatives of the Central Government, State Governments, the Reserve Bank as well as acknowledged experts in the areas of co-operative banking, etc. The body may be given the responsibility of inspection and supervision of UCBs and ensuring their conformity with prudential, capital adequacy and risk-management norms laid down by the Reserve Bank.

Much before the incidence of irregularities in the UCBs discussed above, the Reserve Bank had appointed a HPC (Chairman: Shri. K. Madhava Rao), 1999, to review the performance of the UCBs and to suggest necessary measures to strengthen this sector. The Committee submitted its Report in the same year.

The salient features of the major recommendations of the Committee and the action taken by the Reserve Bank on these recommendations are outlined below.

3.11 Under Section 17(2)(bb) read with Section 17(4)(c) of the Reserve Bank of India Act, 1934, the Reserve Bank extends refinance at the Bank Rate to UCBs against the advances granted by them to the tiny/cottage industries. Demand for such funds is, however, declining in the recent period mainly on account of the comfortable liquidity position. Three UCBs availed of refinance during 2000-01, with an aggregate limit of Rs. 3 crore.

3.12 The UCBs are required to extend 60 per cent of their total advances to priority sector, of which, 25 per cent needs to be deployed to the weaker sections. Information on lending of UCBs towards priority sector and weaker sections as at end-March 2000 was available for 1,467 banks. Of this, 1,266 fulfilled the priority sector target and 990 banks fulfilled the target for lending to weaker sections. Out of the 51 scheduled UCBs, 42 achieved the target of 60 per cent. It may be mentioned that there is no penal provision for non-attainment of targets to priority sector and weaker sections. As an indirect incentive, however, facilities such as branch expansion, expansion of areas of operation, attainment of scheduled status, etc., are dependent on the attainment of priority sector/weaker section targets by the banks. Out of the total priority sector advances of Rs. 26,321 crore extended by the reporting UCBs, cottage and small scale industries received 30 per cent, followed by housing (18 per cent), small business enterprises (17 per cent) and retail trade (15 per cent) (Chart III.2).

3.13 Based on certain parameters of their performance, UCBs are classified into weak and strong banks (Box III.4). There were 261 weak banks as at end-June 2001.

3.14 On account of fragile financial position, orders were issued for liquidation of 15 UCBs between July 2000 and June 2001. As at end-June 2001, 118 UCBs were under liquidation.

3.15 Between July 1, 2000 and June 30, 2001, 1,476 complaints were received against UCBs. Furthermore, 149 cases of frauds involving Rs. 27 crore were reported. All the complaints and fraud cases were investigated or taken up with the concerned banks and the Registrar of Cooperative Socieities (RCS), wherever required, for necessary action.

3.16 At the end of March 2001, the number of UCBs stood at 2,084 including 90 salary earners' banks. The latest information on major banking aggregates on UCBs is available up to end-December 2000, encompassing 1,826 reporting UCBs, i.e., around 88 per cent of the total.¹ The outstanding deposits of UCBs increased by 27.6 per cent as at end-December 2000, while loans outstanding increased by 26.2 per cent and owned fund increased by 23.2 per cent. Owned fund and deposits remained the major source of funds for UCBs. Borrowings by UCBs have increased by 8.9 per cent during the period. As at end-December 2000, the credit-deposit ratio was at 64.6 per cent (Table III.1).

The HPC on UCBs (Chairman: Shri. K. Madhava Rao) observed that the present system for identification of weak UCBs does not capture the incipient sickness of UCBs. The Committee felt that under the present criterion, by the time sickness of a bank is identified, the concerned UCB has already reached the point of "no return". Based on parameters such as capital adequacy, non-performing assets and profitability, the Committee recommended that UCBs, which are not strong, should be classified into two groups-weak and sick (Recommendation II.(5) in Box III.2). Pertinently, the HPC recommended that if an UCB exhibits even one of the three symptoms laid down to identify a weak bank, it should be classified as weak. Further, if the condition of the UCB deteriorates even further in terms of either NPA or profitability along with capital adequacy, then the UCB should be classified as sick as the interests of the depositors are endangered.

The HPC recommended that the weak banks themselves should draw up their revival package with the aid of experts. The Reserve Bank and the RCS should monitor the implementation of the programme. The Committee suggested that the sick UCBs should be liquidated in a time bound manner because functioning of a large number of financially weak banks is detrimental to both the growth of UCBs and the interests of the depositors. The Committee recommended that once an UCB is declared sick it should be put under moratorium. During the period of moratorium, the UCB should either be reconstituted or amalgamated with another UCB failing which its licence should be cancelled.

The recommendations of the HPC on classification of financially fragile UCBs into weak and sick categories have been accepted by the Reserve Bank and would come into effect from March 2002. Although the recommendation of the HPC on placing the sick banks under moratorium/liquidation have been accepted in principle, the decision to wind up the operations would be based on the merits of each case.

3.17 Information on the financial performance of UCBs relating to profits/losses during 1999-2000 are available for 1,747 banks, which roughly cover 84 per cent of the total UCBs. Of these UCBs 1,499 banks registered profits while the rest incurred losses. Information on NPAs, for the year ended March 31, 2000, has been reported by 1,866 UCBs. The gross NPAs of the reporting UCBs as a percentage of total advances decreased marginally from 12.2 per cent as at end-March 1999 to 12.1 per cent by end-March 2000 (Table III.2).

3.18 As on March 31, 2000, there were 51 scheduled UCBs and this number remained unchanged on March 31, 2001. Total deposits and advances of the scheduled UCBs as at end-March 2001 were Rs. 33,164 crore and Rs. 21,511 crore, respectively (Table III.3).

3.19 Between end-March 2000 and end-March 2001, deposits increased by 17.7 per cent and formed 76.1 per cent of the total liabilities of the scheduled UCBs. The share of other liabilities in the total liabilities of the scheduled UCBs at 10.4 per cent as at end-March 2001, declined by 2.9 percentage points over the year while net reserves increased by 3.0 per cent.

3.20 During 2000-01 (April-March) the share of loans and advances in total assets of the scheduled UCBs increased by nearly 3 percentage points to 49.3 per cent while the share of investments remained almost unchanged (Table III.3).

3.21 The total income of the scheduled UCBs increased by 17.2 per cent during the financial year 2000-01. Interest income contributed 93.3 per cent of the total income of the scheduled UCBs (Table III.4).

3.22 The total expenditure of the scheduled UCBs increased sharply by 49.7 per cent in 2000-01. While the share of interest expended in total expenditure reduced considerably by 13 percentage points to 58.0 per cent and that of operating expenses declined by 5 percentage points to 14.8 per cent, the share of provisions and contingencies to total expenditure increased by 18 percentage points during the year (Table III.4).

3.23 During 2000-01, operating profit of the scheduled UCBs increased by 4.7 per cent, while net profit turned out negative mainly because of a single scheduled UCB which had to make provisioning to the tune of Rs. 1,255 crore. Number-wise, 48 out of the 51 scheduled UCBs made net profit during the year. As a percentage of total assets, the operating profit of the scheduled UCBs declined from 1.8 per cent in 1999-2000 to 1.6 per cent in 2000-01 while the net profit declined from 0.8 per cent in 1999-2000 to a negative 2.1 per cent in 2000-01. As percentage of total assets, provisions and contingencies, other income and interest expended of the scheduled UCBs increased during 2000-01, interest income, operating expenses and wage bill declined. The net interest income to assets, measured as the difference between interest income and interest expended as a proportion of total assets, declined from 3.2 per cent in 1999-2000 to 2.8 per cent in 2000-01 (Table III.4). Bank-wise details on the major financial performances of the scheduled UCBs have been given in Appendix Table III.4.

3.24 The growth in deposits of the StCBs during 2000-01 at 10.6 per cent was lower than 14.6 per cent registered during 1999-2000. Growth in loans outstanding also decelerated from 17.4 per cent to 16.9 per cent. The CD ratio improved from 87.0 per cent to 91.9 per cent (Appendix Table III.1). At the all-India level, the recovery performance of the StCBs as a percentage to demand during 1999-2000 improved to 83 per cent from 81 per cent registered during the previous year. StCBs in Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Punjab, Rajasthan, Sikkim, Tamil Nadu and Uttar Pradesh achieved recovery rates of 90 per cent and above during 1999-2000 (Appendix Table III.2).

3.25 The details of assets and liabilities of StCBs are currently available as at end-March 2000. Deposits accounted for 62.1 per cent of the total liabilities followed by borrowing, which accounted for 22.8 per cent as at end-March 2000. On the asset side, loans and advances accounted for 54.0 per cent of the total assets of StCBs, while investments formed 32.3 per cent (Table III.5).

3.26 The total income of StCBs during 1999-2000 (April-March) grew by 17.6 per cent and expenditure by 11.2 per cent. The operating profit of StCBs increased by 77.0 per cent as against a 14.3 per cent decline in 1998-99. Interest income forming about 95 per cent of the total income increased by 16 per cent during the year while "other income" with the relative share of 5.2 per cent increased by about 57 per cent. On the expenditure side, interest expenditure accounted for 78.7 per cent of the total expenditure of StCBs. As against the previous year, while the share of interest expenditure in total expenditure declined, those of provisions and contingencies and operating expenses increased. Almost the entire increase in the amount of operating expenses was due to the increase in wage bill (Table III.6).

3.27 As a proportion of assets, operating profits of StCBs increased to 1.68 per cent in 1999-2000 from 1.08 per cent in 1998-99. The spread (net interest income as a ratio to total assets) of StCBs increased by 0.46 percentage points to 1.92 per cent in 1999-2000 over the previous year. In net terms, StCBs reaped positive return of 0.31 per cent to total assets in 1999-2000 as against a negative return of 0.26 per cent in 1998-99. While non-interest expenditure of StCBs as a percentage of assets increased it was more than offset by the larger fall in the ratio of interest expenditure to total assets. This coupled with increase in both interest and non-interest income, resulted in improvement in the profitability of StCBs during 1999-2000 (Table III.6).

3.28 Deposits of the CCBs during 2000-01 (April-March) increased by 6.2 per cent as against 18.8 per cent growth registered in the previous year. The growth in borrowings by the CCBs decelerated from 14.0 per cent to 8.0 per cent. The loans issued in 2000-01 declined by 3.3 per cent as against a growth of 14.8 per cent in 1999-2000 (Appendix Table III.1). The recovery performance of the CCBs deteriorated albeit marginally from 70 per cent as at end-March 1999 to 69 per cent as at end-March 2000. Notwithstanding the overall trend, recoveries by CCBs in Himachal Pradesh and Madhya Pradesh improved significantly during 1999-2000. In Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu and West Bengal, CCBs recovered more than 70 per cent of their demand in 1998-99 as well as 1999-2000 (Appendix Table III.2).

3.29 The latest information on the details relating to the assets and liabilities of CCBs are available up to end-March 2000. On the liability side, deposits accounted for about two-thirds of the total liabilities of CCBs while the share of borrowings in total liabilities was over 17 per cent. On the asset side, loans and advances accounted for 52.6 per cent of the total assets and investments for 26.8 per cent. During 1999-2000, loans and advances and investments by CCBs increased by 19.5 per cent and 11.8 per cent, respectively. The cash and bank balance which increased significantly by 34.1 per cent during 1999-2000, accounted for 9.0 per cent of the total assets of CCBs (Table III.7).

3.30 The income and expenditure of CCBs during 1999-2000 increased by 16.0 per cent and 17.4 per cent, respectively. The slower growth in income relative to expenditure resulted in a net loss of Rs. 67 crore for CCBs in 1999-2000 as against a net profit of Rs. 39 crore during the previous year. A part of the increased expenditure during 1999-2000 was on account of the 28.8 per cent increase in provisions and contingencies. The operating profit of CCBs during 1999-2000 increased by 18.6 per cent over the previous year. Interest income of CCBs accounted for 94.8 per cent of the total income. Interest expenditure accounted for almost two-thirds of the total expenditure of CCBs during the last two years. There was a decline in the share of operating expenditure by about two-percentage points in total expenditure and one percentage point increase in the share of provisions and contingencies (Table III.8).

3.31 As a percentage of total assets, the net profit of CCBs shifted to a marginal net loss of 0.08 per cent in 1999-2000 from a small net profit of 0.05 per cent in 1998-99. The operating profit as a percentage of assets, increased to 1.62 from 1.60 per cent. As a percentage of assets both components of income- interest income and other income - were lower in 1999-2000 than in 1998-99. Expenditure also declined marginally between these two years. Compared to the previous year, the spread of CCBs decreased by 0.07 percentage points in 1999-2000 (Table III.8).

3.32 It is the PACS which deal directly with the individual farmers, provide short- and medium-term credit, supply agricultural inputs, distribute consumer articles and also arrange for marketing of produce of its members through a co-operative marketing society. As at end- March 1999, there were approximately 92,000 PACS with membership of more than 10 crore. The number of borrowing members is, however, much lower at 4.4 crore i.e. borrowing members constitute around 43 per cent of the total members. The high level of overdues faced by many PACS makes a large portion of the members ineligible for fresh borrowings. As at end-March 1999, deposits mobilised by PACS at Rs. 7,035 crore increased by 7.9 per cent as against an increase of around 15 per cent registered during the previous year. Most of the PACS are dependent on the finance provided by CCBs. In case the CCBs are weak, the PACS are starved of finance, which affects the expansion of both the credit and non-credit functions of PACS. The outstanding borrowings of the PACS as at end-March 1999 at Rs. 16,924 crore, however, was lower by a percentage point over that at end-March 1998. The loans outstanding for PACS increased by 16.1 per cent to reach Rs. 21,108 crore as at end-March 1999.

3.33 With the exception of PACS, deposits constitute the most important source of funding for short-term rural co-operative credit institutions. Even for the PACS, deposits account for nearly one-third of its total liabilities. Long-term rural co-operative banks, on the other hand, are predominantly dependent on borrowings for their financial resources. Previously, SCARDBs were not allowed to raise public deposits but subject to certain conditions, they raise long-term public deposits. The scheme, however, has not been very popular as yet. As at end-March 2001, deposits mobilised by SCARDBs at Rs. 483 crore increased by 26.4 per cent over end-March 2000. Borrowing at Rs. 13,117 crore increased by 6.0 per cent as against 11.9 per cent increase registered during the previous year (Appendix Table III.1).

3.34 On the asset side, loans extended by the SCARDBs as at end-March 2001 at Rs. 2,524 crore increased marginally by 0.8 per cent over the previous year. Loans outstanding of the SCARDBs at end-March 2001 at Rs. 12,375 crore increased by 6.7 per cent, over the year as compared with 11.1 per cent increase during the previous year. During 1999-2000, out of the 18 reporting SCARDBs, 9 registered profit and 9 others were in loss. As on March 31 2000 the accumulated losses of SCARDBs stood at Rs. 779 crore, constituting 6.3 per cent of the total loans outstanding.

3.35 As at end-March 2001, deposits mobilised by PCARDBs at Rs. 302 crore increased by 36.7 per cent as against 30.8 per cent registered as at end-March 2000. As in the case of SCARDBs, PCARDBs are heavily dependant on borrowing as their source of funds. Borrowings by PCARDBs, as at end-March 2001 at Rs. 8,208 crore increased by 7.2 per cent as against an increase of 12.0 per cent in 1999-2000.

3.36 Loans extended by PCARDBs at Rs. 1,754 crore during 2000-01, declined by 3.7 per cent as against an increase of 7.7 per cent registered during 1999-2000. Loans outstanding as at end-March 2001 at Rs. 8,070 crore increased by 6.2 per cent as against 11.5 per cent during the year ended March 2000. As at end-March 2000, accumulated losses of the PCARDBs stood at Rs. 891 crore.

3.37 The asset quality and recovery mechanism of the rural co-operatives have a crucial bearing on the viability of the overall credit system and in particular the viability of co-operative banks. Given the financial constraints faced by the rural co-operative banks, the Reserve Bank allowed such banks providing short-term credit to implement the provisioning norms in a phased manner till 1999-2000. From 1999-2000, however, cooperative banks are required to maintain a general provision of at least 0.25 per cent against standard assets. As at end-March 2000, the aggregate NPAs of StCBs estimated at Rs. 2,758 crore accounted for 10.7 per cent of the total outstanding loans. Out of the total NPAs, around 45 per cent are sub-standard assets, 50 per cent are doubtful assets and 5 per cent are loss assets (Table III.9). During 1999-2000, out of the 29 StCBs, 4 banks had NPAs below 5 per cent of outstanding loans and advances, 10 banks reported NPAs between 5 to 15 per cent and 8 StCBs reported NPAs higher than 30 per cent (Table III.10).

3.38 For CCBs, NPAs as at end-March 2000 at Rs. 7,543 crore accounted for 17.2 per cent of the total outstanding loans. Sub-standard, doubtful and loss assets comprised 49 per cent, 39 per cent and 12 per cent, respectively, of the total NPAs. For the SCARDBs, aggregate NPAs at Rs. 2,157 crore accounted for 18.7 per cent of their outstanding loans at end-March 2000. Among the PCARDBs, NPAs at Rs. 1,519 crore were at 20.0 per cent of loans outstanding at end-March 2000 (Table III.9).

3.39 Co-operative banks extend credit directly to the ultimate borrowers as well as to institutions at the different tiers of the co-operative banking structure. A need has been felt to work out a mutually agreed system of recovery whereby the proceeds of the settlement as well as the cost of recovery/losses would be shared by various concerned tiers of co-operative banks. Consequently, NABARD, in consultation with the Reserve Bank has framed guidelines for one-time settlement of chronic NPAs/overdues of the cooperative banks. The guidelines would cover NPAs under all loans and advances and would remain operative up to end-March 2002.

3.40 All commercial banks are required to maintain a minimum CRAR of 9 per cent. These norms have not as yet been extended to rural co-operative banks. The Task Force on cooperative banks (Chairman: Shri. Jagdish Capoor), however, felt that being an important part of the rural credit system, co-operative banks should also conform to the CRAR standards set for commercial banks albeit in a phased manner. These proposals have not as yet been implemented. The latest information shows that as at end-March 1999, among the reporting StCBs, 22.2 per cent had negative CRAR, 14.8 per cent had positive but less than 8 per cent CRAR and the remaining 63.0 per cent had CRAR of more than 8 per cent.

3.41 In terms of Section 11(1) of B.R. Act, 1949 (AACS), CCBs and non-scheduled StCBs should have minimum share capital of Rs.1 lakh each. The number of banks not complying with this provision has increased, especially after the introduction of prudential norms. As on March 31, 2001, 139 CCBs and 6 StCBs have defaulted in complying with the above provision. In respect of a majority of these banks, the erosion in the value of their assets was larger than their owned funds. To address this issue, NABARD impressed upon the respective State Governments to initiate measures like augmenting share capital base of these banks, helping them in their recovery efforts, etc. To maintain uninterrupted flow of credit in the area of operation of the defaulting CCBs, NABARD continued to sanction short-term credit limits on behalf of such banks, subject to certain conditions. Furthermore, in case of first-time default, CCBs continued to obtain access to credit limits from NABARD for 2000-01 subject to certain conditions.

3.42 The Board of Supervision (for StCBs/ CCBs and RRBs) set up in NABARD as a Committee of its Board of Directors to give direction and guidance to NABARD in supervision-related matters, has been reviewing the financial health of the cooperative banks, based on the inspection findings on an ongoing basis. The Board of Supervision (BoS) has been, inter alia, discussing the financial position of the weak cooperative banks particularly those which have had a high level of erosion in their deposits. As per the decisions of the BoS, various preventive, revival and punitive measures in respect of the banks which are showing signs of weakness have been initiated.

3.43 NABARD has been playing a pivotal role in the channelisation of bank credit to the rural sector. NABARD provides refinance and augments resource base of the institutions providing credit to the rural sector. NABARD also undertakes supervision of the rural co-operative banks.

3.44 The focus of policy initiatives by NABARD during 2000-01 continued to aim at augmentation and smoothening of the ground level rural credit flows. Certain reorientation was introduced in the lending and refinance policies to capture the changing financial requirements of the varied segments of the rural economy. NABARD enhanced the coverage of rural credit institutions by bringing in areas of non-traditional agriculture and new ventures in non-farm activities under their purview. Steps were also taken to restructure the institutional rural credit system in line with recommendations of the Task Force on the cooperative credit system, 2000.

3.45 The net accretion to resources of NABARD during 2000-01 has been Rs. 5,449 crore as compared with Rs. 4,381 crore in the previous year (Table III.11). Out of the total net accretion during 2000-01, major contributions were by the Rural Infrastructure Development Fund (RIDF) deposits (34 per cent), National Rural Credit (Long Term Operations (NRC (LTO)) (21 per cent), reserves and surplus (6 per cent) and market borrowing through bonds and debentures (27 per cent). Between 1999-2000 and 2000-01, contribution of the borrowings from the Reserve Bank to net resource accretion increased from 5 per cent to 13 per cent.

3.46 The total outstanding refinance by NABARD increased sharply by 21.4 per cent from Rs. 6,151 crore as at the end-June 2000 to Rs. 7,464 crore as at end-March 2001 (Table III.12). The largest increase during 2000-01 (July-March) was in refinance to StCBs, which increased by 28 per cent. As regards, the term structure of refinance provided by NABARD during 2000-01 (July-March), 88 per cent was of short-term in nature. Of the short-term credit limit sanctioned by NABARD, that to StCBs was Rs. 7,169 crore, of which seasonal agricultural operations (SAO) accounted for Rs. 6,400 crore. Similarly, of Rs. 1,312 crore credit limit sanctioned to Regional Rural Banks (RRBs) for short-term purposes, SAO accounted for Rs. 1,114 crore. Refinance availed by the banks in the North-Eastern region continued to be low despite certain relaxation extended by NABARD in respect of refinance support to co-operative banks in that region. NABARD sanctioned long-term loans to 12 State Governments aggregating Rs. 68 crore during 2000-01 (July-March) for contribution to the share capital of co-operative credit institutions. The Task Force constituted to study the co-operative credit system had recommended that co-operatives should be self-reliant and member driven. NABARD asked the State Governments to reduce their participation in the capital of the co-operatives and thus reduce borrowing from NABARD for contributing to the share capital of co-operatives.

3.47 RIDF was set up with NABARD under the initiative of the Central Government in 1995-96 to provide loans to State Governments for financing rural infrastructure projects. Since then, six tranches of allocations have been made towards the Fund and the Union Budget 2001-02 has enhanced the allocations under the VII tranche of the Fund. The commercial banks make contributions towards the Fund in accordance with the shortfall in their priority sector lending. Since 1999-2000 (RIDF-V), the scope has been widened to enable utilisation of loans by Panchayati Raj institutions, self-help groups, non-government organisations, etc.

3.48 As at end-March 2001, the total corpus of the fund under the tranches I to VI of the RIDF aggregated to Rs. 18,000 crore. A further allocation of Rs. 5,000 crore as corpus of RIDF-VII has been announced in the Union Budget 2001-02. During 2000-01, deposits mobilised under RIDF increased by Rs. 2,654 crore and the total deposit mobilisation between 1995-96 and 2000-01 stood at Rs. 8,698 crore (Table III.13). The cumulative amounts sanctioned and disbursed under the different tranches till end-March 2001 were at Rs. 18,545 crore and Rs. 9,251 crore, respectively (Table III.14).

3.49 Between end-March 2000 and end-March 2001, the ratio of funds disbursed to funds sanctioned under RIDF increased from 43.6 per cent to 49.9 per cent while utilisation ratio (amount disbursed as a proportion of amount phased) increased from 59.4 per cent to 64.4 per cent. Notwithstanding these improvements, the ratio of disbursement to sanction and to utilisation under RIDF is not very high. Various factors have been attributed to explain this situation, which include high interest cost of funds allocated through RIDF, lack of matching funds with State Governments and other procedural hardships. NABARD has initiated several measures to make the loans under RIDF more attractive and to increase the reach of such loans. The interest rate on RIDF loans has been reduced from 12.0 per cent to 11.5 per cent per annum and further to 10.5 per cent. Apart from State Governments, other institutions and groups such as Panchayati Raj institutions can now implement RIDF projects. The scope of the projects eligible for RIDF loans has been enlarged to include innovative projects such as information technology enabled services and new activities such as system improvement and mini hydel under power sector, construction of primary school buildings, primary health centres, etc.

3.50 Purpose-wise utilisation of RIDF funds indicates high concentration towards irrigation and rural connectivity, which together account for around 80 per cent of the aggregate sanctions till end-March 2001 (Table III.15). State-wise distribution of RIDF funds reflects that as at end-March 2001, five States namely Andhra Pradesh, Gujarat, Madhya Pradesh, Maharashtra and Uttar Pradesh taken together accounted for around 50 per cent of both aggregate sanctions and disbursements (Appendix Table III.3).

3.51 KCC scheme introduced in 1998-99 is popular among both farmers and issuing bankers. Farmers have the flexibility to avail of production credit and also avoid procedural delays in getting credit sanctioned. For bankers, the need for repeated processing of credit applications is avoided. Against the target of 75 lakh KCC to be issued by banks in 2000-01, cooperative banks and RRBs issued 63 lakh KCCs involving a credit limit of Rs. 10,812 crore. Cumulatively since 1998, 102 lakh KCCs involving credit limits of Rs. 15,660 crore as at the end of March 2001 were issued. 27 Public Sector Banks had issued 36 lakh KCCs as at the end-of March 2001, since the inception of the Scheme. For 2001-02, the Union Budget has announced a target of an additional 1 crore KCCs to be issued by the banking system comprising all co-operative banks, RRBs and commercial banks. Furthermore, to ensure that small and medium farmers are not denied access to KCC facility, NABARD, in consultation with the Reserve Bank dispensed with the floor limit of Rs. 5,000 earlier suggested for coverage under the Scheme. The loans disbursed under KCC Scheme were also brought under the Rashtriya Krishi Bima Yojana of the General Insurance Corporations and personal accident insurance cover of Rs. 50,000 for death and Rs. 25,000 for disability from 2001-02 would be provided to KCC holders.

3.52 Effective November 1, 2001 NABARD has revised interest rates on refinance to commercial banks, RRBs and co-operative banks (Table III.16).

3.53 The refinance policy of NABARD on short-term Seasonal Agricultural Operations (SAO) for co-operative banks and RRBs for 2000-01 included, inter alia, augmentation of the ground-level credit flow through adoption of region-specific strategies and rationalisation of the lending policies and procedures. The policy of sanctioning special lines of credit exclusively for financing tribals at concessional rates of interest with relaxation of norms relating to ceiling on credit was continued. The existing concessions in the rate of interest, relaxation in minimum involvement norms, minimum recovery norms, etc., were continued for banks in the North-Eastern States and in Sikkim and Jammu and Kashmir.