THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES IN RURAL CREDIT

Chapter II THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES IN RURAL CREDIT The rural co-operative credit structure in India consists of two parts, one provides short-term and medium-term loans and the other provides longterm loans. The short-term co-operative credit structure is a three tier system consisting of the primary co-operative credit societies at village level, central co-operative banks at district level and state co-operative banks as apex banks at state level. On the other hand, the long-term credit structure at the moment is two-tier comprising primary co-operative agriculture and rural development banks at block and district level and state co-operative agriculture and rural development banks at top level. The organizational structure of rural co-operative credit institutions in India is given in chart 2.1. Rural Co-operative Credit Structure in India Short-term and Medium-term [Three Tier System] Long-term [Two Tier System] State Co-operative Banks [Apex Level] State Co-operative Agriculture and Rural Development Banks [At Top Level] Central Co-operative Banks [District Level] Primary Co-operative Agriculture and Rural Development Banks [At District and Block Level] Primary Agricultural Credit Societies [Village Level] Chart 2.1. Structure of rural co-operative credit institutions in India

Table 2.1 presents a profile of rural co-operative banks in India. 32 Table 2.1 A Profile of Rural Co-operative Banks in India (At end-march 2007) (Rs. in crores) S. No Particulars Short-Term Long-Term SCBs DCCBs PACSs SCARDBs PCARDBs Total 1. No. of Co-operative Banks 31 371 97,224 20 697 98,343 2. Balance Sheet Indicators i) Owned fund (Capital + Reserves) 10,549 26,180 11,038 2,931 3,596 54,294 ii) Deposits 48,560 94,529 23,484 605 341 1,67,519 iii) Borrowings 22,256 29,912 43,715 16,662 12,751 1,25,296 iv) Loans and advances issued 52,777 82,963 49,614 2,436 1,970 1,89,759 v) Loans and advances outstanding 47,354 89,038 58,620 18,644 12,114 2,25,770 vi) Investments 24,140 41,006 N.A. 1,916 824 67,886 vii) Total liabilities / assets 85,756 1,58,894 79,959 24,336 21,774 3,70,719 3. Financial Performance i) Institutions in profit ii) a) Nos. 27 271 33,983 10 350 34,641 b) Amount of profit 319 754 749 280 419 2,521 Institutions in loss a) Nos. 4 97 48,078 8 342 48,529 b) Amount of loss (-) -44-724 -2,402-190 -566-3,926 iii) Overall profit/loss (-) 275 30-1,653 90-147 -1,405 iv) Accumulated loss (-) -389-5,712 N.A. -946-2,870-9,917 4. Non-performing Assets i) Amount 6,704 16,495 11,558 5,643 4,316 44,716 ii) As percentage of loans outstanding 14.2 18.5 26.9 30.3 35.4 19.8 iii) Recovery of loans to demand (%) (as on 30 th June) 85.7 71.1 70.9 44 52 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : N.A. Not available.

33 As on 31 st March 2007, the consolidated assets of the rural co-operative credit institutions amounted to Rs.3,70,719 crores. The rural co-operative sector, on aggregate, held Rs.1,67,519 crores of deposits and a loan portfolio of Rs.2,25,770 crores. Their financial performance continued to deteriorate during 2006-07 when compared to previous year. The number of loss-making entities continued to far exceed the number of profit-making entities. Institution-wise, the upper-tier of the short-term (SCBs and DCCBs) and long-term structure (SCARDBs) made profit, while the lower-tier comprising PACSs and PCARDBs made losses. The asset quality, however, improved as reflected in decline in the NPA ratio (as percentage of loans outstanding) during 2006-07 in respect of both the short-term and long-term rural co-operative credit institutions. Primary Agricultural Credit Societies The agricultural credit societies were established in our country after the enactment of Co-operative Societies Act 1904. PACSs are the grass root level arms of the short-term credit structure. They deal directly with individual borrowers, grant short-term as well as medium-term loans and also supply of agricultural inputs, consumer articles and providing marketing facilities. 1 Primary agricultural credit societies are the pillars of the co-operative credit system. The edifice of the co-operative credit structure has been built on the foundation of PACSs. They occupy a predominant position in the co-operative structure of India and are the backbone not only of the co-operative credit structure, but also of the co-operative marketing set-up in so far as their non credit activities are concerned. These societies, also known 1 S.S. Muley, Role of co-operative banks in rural credit, Cooperative Perspective, Vol.42, no.1-2 (2007), p.33.

as banks, constitute the base and vast network of credit institutions at the village level. The higher agencies viz. SCBs and DCCBs operate and 34 channelise their credit flows downward through this base only. These societies have by now covered more than 90 per cent of the country s 5.8 lakh villages. 2 The role of PACSs assumes a greater significance in the operation of the entire co-operative credit system for the successful implementation of various rural development programmes. The progress of PACSs in India has been given in table 2.2. Table 2.2 The progress of PACSs in India Particulars 1960-61 1970-71 31.3.1986 31.3.1994 31.3.2003 Number (in lakhs) 2.12 1.61 0.92 0.91 1.12 Membership (nos. in lakhs) 170.41 309.63 721 89,067 1,236 Deposits (Rs. in crores) 14.59 69.46 572 2,367.11 19,120.00 Loans issued (Rs. in crores) 202.75 577.88 3140 8,487.40 33,996.00 Loans outstanding (Rs. in crores) N.A. N.A. 4,323 N.A. 42,411 No. of PACSs in profit N.A. N.A. N.A. N.A. 58,683 No. of PACSs in loss N.A. N.A. N.A. N.A. 53,626 Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A - Note Available. Table 2.2 reveals that the total number of PACSs stood at 1.12 lakhs by the end of March 2003 when compared to 1960-61 as 2.12 lakhs. There was a net fall of 1,00,000 PACSs within the period of 1960-61 to 2003. The number of PACSs were decreased during the period due to the implementation of reorganization programme of strengthening and the future development of co-operative structure. The memberships of PACSs increased from 170.41 2 A. Seilan, Primary agricultural credit societies the bank of the rural masses, Tamil Nadu Journal of Cooperation, Vol.7, no.1 (2006), p.26.

35 lakhs in 1960-61 to 1,236 lakhs in March 2003. The deposits in PACSs stood at Rs.14.59 crores in 1960-61 and Rs.19120 crores at the end of March 2003. It is evident from the data that PACSs have increasing trends in mobilizing the deposits. Loans advanced increased from Rs.202.75 crores in 1960-61 to Rs.577.88 crores in 1970-71 and further it was increased from Rs.8,487.40 crores in 1994 to Rs.33,996 crores in 2003. Besides as on 31 st March 2003, out of 1,12,309 PACSs 58,683 PACSs earned profit of Rs.404 crores and 53,626 PACSs incurred loss of Rs.1,862 crores. Table 2.3 shows the select indicators of primary agricultural credit societies in India (Statewise) on 2006-07.

Table 2.3 Select indicators of Primary Agricultural Credit Societies in India - Statewise (2006-07) 36 S. No. Name of the State No. of PACSs No. of villages covered No. of villages per PACS Average deposits (Rs.Lakh) Working capital (Rs.Lakh) Societies in profit No. Amount (Rs.Lakh) No. Societies in loss Amount (Rs.Lakh) Northern Region 12,720 83,547 7 19.21 16,09,183 7,013 13,080 3,538 10,740 1. Chandigarh 16 22 1 0.19 23 14 5 1 12 2. Delhi - - - - - - - - - 3. Haryana 571 7,053 12 52.27 5,33,774 189 1,824 382 5,308 4. Himachal Pradesh 2,086 19,388 9 31.37 93,743 442 937 318 84 5. Jammu and 937 7,396 8 54.11 1,91,537 444 1,609 403 1,781 Kashmir 6. Punjab 3,981 12,329 3 19.17 4,66,489 2,330 4,562 1,183 1,458 7. Rajasthan 5,129 37,359 7 4.3 3,23,617 3,594 4,143 1,251 2,097 North-Eastern Region 3,540 33,527 9 3.83 77,407 615 7,871 850 10,703 8. Arunachal 31 3,649 118-1,636 20 25 6 8 Pradesh 9. Assam 809 23,422 29 0.63 7,533 309 7,639 419 9,909 10. Manipur 186 - - 34.95 45,904 - - 108 201 11. Meghalaya 184 3,761 20 0.45 1,797 51 47 128 512 12. Mizoram 175 660 4 0.09 175 59 70 4 10 13. Nagaland 1,719 969 1 3.73 11,246 - - - - 14. Sikkim 166 166 1-146 56 6 37 4 15. Tripura 270 900 3 0.12 8,970 120 84 148 59 Eastern Region 22,160 196,754 9 161.76 9,16,286 4,992 3,084 12,379 7,189 16. Andaman and 46 109 2 1.89 281 34 0.02 - - Nicobar Island 17. Bihar 5,969 45,098 8 1.02 46,186 1,180 604 3,962 64 18. Jharkhand 208 5,185 25 6.1 1,523 60 91 - - 19. Orissa 3,860 43,303 11 59.27 5,09,046 1,380 1,134 2,387 5,062 20. West Bengal 12,077 103,059 9 8.35 3,59,250 2,338 1,255 6,030 2,063 Central Region 15,265 192,554 13 208.54 5,98,873 7,125 9,841 4,998 18,177 21. Chhattisgarh 1,257 19,899 16 16.59 98,165 779 1,848 474 3,873 22. Madhya Pradesh 4,633 53,951 12 9.35 3,62,951 1,786 6,112 2,456 14,114 23. Uttarakhand 446 5,900 13 6.56 11,830 24 107 100 37 24. Uttar Pradesh 8,929 112,804 13 0.76 1,25,927 4,536 1,774 1,968 153 Western Region 29,086 53,958 2 105.75 15,18,445 10,481 21,175 16,599 75,529 25. Goa 77 206 3 25.94 4,476 41 17 35 13 26. Gujarat 7,956 16,289 2 2.37 4,90,635 3,339 9,565 2,675 36,680 27. Maharashtra 21,045 37,462 2 0.65 10,23,270 7,095 11,593 13,889 38,836 28. Dadra and Nagar Haveli 8 1 - - 64 6 0.01 - - Southern Region 14,453 76,762 5 113.82 32,75,675 3,757 19,844 9,714 1,17,836 29. Andhra Pradesh 4,064 29,207 7 7.88 5,64,084 867 1,612 3,036 24,398 30. Karnataka 4,205 27,242 6 26.68 5,08,361 1,384 5,482 2,447 9,719 31. Kerala 1,624 1,464 1 767.57 13,82,666 811 6,213 754 14,879 32. Puducherry 52 320 6 90.92 8,177 26 0.9 26 3 33. Tamil Nadu 4,508 18,529 4 55.37 8,12,387 669 6,536 3,451 68,837 Total (All India) 97,224 637,102 7 120.82 79,95,869 33,983 74,895 48,078 2,40,174 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08.

37 As shown in table 2.3, the number of both profit making and loss making PACSs declined to 33,983 and 48,078 during 2006-07 from 44,321 and 53,050 respectively during 2005-06, mainly on account of reduction in the total number of PACSs during 2006-07. The share of profit-making PACSs in total PACS declined to 35.0 per cent at end-march 2007 from 41.7 per cent at end-march 2006. While the total profits earned by profit-making PACSs increased, the losses made by loss making PACSs also increased. In the aggregate, 33.983 PACSs earned profits amounting to Rs.749 crores, while 48,078 PACSs incurred losses of Rs.2,402 crores. For the country as a whole as at the end of March 2007, one PACS on an average covered seven villages. While penetration of PACS (number of village served by a PACS) was the highest in the western region, it was the lowest in the central region. At the State / UTs level, only seven states, viz.. Chandigarh, Nagaland, Sikkim, Andaman and Nicobar Islands, Kerala, Maharashtra and Gujarat have achieved high penetration of upto two villages. Haryana, Arunachal Pradesh, Assam, Meghalaya, Jharkhand, Orissa, Chhattisgarh, Madhya Pradesh, Uttarakhand and Uttar Pradesh are the states with low penetration of more than ten villages. The average size of deposits mobilized by PACSs was Rs.120.82 lakhs. The average size of deposits of PACSs in Kerala at Rs.767.57 lakhs far exceeded that of other States. In Puducherry, Orissa, Tamil Nadu, Jammu and Kashmir and Haryana, the average size of deposits mobilized by PACSs was Rs.90.92, Rs.59.27, Rs.55.37, Rs.54.11 and Rs.52.27 lakhs respectively.

38 In eight states (that is Himachal Pradesh, Punjab, Rajasthan, Arunachal Pradesh, Mizoram, Sikkim, Uttar Pradesh and Goa) the number of profitmaking PACSs as well as profits earned by them exceeded the number of loss making PACSs and the amount of losses incurred by them. Puducherry has equal number of profit-making and loss making PACSs. In ten states (that is Haryana, Assam, Meghalaya, Orissa, West Bengal, Madhya Pradesh, Maharashtra, Andhra Pardesh, Karnataka and Tamil Nadu), the number of loss making PACSs as well as the amount of losses incurred by them exceeded the number of profit-making PACSs and the amount of profits earned by them. In five states/uts (that is Chandigarh, Jammu and Kashmir, Chhattisgarh, Gujarat and Kerala) PACSs incurred over-all loss even as the number of profit-making PACSs were more than the number of loss making PACSs. In three states (Tripura, Bihar and Uttarakhand), PACSs earned over-all profits even as the number of loss making PACSs were more than the number of profit-making PACSs.

39 Table 2.4 Primary Agricultural Credit Societies in India - select indicators A. Liabilities Item (Rs. in crores) As at end March Percentage variations 2006 2007 2005-06 2006-07 1. Total resources (2+3+4) 69,871 78,237 2.1 12.0 2. Owned funds (a+b) 9,292 11,039 1.0 18.8 a) Paid-up capital of which : 5,644 6,138 1.3 8.8 Government contribution 622 648 0.2 4.2 b) Total Reserves 3,648 4,900 0.6 34.3 3. Deposits 19,561 23,484 3.1 20.1 4. Borrowings 41,018 43,714 1.9 6.6 5. Working capital 73,387 79,959-2.7 9.0 B. Assets 1. Total Loans Issued (a+b) 42,920 49,613 9.5 15.6 a) Short-Term 35,624 40,796 11.7 14.5 b) Medium-Term 7,296 8,817-0.4 20.8 2. Total loans outstanding (a+b) 51,779 58,620 6.1 13.2 C. Overdues a) Short-Term 34,140 37,764 5.1 10.6 b) Medium-Term 17,639 20,856 8.2 18.2 1. Total demand 50,979 54,112 6.7 6.1 2. Total collection 35,503 38,359 11.9 8.0 3. Total balance (Overdues) (a+b) 15,476 15,753-3.6 1.8 a) Short-Term 11,387 11,558-2.3 1.5 b) Medium-Term 4,089 4,194-7.0 2.6 4. Percentages of overdues to total demand 30.4 29.1 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. As revealed in table 2.4, the total resources of PACSs increased during 2006-07 mainly on account of the increase in owned funds and deposits. The working capital of PACSs also registered a high growth of 9 per cent during

40 2006-07. On the asset side, the loan portfolio expanded by 13.2 per cent during the year as compared with 6.1 per cent during 2005-06. The loan portfolio expanded on account of growth in both the short-term and mediumterm loans. Both the total demand made and the total collections increased in the year 2006-07. Collections, however, grew relatively sharply, resulting in total overdues as percentage of total demand declining to 29.1 in 2006-07 from 30.4 during 2005-06. Central Co-operative Banks The Central Co-operative Banks occupy a cardinal position in the short-term co-operative credit structure. They form an important link between the apex co-operative bank and primary agricultural co-operative banks. When the Co-operative Societies Act was passed in 1904, there was no provision for the formation of central banks. The sponsors of the co-operative movement expected that the rural credit societies would be able to attract substantial deposits from the members and well-to-do sections of the village community and their savings would be available to meet the needs of the needy in the villages. It was also contemplated that any deficiency in the funds would be made good by loans from the government. But these expectations of the promoters did not materialize. The isolated and poorly managed societies failed in the first instance to tap funds from the more affluent and secondly they could not augment their own capital base by encouraging thrift and selfhelp among their members. As the movement gained popularity, the societies started increasing in number by leaps and bounds. But the financial arrangements envisaged did not

41 yield enough money to meet their growing requirements. The Co-operative Societies Act was, therefore, amended on 1912 with a view to permitting the registration of Central Societies. It may be of interest to note that even before the amendment some central banks had been established to cater to the financial needs of the primary societies. The first central bank was registered in Uttar Pradesh in 1906 as a primary society. But the first perfect central bank in the modern sense saw the light of the day in the former Central Provinces and Berar. In Rajasthan the first central co-operative bank was started in 1910 at Ajmer. But the revised Act stimulated the growth of the central financing agencies and within a few years a large number of such banks were established. 3 Objects and Functions The chief object of central co-operative banks is to meet the credit requirements of member societies. They finance agricultural credit societies for production purposes, marketing societies for marketing and supply operations and industrial and other societies for working expenses. They work as an intermediary to link the primary societies with the money market. Further, the central banks serve as the balancing centre for adjusting the surplus and deficiency of the working capital of the primary credit societies. Besides providing loans, the central co-operative banks also provide certain normal banking facilities to the members such as acceptance of deposits, remittance of funds, collection of cheques, etc. In some States, they are responsible for supervision and inspection of primary societies. In brief, the following are the main objects of a central co-operative bank: 3 B.S. Mathur (1996). Co-operation in India. Agra: Sahitya Bhawan, pp.174-175.

42 i. To act as a balancing centre of finance for the primary societies in the district by providing them with funds when they have a shortage and by serving as a clearing house for their funds, which are surplus. ii. iii. iv. To encourage thrift and collect savings from members and others. To provide a safe place for investing the reserves of primary societies. To provide other banking facilities to the members. v. To develop and extend banking facilities in rural areas. vi. To develop the co-operative movement in the district on sound lines and to act as a friend, philosopher and guide. vii. To supervise, guide and control the working of member societies. Progress of District Central Co-operative Banks The central co-operative banks form an important link between the apex co-operative bank and PACSs. The financial resources for the DCCBs consist of share capital, reserve fund out of profit, membership fee from primary societies, deposits from public and other institutions and loans from the apex bank. The progress of DCCBs in India is given in table 2.5.

43 Table 2.5 Progress of the District Central Co-operative Banks in India (Rs. in crores) Particulars 1991 1998 1999 2000 2001 2002 2003 Number of DCCBs 356 367 367 367 367 368 367 Owned funds N.A. 6,223 7,652 10,116 12,180 11,288 16,573 Deposits 10,250 36,228 40,112 54,248 61,786 68,586 73,879 Borrowings N.A. 11,547 12,871 14,658 16,935 18,772 19,635 Working capital N.A. 54,655 65,466 77,679 87,821 N.A. N.A. Loans issued 11,070 34,780 40,397 46,619 45,019 55,915 64,665 Loans outstanding N.A. 31,516 36,949 44,538 52,491 59,283 64,068 Recovery performance N.A. 70 70 70 67 66 61 (% of demand) No. of DCCBs in profit N.A. N.A. N.A. N.A. 247 243 237 No. of DCCBs in loss N.A. N.A. N.A. N.A. 120 125 130 Source: Cooperative Perspective, Vol.42, No.1-2 (2007). Note : N.A. - Not Available. Table 2.5 reveals that the total number of DCCBs stood at 356 in 1991 and increased to 368 in 2002, and came down to 367 in 2003. The deposits in DCCBs stood at Rs.10,250 crores in 1991 and further it had gone up to Rs.73,879 crores in 2003. The borrowing of DCCBs in India during 1998 was recorded as Rs.11,547 crores, which further went up to Rs.12,871 crores in 1999, and further it had gone up to Rs.19,635 crores in 2003. The total loans issued by DCCBs increased from Rs.11,070 crores in 1991 to Rs.64,665 crores in 2003 indicating tremendous increase in the loans issued by DCCBs in India. The outstanding loans of DCCBs increased from Rs.31,516 crores in 1998 to Rs.64,068 crores in 2003. The recovery performance of DCCBs came down from 70 per cent in 1998 to 61 per cent in 2003 to their total demands.

Similarly in 2003, out of total DCCBs, 237 DCCBs earned profit and 130 DCCBs suffered losses. 44 Table 2.6 gives the liabilities and assets of DCCBs in India Table 2.6 Liabilities and assets of DCCBs in India (Rs. in crores) Item As at end-march Percentage variations 2006 2007 2005-06 2006-07 Liabilities 1. Capital 4,748 (3.3) 5,458 (3.4) 9.3 15.0 2. Reserves 18,702 (13.1) 20,722 (13.1) 15.8 10.8 3. Deposits 87,532 (61.2) 94,529 (59.5) 6.6 8.0 4. Borrowings 24,217 ((16.9) 29,912 (18.8) 7.3 23.5 5. Other liabilities 7,891 (5.5) 8,273 (5.2) -3.5 4.8 Total liabilities/assets 1,43,090 1,58,894 7.3 11.0 Assets 1. Cash and Bank balance 10,695 (7.5) 11,274 (7.1) 24.8 5.4 2. Investments 36,628 (25.6) 41,006 (25.8) 1.9 12.0 3. Loans and advances 79,202 (55.3) 89,038 (56.0) 8.3 12.4 4. Other assets 16,565 (11.6) 17,575 (11.1) 5.2 6.1 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total.

45 The business operations of District Central Co-operative Banks (Table 2.6) continued to expand. Assets of DCCBs grew by 11 per cent during 2006-07 as against 7.3 per cent growth achieved during 2005-06. The composition of the liabilities/ assets of DCCBs remained broadly unchanged between end-march 2006 and end-march 2007. Deposits continued to be the principal source of funds for DCCBs, although their share declined. Borrowings, however, increased sharply, implying growing reliance by the DCCBs on outside sources for expansion. On the asset side, both the loans and advances and investment portfolio grew at higher rates when compared to previous year. Table 2.7 Region-wise profit/loss making District Central Co-operative Banks (As at end-march) Region Nos. 2006 2007 Profit Loss Profit Loss Amount Amount Amount Amount Nos. Nos. Nos. (Rs.crores) (Rs.crores) (Rs.crores) (Rs.crores) Northern Region 64 213.64 5 19.45 55 119.39 16 44.01 Eastern Region 50 96.14 14 35.43 45 42.78 19 59.39 Central Region 74 158.91 30 174.01 71 121.16 33 186.00 Western Region 34 244.23 15 245.81 37 166.99 12 241.63 Southern Region 54 406.60 26 450.00 63 304.09 17 192.91 All India Total 276 1,119.52 90 924.7 271 754.41 97 723.94 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. During 2006-07, out of 368 reporting DCCBs, 271 made profits amounting to Rs.754 crores, while 97 DCCBs made losses to the tune of Rs.724 crores.

State Co-operative Banks 46 Immediately after the launching of the co-operative movement in India, the need for a strong and efficient bank at the apex level was felt. The exigency was considerably pressing as the financial resources of the central banks were inadequate. There were many central banks which had ample surplus funds which they could not suitably invest, while other central banks at times were confronted with a shortage of funds. The central banks could overcome this difficulty by interlending between themselves, but the same was not considered as a practical proposition, for it was likely to give rise to the interlocking of liabilities which was dangerous. The only way to be out of difficulty was the creation of a central institution at the provincial level which would act as a clearing-house for capital, pool the resources and canalize the surplus of one locality to meet the deficiency of another to the advantage of the province as a whole. There was yet another difficulty which the central banks had to face in the absence of an apex institution. They had to face the problem of accommodation in the busy season and investment of idle money during the slack season. In the absence of an apex institution they had to invest their surplus money in government securities and postal savings which generally yielded low returns. But these banks had to pay interest at substantially high rates to obtain accommodation, due to low state of their credit. Thus, the situation was that whereas they had to pay heavily for obtaining accommodation during the busy season, the yield secured from investment of idle funds in the slack season was very low. The central banks were thus put to unnecessary loss. There was a need for a strong apex institution at the provincial level to balance this seasonal excess and

deficiency of funds and equate the demand and supply of capital. 4 47 The remedy lays in the formation of a central organization prepared always to take off the idle money in the slack season and supply the affiliated societies and co-operative banks with fluid resources in the busy season. The Maclagan Committee emphasized the need for establishing an apex bank in each major province. 5 The apex co-operative banks were, therefore, established at the provincial level with the chief object of co-ordinating the work of central banks and linking up the co-operative credit organization with the central money market and the Reserve Bank of India. The apex co-operative bank occupies an important position in the entire structure of co-operative short-term credit. It is the head of the co-operative movement in the state and is expected to play a positive role with regard to co-operative credit system. The apex bank is significant not only in mobilizing the financial resources needed by the movement, but also for deploying them appropriately among the various sectors of the movement. 4 5 B.S. Mathur (1996). Op.cit., pp.204-205. Ibid., p.205.

table 2.8. The progress of the State Co-operative Banks in India is presented in Table 2.8 Progress of the State Co-operative Banks in India 48 (Rs. in crores) Particulars 1991 1998 1999 2000 2001 2002 2003 Number of SCBs 28 28 29 29 30 30 30 Owned funds N.A. 3,319 4,135 4,911 5,837 5,208 7,672 Deposits 6,708 22,189 25,788 29,557 32,606 36,260 39,335 Borrowings N.A. 8,558 9,739 10,859 11,685 11,673 12,208 Working capital 22,373 34,667 39,222 44,035 49,490 N.A. N.A. Loans issued 6,593 29,523 32,834 37,368 34,307 34,663 38,642 Loans outstanding N.A. 19,588 21,909 25,709 29,848 32,710 34,758 Recovery performance [as % of demand] N.A. 84 81 83 84 82 79 No.of SCBs in profit N.A. N.A. N.A. N.A. 24 24 25 No. of SCBs in loss N.A. N.A. N.A. N.A. 6 6 5 Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A. - Not Available. Table 2.8 shows that there were 28 SCBs in 1991 and further raised to 30 in 2001 and since then it remained same upto 2003. The owned funds of SCBs were increased from Rs.3,319 crores in 1998 to Rs.7,672 crores in 2003. There has been a noticeable increase in the amount of owned funds of SCBs. The deposits in SCBs stood at Rs.6,708 crores in 1991 and increased to Rs.39,335 crores in 2003. It shows that progress made by SCBs in deposit mobilization. During 1991, the issued loans of SCBs were Rs.6,593 crores which increased to Rs.38,642 crores in 2003, but during 2001 the issued loan comes down to Rs.34,307 crores. The recovery performance of SCBs

decreased during the period from 1998 to 2003, except 2001. Out of the total, 5 SCBs suffered losses in 2003. 49 Table 2.9 shows the liabilities and assets of the State Co-operative Banks in India. Table 2.9 Liabilities and assets of State Co-operative Banks in India (Rs. in crores) Item As at end-march Percentage variations 2006 2007 2005-06 2006-07 Liabilities 1. Capital 1,114 (1.5) 1,246 (1.5) 10.1 11.8 2. Reserves 9,431 (12.3) 9,303 (10.8) 11.1-1.4 3. Deposits 45,405 (59.4) 48,560 (56.6) 2.4 6.9 4. Borrowings 16,989 (22.2) 22,256 (26.0) 16.3 31.0 5. Other liabilities 3,542 (4.6) 4,392 (5.1) 4.5 24.0 Total liabilities/assets 76,481 85,756 6.5 12.1 Assets 1. Cash and Bank balance 4,323 (5.7) 9,290 (10.8) -34.5 114.9 2. Investments 27,694 (36.2) 24,140 (28.2) 18.8-12.8 3. Loans and advances 39,684 (51.9) 47,354 (55.2) 6.2 19.3 4. Other assets 4,781 (6.3) 4,971 (5.8) 4.6 4.0 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total. The balance sheet of SCBs (Table 2.9) expanded significantly during 2006-07. On the liabilities side, deposits continued to account for the largest

50 share of the resources of SCBs, despite the modest decline in the share during the year 2006-07. However, the share of borrowings increased during the year. High growth in borrowings, which outpaced the growth of other components during the year, indicates that SCBs continued to rely heavily on outside sources for their expansion. Capital and deposits also witnessed a higher growth during the year 2006-07. On the asset side, while loans and advances grew at an accelerated pace, investments declined by 12.8 per cent. Cash and bank balances registered a sharp increase during the year. In Tamil Nadu, the Tamil Nadu State Apex Co-operative Bank Limited (TNSACB), over the last ten decades has played a stellar role in the service of agriculture and rural development in Tamil Nadu through the district central co-operative banks, primary agricultural co-operative banks and primary weavers co-operative societies. The state co-operative bank extends short-term and medium-term loans and advances primarily for agricultural and other allied activities. It also provides credit for various rural development projects through district central co-operative banks, consortium arrangements and directly through its head office and branches. In addition to providing loans and advances, it extends various other ancillary banking facilities such as hiring of safe deposit lockers, accepting articles for safe custody, funds transfer, etc.

The bank takes up the following activities 6 51 towards affiliated development. 1. It forms consortium of district central co-operative banks for financing various co-operative sugar mills in the state. 2. It helps the district central co-operative banks to channelise their investments both for statutory and non-statutory purposes. It assists them trading in securities by providing expertise for buying and selling of securities. 3. The bank has constituted the Primary Co-operative Development Fund for the purpose of providing financial assistance to primary agricultural co-operative banks in Tamil Nadu for construction of strong rooms, purchase of jewel safes, installation of defender doors, installation of modern banking counters, etc. 4. The apex bank monitors the functioning of district central co-operative banks in the state, inspects their activities periodically and provides necessary guidance for the efficient running of the banks. 5. The bank has formulated the deposit guarantee scheme for primary agricultural co-operative banks at the instance of Government of India/Government of Tamil Nadu with a view to providing insurance coverage for the deposits accepted by the primary agricultural co-operative banks. 6. The bank has a separate cell for monitoring the progress made under development action plans for all the district central co-operative banks and primary agricultural co-operative banks in the state. 6 Government of Tamil Nadu, Co-operation Department Policy Note: 2004-2005, pp.2-3.

52 7. The bank has created a technical cell for the purpose of providing technical expertise on project evaluation to all the district central co-operative banks for the purpose of clearing projects under non-farm sector schemes of National Bank for Agriculture and Rural Development. 8. The bank convenes state level technical committee meeting every year for fixing uniform scales of finance for all crops for each district in the state. Primary Co-operative Agriculture and Rural Development Bank (PCARDBs) The PCARDBs are at the lowest level of long-term co-operative credit structure. They are at block level. They provide long-term loans to their members for the purpose of minor irrigation, agricultural machinery, development of land, etc. The primary banks obtained their finance from the following sources: a. Share capital b. Deposits c. Grants and subsidies from government bank. d. Admission and other fees. e. Grants and subsidies from government f. Borrowings from other agencies.

53 Table 2.10 Progress of Primary Co-operative Agriculture and Rural Development Banks in India (Rs. in crores) 1998 1999 2000 2001 2002 2003 Number of PCARDBs 745 745 755 755 768 768 Owned funds 989 1167 1379 1628 2494 2730 Deposits 99 166 218 235 256 222 Borrowings 5,888 6,777 7,647 8,412 1,034 11,217 Working capital 7,285 8,824 9,982 10,838 N.A. N.A. Loans issued 1,594 1,735 1,819 1,865 2,045 2,151 Loans outstanding 5,840 6,778 7,611 8,352 9,982 10,775 Recovery performance (% to demand) 55 60 58 53 56 59 No. of PCARDBs in Profit N.A. N.A. N.A. 183 191 226 No. of PCARDBs in Loss N.A. N.A. N.A. 572 577 542 Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A. - Not Available. Table 2.10 indicates that the number of PCARDBs has slightly increased from 745 in 1998 to 768 in 2003. Deposits of PCARDBs showed an increasing trend. The loans issued stood at Rs.1,594 crores in 1998 and increased to Rs.2,151 crores in 2003. It showed that there has been a phenomenal raise in the amount of loan operations of PCARDBs. The loans outstanding increased from Rs.5,840 crores in 1998 to Rs.10,775 crores in 2003. The recovery performance increased from 55 per cent in 1998 to 59 per cent in 2003.

54 Table 2.11 presents the liabilities and assets of PCARDBs in India Table 2.11 Liabilities and assets of PCARDBs in India (Rs. in crores) Liabilities Item As at end-march Percentage variations 2006 2007 2005-06 2006-07 1. Capital 922 (4.3) 918 (4.2) 0.2-0.4 2. Reserves 2,665 (12.5) 2,678 (12.3) 21.4 0.5 3. Deposits 382 (1.8) 341 (1.6) 4.9-10.7 4. Borrowings 13,066 (61.1) 12,751 (58.6) 2.5-2.4 5. Other liabilities 4,331 (20.3) 5,085 (23.3) 3.5 17.4 Total liabilities/assets 21,365 (100) 21,774 (100) 4.7 1.9 Assets 1. Cash and Bank balance 224 (1.1) 223 (1.0) 7.3-0.4 2. Investments 778 (3.6) 824 (3.8) -3.2 5.9 3. Loans and advances 12,740 (59.6) 12,114 (55.6) 0.9-4.9 4. Other assets 7,623 (35.7) 8,612 (39.6) 12.5 13.0 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total. The balance sheets (Table 2.11) of PCARDBs continued to expand during 2006-07 but at a lower rate (1.9%) when compared to previous year (4.7%). This could be attributed to the substantial decline in both deposits and borrowings. The share of borrowings, the most important source of funds in the overall liabilities also declined. Reserves of PCARDBs, after showing a substantial increase during 2005-06, remained almost at the same level during 2006-07. On the asset side, investments recorded a sharp growth, reversing the

trend of the last year, while loans and advances declined by 4.9 per cent during 2006-07. 55 State Co-operative Agriculture and Rural Development Banks (SCARDBs) The State Co-operative Agriculture and Rural Development Banks are the agencies for lending long-term credit to agriculture. They are working at state level. The main function of SCARDBs is to raise long-term funds to finance primary co-operative agricultural and rural development banks affiliated to them or finance individuals directly through their branches and to encourage thrift and co-operation amongst the ultimate members. The SCARDBs get their finance from the following sources. a. Share capital b. Issue of debentures c. Loans from State Bank of India on the guarantee of state governments d. Admission and other fees e. Deposits f. Grants and Subsidies g. Other funds.

Table 2.12 Progress of the State Co-operative Agriculture and Rural Development Banks in India 56 (Rs. in crores) 1998 1999 2000 2001 2002 2003 Number of SCARDBs 19 19 19 20 20 20 Owned funds 1,685 2,353 2,702 3,034 2,484 2,891 Deposits 203 240 422 535 572 545 Borrowings 9,772 1,051 12,390 13,431 14,845 4,189 Working capital 11,716 13,078 15,074 16,896 N.A. N.A. Loans issued 2,295 2,439 2,532 2,586 2,747 2,964 Loans outstanding 9,182 10,441 11,565 12,596 14,147 15,385 Recovery performance (% to demand) 61 62 62 58 60 62 No. of SCARDBs in Profit N.A. N.A. N.A. 10 9 8 No. of SCARDBs in Loss N.A. N.A. N.A. 10 11 12 Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A.: Not available. Table 2.12 reveals that the SCARDBs issued loans of Rs.2,295 crores in 1998 and it increased upto Rs.2,964 crores in 2003. In 1998, loans outstanding was found to be Rs.9,182 crores and further it had raised to Rs.15,385 crores in 2003. The percentage of recovery of SCARDBs to demand stood at 61 per cent in 1998 and it increased to 62 per cent in 2003.

57 Table 2.13 shows the liabilities and assets of the SCARDBs in India. Table 2.13 Liabilities and assets of SCARDBs in India (Rs. in crores) Item As at end-march Percentage variations 2006 2007 2005-06 2006-07 Liabilities 1. Capital 801 (3.2) 794 (3.3) 1.3-0.9 2. Reserves 2,354 (9.6) 2,137 (8.8) 8.7-9.2 3. Deposits 636 (2.6) 605 (2.5) 4.6-4.9 4. Borrowings 17,075 (69.4) 16,662 (68.5) -0.6-2.4 5. Other liabilities 3,739 (15.2) 4,138 (17.0) 6.0 10.7 Total liabilities/assets 24,604 (100) 24,336 (100) 1.4-1.1 Assets 1. Cash and Bank balance 365 (1.5) 279 (1.1) 1.4-23.6 2. Investments 1,885 (7.6) 1,916 (7.9) 1.0 1.6 3. Loans and advances 17,713 (72.0) 18,644 (76.6) 1.8 5.3 4. Other assets 4,641 (18.9) 3,497 (14.4) 0.0-24.6 Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total. As shown in table 2.13, the assets and liabilities of the SCARDBs declined (1.1%) during 2006-07. Borrowings, the main source of funds, as well as deposits declined between 2.4 and 4.9 per cent. Net owned funds also witnessed a decline. On the asset side, loans and advances grew

by 5.3 per cent, while investments recorded a moderate growth of 1.6 per cent. Cash and bank balances and other assets, however, witnessed a sharp decline. 58 Primary Agricultural Credit Societies in Tamil Nadu The first agricultural credit society in Tamil Nadu was started in Tirur in 1904 immediately after the passing of the Co-operative Credit Societies Act 1904. As on 30.06.1915, there were 1446 agricultural credit societies. Until 1918 about 300 societies came into existence every year. In 1918-1919 the number of societies increased by more than 800 and till 1927-28 there was an addition of primary agricultural credit societies between 750 and 1000. As on 30.06.1921, the number of societies was 5,199 and the membership was 2,74,808. The average membership per society works out to 53. The financial particulars of the primary agricultural credit societies as on 30.6.1921 are given below. (Rs. in lakhs) Borrowings 156.23 Loans outstanding against members 159.65 Reserve fund and other funds 9.58 Working capital 183.86 Profit 1.93 Loss 2.84 About thirty years later, the number of agricultural credit societies rose to 10,887 with a membership of 6.66 lakhs and a paid up share capital of

Rs.59.22 lakhs as on 30.06.1950. 7 The other financial particulars of these societies are given in the following statement. 59 (Rs. in lakhs) Borrowings 652.36 Loans outstanding against members 831.62 Reserve fund and other funds 149.86 Working Capital 999.73 Profit 14.33 Loss 10.91 The average membership per society in 1949-50 was 61. There was, thus, an increase of only eight members in the average membership during the period from 1920-21 to 1949-50. This can be termed as poor progress. There is however, an increase under borrowings, loans outstanding against members, reserve fund and other funds and working capital as on 30.06.1950 when compared to the corresponding figures as on 30.06.1921. 8 Introduction of a scheme for expansion of rural credit in 1949-50 A scheme for the expansion of rural credit co-operatives was introduced in February 1949 to cover at least 50 per cent of the villages and 30 per cent of the population. In 1949-50, agricultural credit co-operatives covered 41.40 per cent of the villages. During this year, 6,444 rural credit societies undertook some multi-purpose activity like distribution 7 8 K. Keshav Kini, Primary Agricultural Credit Societies in Tamil Nadu Tamil Nadu Journal of Cooperation, Vol.1, no.1 (2000), p.34. Ibid., pp.34-35.

of seeds, manures, agricultural implements and controlled commodities like rice, sugar, kerosene, etc. 9 60 Co-operative Agricultural Banks Following the recommendations of the Rural Credit Survey Committee, twelve large sized societies known as co-operative agricultural banks whose liability was limited to a multiple of the share capital subscribed by the members were organized in 1955-56. More banks were organized subsequently and as on 30 th June 1961, 329 co-operative agricultural banks were functioning in the state. In November 1958, the National Development Council enunciated the principle that agricultural credit co-operatives should be organized on the basis of village community as a primary unit and that they should not only disburse credit, but also undertake supply of agricultural requisites to the members. The state government accepted the recommendation and directed the Registrar of Co-operative Societies not to organize agricultural banks any more. 10 Intensive Agricultural District Programme The intensive agricultural district programme popularly known as the package scheme was introduced in Thanjavur district on 13 th April 1960 in 23 community development blocks. A compact group of villages (317) was selected to cover 1/5 of the cultivated lands (about 2.23 lakh acres). In these blocks one hundred and eighty-two rural credit co-operatives were to issue credit and agricultural inputs to their members on the basis of farm production 9 K. Keshav Kini, Op.cit., p.35. 10 Ibid., p.36.

61 plans which were prepared for them by the community development blocks. The objective of the scheme was to maximize agricultural production by providing timely credit with cash and kind components, consisting of mainly chemical fertilizers, pesticides and seeds. The programmes were extended to other areas on the subsequent years. 11 Introduction of the crop loan scheme In 1966-67, a rationalization of short-term lending policies was effected by the introduction of the crop loan system. Under this system, the issue of loans coincided with the commencement of agricultural operations and the dates of the recoveries of the loans were fixed, a month or two after the harvest. There were the cash and the kind components to a loan. The cash portion was given for wages of labour, hire charges of plough bulls etc. The kind portion consisted of chemical fertilizers, seeds and pesticides etc. Scales of finance were fixed for each crop per acre. Landless tenants were also to be issued loans under this scheme. The linking of credit with marketing was an important plan of the crop loan system. The following statement gives particulars of the issue of loans by agricultural credit societies during the years 1978-79, 79-80 and 1980-81. Year Issue of Loans (Rs. in crores) 1978-79 122.48 1979-80 68.61 1980-81 45.51 11 K. Keshav Kini, Op.cit., p.36.

62 There was a decline in the issue of loans from 1978-79 onwards. The decline in the issue of loan was mainly due to heavy overdues. As on 30.06.1962, the percentage of overdues to demand was 9.2 and as on 30.06.1981, it was 43.8 indicating that the collection drive was not particularly effective. 12 While as on 30.06.1951, the average membership and the paid up share capital per society were 83 and Rs.1,033, as on 30.06.1981, the average membership and the paid up share capital were 1,055 and Rs.88,635 respectively. It may be seen that the increase in membership and the paid up share capital over the years has been quite satisfactory. The results were achieved either by weeding out uneconomic units or amalgamating them with viable and potentially viable societies. 13 Primary Agricultural Co-operative Banks The primary agricultural credit societies have been designated as primary agricultural co-operative banks in Tamil Nadu. As on 30.06.1987, there were 4,655 primary agricultural co-operative banks in the state. On that date, the membership of these banks was 60.13 lakhs and the paid up share capital was Rs.6,068.90 lakhs. As on 30.06.1981 the membership per society was 1,055 while as on 30.06.1987 it went upto 1,292. The progress can be termed as satisfactory. 12 13 K. Keshav Kini, Primary Agricultural Credit Societies in Tamil Nadu, Tamil Nadu Journal of Cooperation, Vol.1, no.1 (2000), pp.41-42. Ibid., p.42.

63 As on 30.06.1981, the deposits per society worked out to Rs.36,485 whereas as on 30.06.1987, the deposits were Rs.1,19,795 per bank. Good progress was registered by these banks in mobilizing deposits. Loan issues also registered an increase in 1986-87 as compared with 1980-81. In 1986-87, the loans issued were Rs.30,416.77 lakhs while in 1980-81 the loan issues were Rs.4,550.65 lakhs. Action plan for strengthening the primary co-operative agricultural structure was launched on 1999. A memorandum of understanding was entered into by the Tamil Nadu State Apex Co-operative Bank with NABARD. The objective was making all the primary agricultural co-operative banks viable. In each Regional Joint Registrar s region, a task force was set up under the chairmanship of the Regional Joint Registrar and 118 banks were identified under the scheme. The scheme envisages that either the banks amalgamate themselves with other banks or go into liquidation. The details of the number of banks in which the state participated in the share capital from 1994-95 to 1998-99 are given below. Year No. of PACBs 1994-95 705 1995-96 1640 1996-97 851 1997-98 922 1998-99 973 In 1992, a deposit guarantee scheme was introduced to help the banks to strengthen their deposit base. Under the scheme, the central co-operative

64 banks guarantee the deposits of the primary banks. While as on 31.03.1993, the banks had deposits of Rs.357 crores, on 31.03.1999 they increased to Rs.2045.40 crores. The progress recorded was indeed spectacular. 14 A fact that cannot escape our notice is that as on 31.03.1997, out of 4,957 primary agricultural co-operative banks, as many as 3,778 banks were working on loss, the loss being Rs.6,814.13 lakhs. As on 30.06.1993 out of the loans outstanding of Rs.1,435.79 crores, the overdues were Rs.398.71 crores. As on 30.06.1998 the overdues constituted 32.4 per cent of the loans outstanding. 15 The primary agricultural co-operative banks in the villages meet the short-term agricultural credit requirements of the farmer members towards their cultivation operations. The period of repayment of short-term loan ranges between 12 and 15 months. The banks issue medium-term loan also to the members for undertaking subsidiary occupation allied to agricultural activities like purchase of milch animals, sheep rearing, poultry farming, etc. The time of repayment of these loans is 3 to 5 years. These banks provide loans for cultivation on personal surety basis as per the scales of finance which are fixed by a state level committee. As on 2003-04, there were 4,555 primary agricultural co-operative banks in the state. 16 During 2003-04, the Government has sanctioned Rs.56.60 lakhs as share capital to 115 primary agricultural co-operative banks 14 15 16 K. Keshav Kini, Primary Agricultural Co-operative Banks, Tamil Nadu Journal of Cooperation, Vol.1, no.1 (2000), pp.43-44. Ibid., p.44. Government of Tamil Nadu, Co-operation Department Policy Note, 2004-05.

65 coming under the purview of Salem, Tiruchirapalli, Kumbakonam and Sivagangai District Central Co-operative Banks for availing loan from National Bank for Agriculture and Rural Development from its National Rural Credit [LTO] Fund. A sum of Rs.500 is provided as interest free loan to women members of primary agricultural co-operative banks to increase their share capital for obtaining enhanced loan amount. In 2003-04, an amount of Rs.10 lakhs has been sanctioned under this scheme benefitting 2000 women members. 17 Rural co-operative banking sector in post economic reform period The role of rural co-operative banking sector is inevitable in the development of agriculture in India. Indian agriculture has been going through a serious crisis during the post-reform period. Besides domestic concerns, such as decline in productivity, high input-cost, declining public sector investment, inadequate availability of institutional credit and raising agricultural imports. Indian agriculture has also been facing external challenges under the WTO regime. 18 Now farmers have to face the challenge of increased production with less production cost, so that their produce stands competitively in global market, where prices will be the dictating factor. 19 In the wake of WTO Agreement on Agriculture and with the removal of quantitative restrictions on imports of various agricultural commodities with effect from 1 st April, 2001, the co-operative marketing organizations have been taking steps to improve their competitive edge in terms of cost- 17 18 19 Government of Tamil Nadu, Co-operation Department Policy Note, 2004-05. S.P. Singh and M.R. Behera, Indian Agriculture and WTO, Yojana, Vol.50, (September, 2006), p.24. Prasoon Verma, Agriculture as an Industry, Yojana, Vol.50 (September, 2006), p.20.

effectiveness, improvement in quality standards and control on management and operational costs. 20 66 The agriculture sector is the mainstay of Indian economy as it supports more than half a billion people, by providing employment to nearly 52 per cent of the workforce in our country. However, the agriculture sector faces many challenges which affect its growth. Recognizing the importance of agricultural sector in the overall growth of the country, the Ministry of Agriculture has initiated several policies and programmes to increase crop production in the country and improve farm incomes. Fulfilling its commitment towards farmers welfare, the government announced a Rs.71,680 crores agricultural debt waiver and debt relief scheme, which is the first of its kind since independence for farmers covering direct agricultural loans. 21 This is an age of co-operative reforms. Several reforms have already made their way into the functioning of the co-operative banks of the nation. However, a lot remains to be done. We cannot run away from the fact that the co-operative banks have not realized their full potential. However, this does not mean that the very model of co-operative behaviour is outdated. An impartial assessment of the performance of the banks will lead to the formulation of appropriate policy reforms. 22 In order to face the challenges of globalization and liberalization, which affect all major sectors of the economy, the co-operative banking sector has to necessarily reinvent itself, by 20 21 22 G.H. Amin, Development of Agriculture Co-operatives in India, The Cooperator, Vol.45, no.5 (2007), p.183. Sharad Pawar, Agriculture sector: some issues, The Cooperator, Vol.46, no.8 (2009), p.343. Sharad Pawar, Co-operative banks: some issues, The Cooperator, Vol.45, no.4 (2007), p.127.