kmzj Jm KamoKar Yashwantrao Chavan Maharashtra Open University BFG102 Institutions in India Unit 1 Co-operative Banks in India-I : Structure and Urban cooperative Banks 1 Unit 2 Co-operative Banks in India-II : Structure of Co-operative Banks in Rural 17 Area and Problems Unit 3 Development Financial Institutions-I: Functions and Structure and profile 32 of National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI) Unit 4 Development Financial Institutions II: Profile of Export and Import Bank 48 of India (EXIM Bank) and National Bank for Agriculture and Rural Development (NABARD) and Performance of Financial Institutions Unit 5 Non-Banking Finance Companies (NBFCs) I : Classification, Nature of 63 Business and Prudential Norms Unit 6 Non-Banking Finance Companies II : Performance of NBFCs and 78 Housing Finance Companies (HFCs) Unit 7 Market for Asset Securitization 96 Unit 8 Market for Factoring and Forfaiting Products 111 Unit 9 Mutual Funds 128 Unit 10 Credit Rating and Credit Rating Agencies 143 Unit 11 Derivatives Market in India 161 Unit 12 Market for Leasing and Hire Purchase Finance 182
Yashawantrao Chavan Maharashtra Open University Vice-Chancellor : Dr. M. M. Salunkhe Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh State Level Advisory Committee Dr. Pandit Palande Hon. Vice Chancellor Dr. B. R. Ambedkar University Muaaffarpur, Bihar Dr. Mahesh Kulkarni Ex-Professor B.Y.K. College, Nashik Dr. A. G. Gosavi Professor Modern College, Shivaji Nagar, Pune Dr. Parag Saraf Chartered Accountant Sangamner Dist. AhmedNagar Dr. Latika Ajitkumar Ajbani Assistant Professor, School of Commerce & Management, Y.C.M.O.U., Nashik Dr. Suhas Mahajan Ex-Professor Ness Wadia College of Commerce Pune Dr. J. F. Patil Economist Kolhapur Dr. Madhuri Sunil Deshpande Professor, Swami Ramanand Teerth Marathwada, University, Nanded Dr. S. V. Kuvalekar Associate Professor and Associate Dean (Training)(Finance) National Institute of Bank Management, Pune Dr. V. V. Morajkar Ex-Professor B.Y.K. College, Nashik Dr. Ashutosh Raravikar Director, EDMU, Ministry of Finance, New Delhi Dr. Prakash Deshmukh Director (I/C) School of Commerce & Management Y.C.M.O.U., Nashik Dr. Surendra Patole Assistant Professor School of Commerce & Management Y.C.M.O.U., Nashik Author & Editor Instructional Technology Editing & Programme Co-ordinator Dr. S. V. Kuvalekar Associate Professor and Associate Dean (Training)(Finance) National Institute of Bank Management, Pune Dr. Latika Ajitkumar Ajbani Assistant Professor School of Commerce & Management, Y.C.M.O.U., Nashik Production Shri. Anand Yadav Manager, Print Production Centre Y. C. M. Open University, Nashik- 422 222 Copyright Yashwantrao Chavan Maharashtra Open University, Nashik. (First edition developed under DEC development grant) First Publication : Sept. 2015 Typesetting : Arya Enterprises, Nashik Cover Print : Printed by : Publisher : Dr. Prakash Atkare, Registrar, Y. C. M. Open University, Nashik- 422 222 -------
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UNIT 1 CO-OPERATIVE BANKS IN INDIA-I : STRUCTURE AND URBAN COOPERATIVE BANKS Co-operative Banks in India-I: Structure and Urban cooperative Banks Structure 1.1 Introduction 1.2 Unit Objectives 1.3 Structure of Co-operative Banks 1.4 Difference between Commercial Banks and Co-operative Banks 1.5 Urban Co-operative Banks 1.6 Summery 1.7 Key Terms & List of Abbreviations 1.8 Self Assessment Questions 1.9 Further Reading & References 1.1 Introduction The Co-operative banks have been in the operations since more than 100 years. These banks are an important segment of the Indian Financial System and play an important role in making available banking facilities in urban and rural areas. These banks are formed on the principles of co-operation, mutual help, democratic decision making process and open membership. Like commercial banks, co-operative banks are financial intermediates in the financial system. These banks accept demand and time deposits from various customers for the purpose of lending in urban and rural areas. Co-operative banks provide credit facility mainly for financing agriculture and allied activities, rural based small and medium size enterprises, trade and industry in urban areas. Because of this, co-operative banks in India plays an important role in financing of economic activities in rural, semi urban and urban areas. The business of co-operative banks in urban areas has increased phenomenally in recent years on account of increase in number of branches and their ability to reach local customers to meet their business needs. These banks are registered under the co-operative societies act. They are also governed by the Reserve Bank of India under the Banking Regulation Act of 1949 as amended by the Laws (Applicable to Co-operative Societies) Rules, 1966. The certain clauses of the Reserve Bank of India Act, 1934 (RBI) are also applicable to co-operative banks. The Government of India appointed a committee leaded by Mr M Narasimham in 1997 to suggest measures to strengthen the banking system in India. This committee submitted its report in 1998. The important recommendations of this committee with respect to the co-operative banks, were as under : i) Co-operative banks should reach a minimum of 8 per cent capital to risk Institutions in India : 1
Co-operative Banks in India-I: Structure and Urban cooperative Banks ii) iii) iv) asset ratio over a period of 5 years. Co-operative banks need to increase their capital base through subscription by members and not by the Government. Present dual control over co-operative banks by the State Government and the RBI/NABARD should be eliminated and these institutions should be brought under the purview of the Banking Regulation Act of 1949 Co-operative banks must meet genuine credit needs of small industries which includes small borrowers. 1.2 Unit Objectives The objectives of this unit are as under : (i) (ii) To understand the structure of cooperative banking system in India To study performance of urban Co-operative Banks 1.3 Structure of Co-operative Banks The structure of co-operative banks in India is given in chart no. 1. Based on this chart, co-operative banks in India can be classified into two groups namely urban cooperative banks and rural co-operative banks. There were 1606 urban co-operative banks as on 31, March 2013. Of these 51 urban co-operative banks were scheduled banks and 1555 urban co-operative banks were non-scheduled banks. The rural cooperative banks can be classified into two groups. One group is of those banks like State Co-operative Banks and District Central Co-operative Banks which provide short term loans. There were 31 State Co-operative Banks and 370 District Central Cooperative Banks as on March 31, 2012. Other group is of State Co-operative Agriculture and Rural Development Banks and Primary Co-operative Agriculture & Rural Development Banks. There were 20 State Co-operative Agriculture and Rural Development Banks and 697 Primary Co-operative agriculture & Rural Development Banks as on March 31, 2012. The chart 1 clearly indicates that co-operative banks in India have a three tier structure namely primary (Urban and Agriculture) co-operative credit banks, District Central Co-operative Banks and at the apex level State Co-operative Banks. The RBI is responsible for supervision and regulation of primary urban cooperative banks. The National Bank for Agriculture and Rural Development (NABARD) is responsible for supervision of State Co-operative Agriculture and rural development banks, State-Co-operative Banks and District Central Co-operative Banks. Institutions in India : 2
Chart No. 1: Structure of Co-operative Credit Institutions in India (As at end - March 2012) Co-operative Banks in India-I: Structure and Urban cooperative Banks Scheduled (51) Multi-State (25) Single State UCBs (1,606) (26) Credit co-operatives (95,156) Non-scheduled (1,555) Multi-State (21) Single State (1,534) Long-term SCARDBs PCARDBs Rural Co-operatives (717) (20) (697) (93,550) Short-term (92,833) StCBs (31) DCCBs (370) PACS (92,434) STCBs : State Co-operative Banks, DCCBs: District Central Co-operative Banks, PACS: Primary Agricultural Credit Societies, SCARDBs: State Co-operative Agriculture and Rural Development Banks, PCARDBS: Primary Co-operative Agriculture and Rural Development Banks. Notes: 1. Figures in brackets indicate the number of institutions at end-march 2013 for UCBs and at end-march 2012 for rural co-operatives. 2. For rural co-operatives, the number of co-operatives refers to reporting cooperatives. Source : RBI s Report on Trends in banking 2012-13. 1.4 Difference between Commercial Banks and Cooperative Banks The co-operative banks perform basic banking function namely of acceptance of deposits for the purpose of lending. However they differ from commercial banks in the following respects. (1) Commercial banks are either in the form of joint stock companies registered under the companies act with limited liability or public sector banks under the specified act of a parliament. As against this, co-operative banks are registered Institutions in India : 3
Co-operative Banks in India-I: Structure and Urban cooperative Banks Check Your Progress 1) Explain structure of cooperative banks in India 2) State whether the following statements are true or false (i) The entire business of co-operativebanks is run on commercial principle. (ii) All the provisions of the banking Regulation Act of 1949 are applicable to cooperative banks. 3) Distinguish between co-operative banks and commercial banks. under the co-operative society s act of concerned state. (2) Co-operative banks are formed and functioned on the principle of co-operation and mutual help. Therefore the entire business is not run on commercial principle alone. However commercial banks undertake banking business entirely on commercial consideration. (3) Commercial banks have internal three tier structure namely branches, controlling offices and corporate office. With an exception of UCBs other co-operative banks have three tier set up namely state co-operative banks at apex level (i.e state level), central district co-operative banks at district level and primary co-operative credit societies at village level. (4) All the provisions of the Banking Regulation Act of 1949 are applicable to commercial banks. The RBI has full control or jurisdiction over commercial banks. Only some of the sections of the Banking Regulation Act of 1949 are applicable to co-operative banks. In view of this the RBI has partial control over the working of co-operative banks in India. 1.5 Urban Co-operative Banks 1.5.1 Recommendations of various RBI s Committee on UCB s The RBI constituted various committees to improve working of UCBs and promote growth in their business. The committee headed by Mr S S Marathe which was constituted in 1991 made significant recommendations with a view to achieve following objectives:. i) to introduce viability norms for UCBs ii) iii) to broaden the area of operation of UCBs to carry out a comprehensive study on treatment to weak and sick banks by the RBI. Further a working group was formed under chairmanship of Mr U M Chitale. This working group recommended revision in audit ratings model for UCBs. The RBI appointed a high power committee on UCBs in the year 1999 under the chairmanship of Mr K Madhava Rao. This committee made vary significant recommendations. Few of these recommendations are given below: i) The regulator must prescribe the twin criteria for setting up of new UCBs in respect of capital base and norms for eligibility of promoters. ii) Use of qualitative norms like Capital Risk Asset Ratio, limit of non- performing assets and operational efficiencies by the RBI to fix viability standards for UCBs. iii) UCB must have a networth of not less than Rs.50 crore in case if it want to open a branches in other states. Institutions in India : 4
iv) Newly formed UCBs must be allowed to extend their area of operations to the entire district of their registration and adjoining districts. 1.5.2 Structure, Regulations and Nature of Business Urban Co-operative Banks (UCBs) are primary co-operative banks which are located in urban and semi-urban areas. UCBs have been organized with a view to achieve the objective of promoting saving habits among middle and lower middle class segments of the society and providing credit facilities to the people with small means in urban and semi urban cities. Primary (Urban) credit society subject to the certain criteria can apply to the RBI for a banking license under the Banking Regulation Act of 1949 to operate as urban co-operative bank. The banking business of UCBs comprising of deposits and advances have concentrated in the western and southern region of the country. These two regions account for 92 per cent of total banking business of UCBs in India. UCBs are registered under the respective co-operative society s acts of the concerned state governments and also regulated by the respective state governments. In view of this, urban co-operative banks operate under the dual control of the RBI as well as State Government. The managerial aspects of these banks like registration, administration, amalgamation etc. are regulated by the State Government. The operational aspects of banking business of these banks are monitored regularly by the RBI based on its assessment of the financial position of the UCBs and initiates supervisory actions. By and large the area of operations of urban co-operative banks is confined to metropolitan, urban and semi urban centers. However, at present urban co-operative banks are allowed to undertake business in the whole district in which they are registered including rural areas. As on March 31, 2013 there were 1606 urban co-operative banks in India. Of these 51 were scheduled banks and 1555 were nonscheduled banks. Few urban co-operative Banks which are financially sound and having deposits of over 50 crore have been allowed to operate in more than one state. There were 46 multi state urban co-operative banks as on March 31, 2013. Till 1996, these banks were allowed to lend money only for non-agriculture purposes. But now these banks with few exceptions undertake banking business similar to that of commercial banks. In other words they undertake retail banking business, provide finance to MSMEs and agriculture sector etc. Urban co-operative banks provide funds and non fund based facilities to the small borrowers including small enterprises, retail traders, small entrepreneurs, professionals and employed persons. Some urban co-operative banks like Saraswat Co-operative Bank and Cosmos Co-operative Bank, etc. have been permitted by the RBI to undertake foreign exchange business including financial assistance to the exporters and importers. Co-operative Banks in India-I: Structure and Urban cooperative Banks 1.5.3 Number of UCBs and FSWM On account of consolidation (i.e merger of weak and unviable UCBs with financially strong and viable UCBs) there has been a continued reduction in numbers of UCBs in India. The total number of UCBs declined from 1872 as on March 31, 2005 to 1606 as on March 31, 2013. This can be seen from data given in Table 1.1. Institutions in India : 5
Co-operative Banks in India-I: Structure and Urban cooperative Banks Table 1.1: Total number of UCBs As on March 31 No. of UCBs 2005 1872 2006 1853 2007 1813 2008 1770 2009 1721 2010 1674 2011 1645 2012 1618 2013 1606 Source: RBI s Report on Trend and progress of Banking in India for 2012-13 UCBs which fulfill the following stated six norms are called as Financially Sound and well Managed (FSWM) UCBs. (a) Capital risk Asset Ratio (CRAR) is not less than 10 per cent. (b) (c) (d) (e) (f) Net non performing assets (NPAs) are not more than 3 per cent and gross NPAs are less than 7%. No default in the maintenance of Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR) during the preceding financial year. Uninterrupted net profit for the last three years. Sound internal control systems with at least two professional directors on The board. Regulatory comfort based on inter-alia record of compliance with the provisions of banking Regulation Act of 1949, RBI Act of 1934 and instructions/ directions issued by the RBI from time to time. 1.5.3 Classification of UCBs: Tier I and Tier II The RBI has classified all UCBs into Tier I and Tier II categories based on their deposit base. Tier I UCBs are defined as UCBs having (i) (ii) (iii) Deposit base below Rs. 1 billion operating in a single district. Deposit base below Rs. 1 billion operating in more than one district provided the branches are in contiguous districts and deposits and advances of branches in one district separately constituted at least 95 per cent of the total deposits and advances respectively of a bank. Deposit base below Rs. 1 billion whose branches were originally in a single district but subsequently became multi district due to reorganization of the districts. Institutions in India : 6 All other UCBs are defined as Tier II UCBs
The licensed Tier I and Tier II UCBs which are financially sound and well managed (FSWM) have been permitted by the RBI to extend their area of operation to the whole of the district of registration and to its adjoining districts within the state of registration. Such FSWM UCBs are not required to approach the RBI for its permission for extention of area of operation. Such banks can directly approach the register of co-operative societies (RCS) of the state concerned for extension of area of operation to the entire district of registration and as adjoining districts within the state of registration. Co-operative Banks in India-I: Structure and Urban cooperative Banks The Tier II UCBs, which are FSWM UCBs, are allowed to extend their area of operation to the entire state of the registration. Tier II UCBs which are registered under the Multi-State Co-operative Societies Act 2002 and satisfies the criteria for FSWM UCBs also have been permitted to extend their area of operation to the entire state of original registration. The financially sound and well managed (FSWM) UCBs which have a minimum net worth of Rs. 50 crore have been permitted to extend their area of operation beyond the state of registration i.e. to any other states. These banks are called as Multi State Urban Co-operative Banks. Such UCBs are eligible to open branches as well as extension centers (ECs) in other states. Data given in Table 1.2 indicates that as on March 31, 2013, out of 1606 UCBs, 412 UCBs were Tier II banks having deposit base of Rs. 1 billion or more per bank constituting 25.7 per cent of total UCBs. However, tier II UCBs had 84 per cent share in total deposits, 85 per cent share in total advances and 83 per cent share in total assets of all UCBs put together at the end of March 2013. Therefore despite 25 percent of UCBs in tier II group these banks have more than 80 percent of total business of deposits, advances and total assets due to wider geographical presence. Table 1.2 : Tier-wise Distribution of Urban Co-operative Banks (As at end - March 2013) (Amount in Rs. Billion) The Type No. of banks Deposits Advances Assets % to % to % to % to Number Total Amount Total Amount Total Amount Total 1 2 3 4 5 6 7 8 9 Tier I UCBs 1,194 74.3 434 15.7 272 15.0 545 16.2 Tier II UCBs 412 25.7 2,335 84.3 1,538 85.0 2,827 83.8 All UCBs 1,606 100.0 2,769 100.0 1,810 100.0 3,372 100.0 Source: RBI s Report on Trend and progress of banking in India, 2012-13. 1.5.4 Deposit and Loan Products of UCBs Like commercial banks, UCBs also accept deposits under various deposit accounts schemes and provides loans to small borrowers under various credit facilities. UCBs accept deposits from the various customers under current account deposits, savings account deposits and term deposit schemes. However, UCBs are not allowed to issue Institutions in India : 7
Co-operative Banks in India-I: Structure and Urban cooperative Banks certificate of deposits (CDs). These banks are free to determine interest rates on various deposit accounts subject to the following RBI guidelines. 1) UCBs can pay interest at a rate not exceeding half per cent per annum on current accounts deposits. However, banks are encouraged not to pay interest on such deposits. 2) In case of savings deposits, UCBs have to offer a uniform interest rate on savings bank deposits up to Rs. one lakhs irrespective of the amount in the savings account within this limit. For savings bank deposits over Rs. 1 Lakh, UCBs may provide differential interest rate. 3) In case of domestic term deposits UCBs are required to offer uniform rates on deposits below Rs. 15 lakhs for the same maturity. NRE Deposit Accounts The UCBs registered in states that have entered into a MOU with the RBI for supervisory and regulatory monitoring and those registered under multi state cooperative society s act 2002 and complying with following norms are eligible for authorization to maintain NRE Deposit account. (i) (ii) Minimum net worth of Rs. 25 crore CRAR of not less than 9 per cent (iii) Net NPA to be less than 10 percent (iv) Compliance with CRR/SLR maintenance (v) Net profit for preceding three years without any accumulated losses (vi) Sound internal control system (vii) Satisfactory with compliance with KYC/AML guidelines (viii) Presence of at least two professional directors on the board Loan Products UCBs have been allowed to provide working capital loans including export credit to their borrowers. They also discount and rediscount genuine commercial trade bills. Besides this, UCBs also provide advances to the real estate and commercial real estate sector, term loans, vehicle loans, housing loans and advances against Gold and Silver etc. UCBs in the Tier I category have been permitted to give housing loans to individual borrowers up to a maximum of Rs.30 lakhs. These UCBs which are in the Tier II category have been permitted to extend housing loans to individual borrowers up to a maximum of 70 lakhs. Further the RBI has allowed all UCBs to give housing Loans for a maximum period of 20 years. They are allowed to provide financial assistance to those NBFCs which are engaged in hire purchase and leasing business. Such NBFCs are reclassified as Asset Finance Companies. Besides this, UCBs are allowed to lend to self help groups and joint liability groups. However UCBs are not permitted following lending activities: Institutions in India : 8 (i) (ii) to provide finance to the investment and loan companies. to provide bridge loan/interim finance to any company including finance
company and in respect of euro issue. UCBs are free to decide their lending rates keeping in view their cost of funds and transaction cost etc. However, these banks have to ensure that the interest rates charged by them are transparent and known to the borrowers. For this, banks have to publish minimum and maximum interest rates charged on advances and display this information in every branch.even though there are large number of UCBs, their business in term of deposits and advances is concentrated in small number of UCBs. This can be observed from data given in Table 1.3. This data reveals that 90 UCBs out of 1606 have deposits of Rs. 5 billion or more. This accounts for around 58 per cent of total deposits with all UCBs. Similarly 56 UCBs out of 1606 have advances of Rs. 5 billion or more per UCB. This accounts for around 52 per cent of total advances of all UCBs. Table 1.3 : Distribution of UCBs by Deposits and Advances (As on March 31, 2013) (Amount in Rs. Billion) Deposit Number Amount Number Amount (Rs Billion) of UCBs of Deposits of UCBs of Advances No. % share Amount % share No. % share Amount % share 1 2 3 4 5 6 7 8 9 10 0.0.10 201 12.5 11 0.4 0.0.10 388 24.2 21 1.2 0.10-0.25 358 22.3 61 2.2 0.10-0.25 419 26.1 70 3.9 0.25-0.50 340 21.2 121 4.4 0.25-0.50 269 16.7 94 5.2 0.50-1.0 263 16.4 189 6.8 0.50-1.0 229 4.3 161 8.9 1.0-2.5 241 15.0 370 13.4 1.0-2.5 176 11.0 284 15.7 2.5-5.0 113 7.0 396 14.3 2.5-5.0 69 431 240 13.3 5.0-10.0 47 2.9 330 11.9 5.0-10.0 31 1.9 216 11.9 10.0 & above 43 2.7 1290 46.6 10.0 & above 25 1.6 724 40.0 Total 1606 100.0 2769 100.0 Total 1606 100.0 1580 100.0 Source: RBI s Report on trend and Progress of Banking in India, 2012-13. 1.5.5 Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR) for UCBs Like commercial banks UCBs are required to maintain CRR and SLR as stipulated by the RBI. At present UCBs are required to maintain CRR at 4 percent of total net demand and time liabilities adjusted for exemptions. Further scheduled UCBs are required to maintain minimum of 95 percent of average daily balance of prescribed CRR i.e. 4 percent of their net demand and time liabilities as on the last Friday of the second preceding fortnight. For the purpose of maintaining CRR every schedule urban co-operative bank is required to maintain a principal account with the Deposit Accounts Department (DAD) of the RBI at the center where the principal office of a bank is Co-operative Banks in India-I: Structure and Urban cooperative Banks Check Your Progress Q 1 State whether the following statements are true or false (i) Urban co-operative banks operate under the dual control of the RBI as well as State Government. (ii) Urban co-operative banks have been allowed to undertake only retail banking business. (iii) All urban cooperative banks are allowed by the RBI to undertake foreign exchange business. (iv) The banking business of UCBs comprising of deposits and advances have concentrated in the Northern and Eastern regions of the country. (v) UCBs are allowed to lend to the NBFCs having principal business of investment and loans. Q 2 State various norms which are used to decide financial sound and well managed (FSWM) UCBs. Q 3 What do you mean by Tier I and Tier II UCBs? Institutions in India : 9
Co-operative Banks in India-I: Structure and Urban cooperative Banks located. The RBI does not pay interest on CRR balances maintained by UCBs. At present all UCBs are required to maintain statutory liquidity ratio of 21.5 per cent of their total net and demand and time liabilities in India. All scheduled and nonscheduled urban co-operative banks are required to maintain their entire SLR assets of 21.5 percent of NDTL in the form of following assets: (i) Cash (ii) Gold (iii) Government securities comprising of Treasury Bills, Government of India dated securities and State Government Securities 1.5.5 Internet Banking The scheduled UCBs, which have a minimum net worth of Rs.1 billion, capital Risk Asset ratio of at least 10 per cent, net NPA less than 5 per cent and have earned net profit continuously in the last three financial years have been permitted to offer an internet banking facilities to their customers. For this, eligible UCBs have to take permission from the RBI. 1.5.6 Capital Adequacy Norms Like commercial banks UCBs also require to have capital which is adequate. In terms of the provisions contained in Section 11 of banking Regulation Act no co-operative bank shall commence or carry on banking business unless the aggregate value of its paid-up capital and reserves is not less than one lakh rupees. Further under section 22(3) (d) of the Banking Regulation Act of 1949, the RBI has power to prescribe the minimum entry point capital from time to time for setting up of a new primary (urban) co-operation bank. Earlier share capital of primary (urban) cooperative banks was linked with the borrowings of the members with the following norms. (1) 5 per cent of the borrowings if the borrowings are on unsecured basis. (2) 2.5 per cent of borrowings in case secured borrowings. (3) In case of secured borrowings by SSIs 2.5 per cent of borrowings of which 1 per cent is to be collected initially and balance of 1.5 per cent is to be collected in the course of next 2 years. With the introduction of Basel Accord I as capital adequacy norm for commercial bank, the RBI also has introduced this norm for urban co-operative banks. With effect from 2005 the RBI has prescribed minimum 9 per cent capital to risk asset ratio for all UCBs. The UCBs having AD category I license are required to provide capital for market risk with effect from April 1, 2010. This means UCBs not having AD category I license are required to provide capital only for credit risk. The capital risk asset ratio in case UCBs can be calculated as follows: Institutions in India : 10
Capital risk Asset Ratio in case of UCBs without having AD category I license. Tier I capital (core capital) + Tier II Capital (supplementary capital) Capital to Risk Asset Ratio (CRAR) = Risk weighted Assets for Credit Risk Co-operative Banks in India-I: Structure and Urban cooperative Banks Capital Risk Asset Ratio in case of UCBs having AD category I license Tier I capital (core capital) + Tier II Capital (supplementary capital) Capital to Risk Asset Ratio (CRAR) = Risk weighted Assets for Credit Risk + Risk weighted Assets for Market Risk The data relating to the CRAR of UCBs at the end March 2013, is given in Table 1.4. This data reveals that majority of UCBs (91 per cent) reported capital to Risk Asset Ratio (CRAR) above the statutory minimum of 9 per cent at end March 2013. This clearly shows that capital position of majority of UCBs has been satisfactory. Table 1.4: Distribution of UCBa by CRAR (As at end-march 2013) CRAR Scheduled Non-Scheduled All UCBs (in per cent) UCBs UCBs 1 2 3 4 CRAR < 3 5 155 160 CRAR e 3 but < 6 1 7 8 CRAR e 6 but < 9 0 23 23 CRAR e 9 but < 12 9 216 225 CRAR e 12 36 1,154 1,190 Total 51 1,566 1,606 Source : RBI s Report on Trend and Progress of banking in India, 2012-13 1.5.7 Business and Financial Performance of UCBs There has been an increasing trend in credit deposit (CD) ratio of UCBs reflecting expansion in credit business of these institutions. The credit deposit ratio of UCBs increased from 61.3 per cent as on March 31 2009 to 65.4 per cent as on March 31, 2013. This can be seen from the data given in Table 1.5 Institutions in India : 11
Co-operative Banks in India-I: Structure and Urban cooperative Banks Table 1.5: Credit-Deposit ratios for all UCBs Year (As on March 31) Credit-Deposit Ratio 2008-09 61.3 2009-10 61.4 2010-11 64.4 2011-12 66.3 2011-12 66.1 2012-13 65.4 Source: RBI s annual Report on Trend and Progress of Banking in India, for the period 2008-09 to 2012-13. The share of interest income in total income of UCBs has been more than 90 per cent. This means UCBs have limited non-interest income. This is mainly on account of more focus on lending business and investment in Government securities. This is also driven by the RBI s policy towards UCBs business. The return on assets (ROA) and net interest margin (NIM) for all UCBs together have been above 1 percent and 3 percent respectively which is reasonably very good. This can been seen from Data given in Table 1.6. Check Your Progress 1. State whether the following statements are true or false (i) The capital position of majority of UCBs has been unsatisfactory. (ii) All UCBs are required to provide capital charge for market risk. 2. What do you mean by Multi-State Urban Cooperative Banks? 3. Comment on Capital adequacy norms for UCBs. Institutions in India : 12 Table 1.6: Financial Performance of Scheduled and Non-Scheduled Urban Co-operative Bank Table 1.6: Financial Performance of Scheduled and Non-Scheduled Urban Co-operative (Amount in Rs. Billion) Item Scheduled UCBsNon-Scheduled UCBs All UCBs 2012-13 2011-12 2012-13 2011-12 2012-13 2011-12 1 2 3 4 5 6 7 A Total Income (i+ii) 150 124 200 158 350 282 (100) (100) (100) (100) (100) (100) i. Interest Income 135 113 189 148 324 261 (90.3) (91.7) (94.4) (93.9) (92.6) (92.8) ii. Non-Interest Income 15 10 11 10 26 20 (9.7) (8.3) (5.6) (6.1) (7.4) (7.2) B Total Expenditure (i+ii) 122 100 167 129 289 229 (100) (100) (100) (100) (100) (100) i. Interest Expenditure 93 74 124 92 217 166 (76.4) (74.3) (74.4) (71.1) (75.3) (72.5) ii. Non-Interest Expenditure 29 26 43 37 72 63 (23.6) (25.7) (25.6) (28.9) (24.7) (27.5) of which : Staff Expenses 15 13 22 18 37 32 C Profits i. Amount of operating profits 28 24 33 29 62 52 ii. Provisions, contingencies, taxe 15 10 12 11 27 20 iii. Amount of net profits 13 14 21 18 35 32 D Profitability Ratios i. Return on Assets 0.9 1.12 1.25 1.14 1.09 1.13 ii. Return on Equity 8.65 10.5 10.4 9.17 9.65 9.73 iii. Net Interest Margin 2.89 2.98 3.74 3.59 3.35 3.31 Note: Figures in brackets are percentages to total income/expenditure Source: RBI s Report on Trend and Progress of Banking in India, 2011-12 and 2012-13.
1.6 Summary Co-operative banks are an important segment of the Indian Financial system. These banks like commercial banks are important financial intermediaries in the financial system. These banks mobilize deposits from small investors and provide credit mainly for financing agriculture and allied activities, rural based micro and small size enterprises and trade and industry in urban areas. Co-operative banks in India have a three tier structure namely primary (urban and agriculture) cooperative banks, District Central Co-operative banks (DCBBs) and State Co-operative Banks. Urban co-operative banks are registered under the co-operative society s acts of concerned state. Therefore these banks function on the principle of co-operation and mutual help. The RBI is responsible for supervision and regulation of primary urban co-operative banks. UCB sector has performed well in terms of growth in assets, return on assets and net interest margin. The capital position of majority of UCBs has been satisfactory. Co-operative Banks in India-I: Structure and Urban cooperative Banks 1.7 Key Terms and List of Abbreviations A) Key Terms 1) Scheduled Bank These banks are included in the second schedule of RBI Act of 1934. The RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42(6) of the RBI Act. Under this criteria the paid up capital and collected funds of a bank should not be less than Rs. 5 lakh. Every scheduled bank enjoys the certain facilities such as loans from the RBI at a bank rate. Further such bank is automatically entitled to get membership of clearing house. 2) Non - Scheduled Bank The bank which is not scheduled bank is defined as non-scheduled bank 3) Co-operative Society A Co-operative society is a legal entity which is registered under the State Cooperative Act of a state. It pools human and financial resources in the spirit of self and mutual help with a view to provide services and support to its members. The cooperative society functions based on co-operative principles which are as follows (i) (ii) (iii) Voluntary and open membership One member one vote Autonomy and Democratic Control 4) Urban Co-operative Banks Urban co-operative banks are a primary co-operative banks which operate in urban and semi urban areas. These banks accept deposits and provide fund and nonfund based facilities to the small borrowers including small enterprises, entrepreneurs Institutions in India : 13
Co-operative Banks in India-I: Structure and Urban cooperative Banks and traders. These banks also have retail banking business like housing loans, personal loans etc. 5) Non-fund facility Such facility is comprised of guarantees and letter of credit. Urban co-operative banks are allowed by the RBI to provide non-fund facilities to their customers. 6) NRE account Non-Resident Indian (NRIs) have been permitted to open a Non-Resident Rupee (NRE) accounts with banks. This account can be opened as savings as well as current accounts. NRE account covering principal and interest is freely repatriable. Such account is not subjected to income tax and wealth tax. NRE account can be jointly held with another NRI but not with resident Indian. 7) Tier I Capital: It is called as core capital. It is comprised of following components: (i) (ii) (iii) Paid up share capital collected from regular members having voting rights. Contribution/non-refundable admission fees collected from the nominal and associate members which is held separately as reserves. Perpetual Non-Cumulative Preference Shares (iv) Free Reserves (v) Capital reserve representing surplus arising out of sale of assets (vi) Innovative perpetual debt instrument (vii) Any surplus (net) in profit and loss account 8) Tier II Capital It is called as supplementary capital. It is comprised of following components: (i) (ii) Undisclosed Reserves Revaluation Reserves (iii) General Provisions & Loss Reserves (iv) Investment Fluctuation Reserve (v) Hybrid Debt Capital Instruments (vi) Subordinate Debit 9) Credit-Deposit Ratio It is calculated as follows: Loan Assets X 100 Total Deposits Institutions in India : 14 This ratio provides information about extent to which deposits have been used for giving credit. High ratio indicates that banks have used more deposits for giving loans. With high credit deposit ratio, a bank is likely to generate more interest income from
loan assets. This ratio is impacted by certain factors such as demand for credit, high cash reserve ratio, and statutory liquidity ratio and banks attitude towards investment banking business etc. 10) Net Interest Margin Net interest margin is the ratio of net interest income to average interest earning assets. It is always expressed in terms percentage. It is calculated as follows: Co-operative Banks in India-I: Structure and Urban cooperative Banks Interest Income less Interest Expense Net Interest Margin = * 100 Average Interest Earning Assets Net interest margin is used to assess spread which is available to a bank or financial Institution. If a bank has less non performing assets then such bank is likely to have higher net interest margin. 11) Authorized Dealer Authorized dealer is one who is authorized by the RBI to undertake all types of transactions in foreign currencies including dealings (i.e. trading) in all foreign currencies subject to such conditions as stipulated by the RBI. B) List of Abbreviations: 1) UCB : Urban Co-operative Banks 2) CRAR : Capital Risk Asset Ratio 3) FSWM UCBs : Financially Sound & Well Managed UCBs 4) KYC : Know Your Customer 5) AML : Anti Money Laundering 6) ROA : Return on Asset 7) NIM : Net Interest Margin 8) SSI : Small Scale Industries 1.8 Self Assessment Questions 1. Explain the structure of co-operative banking system in India 2. What do you mean by Urban Co-operative Banks? 3. Explain the following classification of urban co-operative banks a) Tier I UCBs b) Tier II UCBs 4. Comment on business profile and performance of UCBs 5. State whether the following statements are true or false (i) (ii) All the UCBs are allowed to operate in all the districts of the state. UCBs are allowed to mobilize deposits through issue certificate ofdeposits. Institutions in India : 15
Co-operative Banks in India-I: Structure and Urban cooperative Banks (iii) All the UCBs are required to maintain statutory liquidity ratio of 25 per cent of their total net demand and time liabilities in India. (iv) All the UCBs are required to maintain minimum capital adequacy ratio (CRAR) of 9 per cent. (v) The UCBs having AD category I are required to provide capital charge for market risk. 5. Distinguish between commercial banks and co-operative banks. 1.9 Further Reading and References 1. Laws of Co-operative Banking published by Macmillan India Ltd for Indian Institute of Banking and Finance, 2007 (Latest Edition). 2. RBI Report on Trend and Progress of Banking in India for 2010-11 and 2011-12 and 2012-13. 3. RBI s Master Circulars for Urban Co-operative Banks 4. Co-operative Banks in India by Amit Basak, published by Neha Publishers, 2010. 5. Co-operative Banking in India by R Thirunarayanan, published by Mittal Publications, New Delhi (Latest Edition). 6. Web site of the RBI and Leading Urban Co-operative Banks like Saraswat Co-operative Bank and Cosmos Co-operative Bank. Institutions in India : 16
UNIT 2 CO-OPERATIVE BANKS IN INDIA-II : STRUCTURE OF CO-OPERATIVE BANKS IN RURAL AREA AND PROBLEMS Co-operative Banks in India-II: Structure and Co-operative Banks in Rural Area and Problems Structure 2.1 Introduction 2.2 Unit Objectives 2.3 State Co-operative banks 2.4 District Central Co-operative Banks 2.5 State Co-operative Agricultural and Rural Development Banks 2.6 Problems of Co-operative Banks 2.7 Summery 2.8 Key Terms and List of Abbreviations 2.9 Self - Assessment Questions 2.10 Further reading & References 2.1 Introduction The structure of co-operative banks in rural area is comprised of cooperative banks, which provide short term credit as well as long term credit. The State Cooperative Banks, District Central Co-operative Banks (DCCBs) and Primary Agriculture Credit Societies (PACSs) provide short term credit to the farmers and other borrowers in rural areas. State co-operative banks operate at state level. In all there are 31 state co-operative banks in India. District central co-operative banks function at district level. In all there are 370 district central co-operative banks in India. Primary Agriculture Credit Societies (PACS) operate at the village level. In 19 states a three tier short term co-operative credit structure is prevalent. It comprises of State Co-operative Banks, District Central Co-operative Banks (DCCBs) and Primary Agriculture Credit Societies (PACSs). Twelve states have two tier short term credit co-operative credit structure comprising of State Co-operative banks and Primary Agricultural Co-Operative Societies. The long term rural co-operative credit structure is comprised of State Co-operative Agriculture and rural development banks (SCARDBs) and primary credit agriculture and rural development banks (PCARDBs). The RBI regulates State Co-operative banks and District Central Co-operative banks under the Banking Regulation Act of 1949 while the Nabard supervise them. The Nabard conducts statutory inspection of State Co-operative Banks and District Central Co-operative Banks. It also carries and volunteers inspection of SCARDBs. Institutions in India : 17
Co-operative Banks in India-II: Structure and Co-operative Banks in Rural Area and Problems 2.2 Unit Objectives The objectives of this unit are as under : (i) To study working and performance of State Co-operative Banks, District Central Co-operative Banks (DCCBs). (ii) (iii) To study working and performance of State Co-operative Agriculture and Rural Development Banks (SCARDBs). To examine various problems of co-operative banks. 2.3 State Co-operative Banks and District Central Co-operative Banks 2.3.1 State Co-operative Banks The state co-operative banks have been set up with the principal objective of supervising business of District Central Co-operative Banks (DCCBs) and coordinate their activities. These banks are committed to agriculture and rural development through the co-operatives. As on March 31, 2013 there were 31 state co-operative banks in India. The jurisdiction of these banks is restricted to the concerned state. This bank is a federation of District Central Co-operative Banks and acts as a driving force to strengthen the cooperative banking system in the state. Such bank is also described as leader of the co-operative banking institutions in the state. The State Government and DCCBs contribute to the share capital of the state co-operative banks. Some state cooperative banks like Maharashtra State Co-operative bank extend financial assistance to the borrowers like vehicle loan, consumer loan and housing loan etc. under retail banking business. By and large, these banks extend financial support to DCCBs which in turn extend financial support to Primary Agriculture Credit Societies (PACSs). The State Co-operative Banks have to maintain cash reserved ratio (CRR) at 4 per cent and statutory liquidity ratio (SLR) at 22.5 per cent. 2.3.2 Functions of State Co-operative Banks The following are functions of State Co-operative Banks. Institutions in India : 18 (1) It undertakes traditional banking business. It accepts deposits from individuals, companies, member societies, local bodies etc. under saving, current and fixed deposit schemes. It also extend financial assistance to co-operative sugar factories, spinning mills, weaver's societies, employees co-operative credit societies and District Central Co-operative Banks (DCCBs). (2) These banks act as an intermediately institutions. It borrows funds from the RBI and markets and lend to DCCBs. (3) It helps DCCBs to formulate business plan, manage their investment portfolio including surplus funds (4) It supervises, regulates and monitors the working of the DCCBs including its
performance. (5) It extends financial support to apex co-operative federations in a state. (6) It also offers wide range of banking services to its clients in urban areas under various deposit schemes, loans schemes and locker facilities etc. (7) State co-operative banks like Maharashtra State Co-operative Bank also provide refinance facility to the urban co-operative banks against their advances to the members for hypothecation/pledge of Goods and gold ornaments. Co-operative Banks in India-II: Structure and Co-operative Banks in Rural Area and Problems 2.3.3 Composition of Assets and Liabilities of State Co-operative Banks The sources of funds of state co-operative banks are comprised mainly of deposits and borrowings. The proportion of deposits and borrowings in total liabilities were 57 per cent and 28 per cent respectively as on March 31, 2013. The share of borrowings in total liabilities increased from 24.3 per cent as on March 31, 2012 to 28.1 per cent as on March 31, 2013. As far as composition of assets is concerned investment and loan and advances are two important assets in case of state co-operative banks. The proportion of investments and loans in total assets were 37 per cent and 51 per cent respectively as on March 31, 2013. This can be seen from the data given in Table 2.1. Institutions in India : 19
Co-operative Banks in India-II: Structure and Co-operative Banks in Rural Area and Problems Table 2.1: Liabilities and Assets of State Co-operative Banks (Amount in Rs. Billion) Item As at end-march 2010-11 2011-12 1 2 3 Liabilities 1 Capital 21 26 (1.6) (1.7) 2 Reserves 118 120 (8.8) (8.1) 3 Deposits 809 849 (60.6) (57.2) 4 Borrowings 324 417 (24.3) (28.1) 5 Other Liabilities 64 72 (4.8) (4.9) Assets 1 Cash and Bank Balances 83 94 (6.2) (6.4) 2 Investments 525 566 (39.3) (38.1) 3 Loans and Advances 660 756 (49.4) (51.0) 4 Other Assets 68 67 (5.1) (4.5) Total Liabilities/Assets 1,336 1,483 (100) (100) Notes: Figures in brackets are percentages to total liabilities/assets Source: RBI's Report on Trend and Progress of Banking in India, 2012-13. 2.3.4 Financial Performance of State Co-operative Banks Institutions in India : 20 Out of 31 state co-operatives banks, 28 banks reported total profit of Rs. 1110 crore during the year 2012-13 as against Rs. 624 crore profit by 29 state co-operative banks during 2011-12. The three state co-operative banks reported loss amounting to Rs. 30 crore during 2012-13 as against Rs. 75 crore loss by two state co-operative banks during 2011-12. The net profit of all state co-operative banks increased from Rs. 2 billion in 2010-11 to Rs. 5 billion in 2011-12. The increase in profits of state co-
operative banks was on account of increase in income as compared to rise in expenditure. The growth in income was primarily because of growth in interest income. This can be seen from the data given in Table 2.2. Table 2.2: Financial Performance of State Co-operative Banks (Amount in Rs. Billion) Co-operative Banks in India-II: Structure and Co-operative Banks in Rural Area and Problems Item As during 2010-11 2011-12 1 2 3 A. Income (i + ii) 93 102 (100.0) (100.0) i. Interest Income 88 97 (94.9) (95.0) ii. Other Income 5 5 (5.1) (5.0) B. Expenditure (I + ii + iii) 91 97 (100.0) (100.0) i. Interest Expended 71 79 (78.0) (80.9) ii. Provisions and Contingencies 8 5 (8.8) (5.3) iii. Operating Expenses 12 13 (13.2) (13.8) Of which, Wage Bill 7 8 (8.2) (10) C. Profits i. Operating Profits 10 10 ii. Net Profits 2 5 Notes : Figures in brackets are percentages to total income/expenditure Source: RBI's Report on Trend and Progress of Banking in India, 2011-12 and 2012-13 2.4 District Central Co-operative Banks (DCCBs) The co-operative societies act 1912 permitted for setting up of central co-operative banks at district level. In 1952 the Standing Advisory Committee appointed by the RBI on Agriculture Credit recommended one central co-operative bank for each district. These banks are the federations of primary credit societies in a district. As on March 31, 2013 there were 370 DCCBs in India. The primary objective of DCCBs has been to mobilize funds from urban and rural areas and provide financial assistance to the member societies within the limits of the borrowing capacity of societies. Institutions in India : 21
Co-operative Banks in India-II: Structure and Co-operative Banks in Rural Area and Problems 2.4.1 Functions of DCCBs The following are the functions of DCCBs. (i) to undertake traditional banking business such acceptance of deposits from local customers and lending of funds to the primary co-operative credit societies. This will help to extend bank facilities in the rural and semi urban areas. (ii) (iii) to help primary co-operative societies in investing their surplus funds. to develop and nurtured co-operative movement in the district (iv) to supervise and monitor the working of member societies. 2.4.2 Composition of Assets and Liabilities of DCCBs Like state co-operative banks borrowings and deposits are main sources of funds for DCCBs. As on March 31, 2012 the proportion of deposits and borrowings of DCCBs in their total liabilities was 63 per cent and 17 per cent respectively. During the year 2011-12 DCCBs reported increase in their loan assets. The share of loan assets in total assets increased from 51.1 per cent as on March 31, 2011 to 53.8 per cent as on March 31, 2012. This can be see from the data in Table 2.3 Table 2.3: Liabilities and Assets of District Central Co-operative Banks (Amount in Rs. Billion) Item As at end-march 2011 2012 1 2 3 Liabilities 1 Capital 79 90 (3.1) (3.1) 2 Reserves 251 269 (9.7) (9.2) 3 Deposits 1680 1,842 (65.2) (62.7) 4 Borrowings 425 508 (16.5) (17.3) 5 Other Liabilities 143 229 (5.5) (7.8) Assets 1 Cash and Bank Balances 188 200 (7.3) (6.8) 2 Investments 861 932 Institutions in India : 22 (33.4) (31.7)