COOPERATIVES CONTRIBUTE TO BUILD A BETTER WORLD WITH PARTICULAR

REFRENCE TO ‘TACKLING THE ECONOMIC CRISIS’(ICA General Assembly -Workshop, Cape Town, 2-3 November, 2013)

BY

BHIMA SUBRAHMANYAMManaging Director

NATIONAL FEDERATION OF STATE COOPERATIVE BANKS (NAFSCOB)J.K. CHAMBERS, PLOT NO. 76, SECTOR-17, VASHI,

NAVI MUMBAI – 400 703, INDIAPhone: 91-22-27892741/27892697/27892738.

Fax: 91-22-27892604E-mail: nafscob@nafscob.org, nafscob@gmail.com

Website:http://www.nafscob.org

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• Coverage of Presentation:– Strength & Weaknesses of Indian Cooperative Credit &

Banking Institutions.– Regulatory/Supervisory/Statutory Authority.– Provisions Applicable (BR Act 1949 of RBI) to Cooperatives.– Applicability of Basel Norms-Prudential Norms.– Recommendations of Committee on Financial Sector

Assessment (CFSA).– Global Financial Crisis, Survival of Cooperative

Banks/Lessons.– Issues Concern/Future opportunities/Initiatives.– Potential for Cooperatives to Build a Better World to tackle

Economic Crisis.

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• Mr. Ban Ki-moon, Secretary –General, United Nations, rightly mentioned the importance cooperatives during recent global financial crisis as “With the world facing multiple crises, and with natural disasters testing even the most robust economies and communities, cooperatives have meanwhile maintained high credit ratings, increased assets and turnover, and expanded their membership and customer base. After disasters such as earthquakes, tsunamis and floods, cooperatives have shown their ability to mobilize solidarity for reconstruction; agricultural cooperatives improve the productivity of farmers by facilitating access to markets, credit, insurance and technology. Social cooperatives can provide an important safety net in the face of declining or minimal public welfare. They also show considerable potential for empowering youth and alleviating the growing global youth jobs crisis”.

• Mr. Guy Ryder, Director-General, UN International Labour Organization (ILO) also highlighted the importance of cooperatives as “As global attention focuses on the challenge of sustainable development, cooperatives can and must play a key role as creative enterprises expanding into new and innovative areas - recycling and renewable energy, providing people with know-how, inputs, finance and markets at fair prices with low-environmental impact. In so doing, they will be making a valuable contribution to a just transition to a low-carbon sustainable development path. From the world of work perspective, cooperative enterprises are well placed to be leaders in advancing the decent work dimension of a just transition,”

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Strengths and Weaknesses of Indian Cooperative Credit & Banking Institutions

Sl.No.

Strength Weaknesses Opportunities Threats

1 More than 100 years old movement

Poor Management/ Governance

Strong state participation Leadership Vacuum

2 Democratic/ Autonomous

Lack of Professionalism/ Approach

Challenges of Financial Sector Reforms

Politicisation

3 Large outreach/ 100% village coverage

Lack of Freedom of Autonomy

Diversification of Lending – Innovative Approaches

Populist Measures

4 Farmers’ Institutions – Member Participation

Government Interferences

Resource Mobilisation - Independence

Duality of Control

5 Resource Mobilisation Low Interest Margin Linking Credit with Marketing

Competition

6 Strong Balancing Centre

Lack of Adequate Resources

Professionalisation/ Modernisation

Restrictive Provisions of BR Act.

7 Innovative Approaches Inadequate / non-active Member Participation

Redefining the role and responsibilities

Proposals of delayering

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REGULATORY/SUPERVISORY/STATUTORY AUTHORITY

1. Reserve Bank of India * Regulatory, Supervisory & Monitory Authority * RBI Act – 1934 * BR Act – 1949(AACS)2. NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT (NABARD) * Delegated Powers of RBI * Supervisory Role * Refinance Role * Promotional Role * Developmental Role * Initiated Micro-System through NGOs/SHGs.3. Government of India * Multi-State Cooperative Societies Act, 20024. State Governments * State Cooperative Societies Act5. Registrar of Cooperative Societies

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Provisions Applicable (BR Act 1949 of RBI (AACS))

to Cooperatives

• Issues relating to interest rates, loan policies, investments, prudential exposure, norms, forms of financial statements, reserve requirements, appropriation of profits etc.

• Bank and Branch Licensing, area of operation,• Acquisition of Assets incidental to carrying on banking

functions,• Policy regarding remission of debts,• Audit,• Change of Management and appointment of CEO• Appointment of Administration,• Any other banking related function to be notified by RBI

from time to time.

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• Reduction in Cash Reserve Ratio (CRR): Policy Rates Reserve Ratios

Bank Rate Repo Rate Reverse Repo Rate

CRR SLR

2011* 2013** 2011* 2013 $ 2011* 2013 $ 2011* 2013^ 2011* 2012^^

6.00% 9.00% 8.50% 7.50% 7.50% 6.50% 6.00% 4.00%

25.00%

25%

*As on 2-11-2011, **As on 07-10-2013, $ 19-03-2013, ^ As on 9-02-2013, ^ ^ As on 12-04-2012(As on 11-08-2012 SLR for Scheduled Commercial Banks – 23.00%) Source: RBI

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PRUDENTIAL NORMS

• Prudential Norms for Income Recognition, Asset Classification and Provisioning have been introduced for SCBs and DCCB from the year 1996-97.

MADE APPLICABLE• CAPITAL TO RISK ASSETS RATIOS (CRAR)

RECOMMENDED CRAR TO COOPERATIVES• INITIALLY WITH CAPITALISATION : 7%• WITHIN THREE YERS OF CAPITALISATION : 9% • NEXT TWO YEARS : 12 %

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• Major Recommendations of the Committee on Financial Sector Assessment (CFSA):– Low resources of SCBs/DCCBs, – Duel control of RBI, NABARD and RSC, – Board of supervision by NABARD for SCBs/DCCBs, – Compliance, – Licensing of cooperatives, – Capital adequacy, – Regulation and supervision, – Corporate governance etc.

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• BASEL - I: Focused mainly on credit risk by creating a bank asset classification system.

• BASEL – II: Created standards and regulations to reduce the risks associated with its investing and lending practices.

• Basel – III: is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. – These measures aim to: • improve the banking sector's ability to absorb shocks

arising from financial and economic stress, whatever the source • improve risk management and governance • strengthen banks' transparency and disclosures.

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Assessment of 25 Basel Core Principles -SCBs/DCCBsSr. No. Assessment Number of BCPs

1 Compliant 3

2 Largely Compliant 10

3 Materially Non-compliant 6

4 Non-Compliant 2

5 Not Applicable 4

SCBs: State Cooperative Banks, DCCBs: District Central Cooperative Banks

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COOPERATIVES Vs. BASEL CORE PRINCIPLES (25)

Compliant (C)

Largely Compliant (LC)

Materially Non-compliant (MNC)

Non-Compliant (NC)

Not Applicable (NA)

i. Major acquisitionsii. Large exposure limitsiii. Exposure to related

party

i. Objective is independence, powers, transparency & cooperationii. Permissible activitiesiii. Licencing criteriaiv. Credit Riskv. Problem Assets, Provisions and reservevi. Supervisory Approachvii. Supervisory Techniquesviii. Supervisory Reportingix. Accounting & disclosure x. Corrective & Remedial power of supervisors

i. Capital adequacyii. Risk management processiii. Market Riskiv. Liquidity Riskv. Internal control & auditvi. Abuse of financial services

i. Operational riskii. Interest rate risk in banking book

i. Transfer of significant ownershipii. Country & transfer riskiii. Consolidated supervisioniv. Home - Host relationship

3 10 6 2 4

Global Financial Crisis:• September, 2008, biggest investment bank, Lehman Brothers

in United States of America (USA) collapsed and set off financial crisis in the entire globe.

• The regulatory failure was rated as a reason for global financial crisis.

• This crisis has had its impact on both developed and developing countries.

• Bank credit growth in major economies such as US, UK, and the Eurozone secularly declined throughout 2009. The asset quality has also been adversely impacted with NPA (as % of total loans) rising to higher levels. The NPAs in the UK and US have risen from 0.9 per cent and 1.4 per cent in 2007 to 4.0 per cent and 4.9 per cent in 2009 respectively.

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• The Indian banking sector has, however, withstood the spillover effects of the global financial crisis as was evident in the robust Capital to Risk Weighted Assets Ratio (CRAR) and Tier 1 CRAR which remained far above the stipulated regulatory minimum of 9 per cent.

• Commercial Banks are required to maintain a minimum CRAR of 9%.

• Cooperative Credit and Banking Institutions Viz., PACS, DCCBs & SCBs are expected to achieve a minimum CRAR of 7% with the external financial support from the date of implementation of the Revival Package provided by Government of India.

• Gradual increase in CRAR to 9% and 12% with recapitalisation support (as suggested by Task Force).

• As on March, 2012 – Gross Non-Performing Assets(NPAs):– Commercial Banks-2.9%, SCBs-6.88, DCCBs-9.26% and Urban

Cooperative Banks- 7%14

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How Indian Banks Survived the Global Crisis ?

• India has displayed the ability to recover from recession faster than the US or any other developed country.

• The cautious approach of Reserve Bank of India in the last two to three years advising banks to go slow on their exposure to sensitive sectors.

• The regulatory authorities had shown vision to forsee the dangerous signals ahead.

• The Indian Banking system was not affected severely by the global crisis because its parameters have remained strong.

• The present financial system itself is adequate enough to allow both public and private sector banks to play an active role.

• The economic reforms since 1991 has had a salutary impact on the financial health of the banking system.

• The reforms have also improved the profitability of banks.• The banking sector reforms also emphasized the need to improve

productivity.• A variety of initiatives taken by the banks, including adoption of

technology, has resulted in increased productivity . Source:(Financial Express-July 24, 2009)

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MAIN REASON FOR SURVIVAL

• Favourable large net-work and outreach, • Deep roots with rural areas, • Member driven, democratic organisation in

character, • Support from Governments, • Appropriate regulatory, supervisory and monitoring

mechanism, initiatives taken by Union Government, State Government and the cooperative banking structure towards revival, reform and restructuring etc.

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Cooperative Banks and Global Financial Crisis:

The main reason for the survival of Indian Cooperative Banks may be attributed to their (a) favourable large net-work and outreach, (b) in-depth roots with rural areas, (c) member driven, democratic organisations in character, (d) support from Governments, (e) appropriate regulatory, supervisory and monitoring mechanism, initiatives taken by Union Government, State Government and the cooperative banking structure towards revival, reform and restructuring etc.

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Lessons from Global Financial Crisis • Safeguarding Financial Stability:

“Financial stability is a condition in which the financial system can withstand shocks thereby reducing the probability of disruption or breakdown of the system.” – Initiatives of India: • Committee on Financial Sector Assessment (CFSA)-

March, 2009 (Chairman- Dr. Rakesh Mohan)• Establishment of Financial Stability & Development

Council (FSDC)- December, 2010.• Financial Sector Legislative Reforms Commission (FSLRC) –

March, 2013 (Chairman- Justice (Retd.) B. N. Srikrishna).

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Dr. D Subbarao, Former Governor, RBI – “The RBI has always held that ‘Financial Stability’ cannot be its exclusive mandate, and that all Regulators and the Government have to share the responsibility for ‘Financial Stability’, that coordination is important and that the Government has a more active role to play in a crisis time than in normal times”.

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Issues of concern:a) Business managementb) Funds managementc) Recovery managementd) Human Resource Management e) Others

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FUTURE OPPORTUNITIES/INITIATIVES

• Member-driven – Members centred organization/Member education• Efficient banking institutions as per the statutory requirements/BASEL norms• Contribution towards Financial Inclusion• Strengthen the area of Insurance Protection System / Institutional Protection

System • Human Resource Development• Involve Government intervention rather than invite Government interference• Adherence of KYC Guidelines / Money laundering standards• Risk Management• Consolidation/Merger• Research and Studies/Training• Corporate governance• Cooperative Bank of India to bridge the existing systemic gap in the cooperative

banking system• Formulation of Institutional Protection System• Legal / Statutory reforms to ensure freedom of autonomy in the management

Conti…….

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FUTURE OPPORTUNITIES/INITIATIVES (Cont..) • Strong state participation• Challenges of financial sector reforms• Diversification of lending – innovative approaches• Resource mobilisation – independence• Linking credit with marketing• Professionalization/ modernisation, redefining the role and

responsibilities• Leadership• Net-working * HRD * Best Practices * Exchange of Expertise: Arrangement for Replication * Create Awareness & to combat adverse effects of climate change * Promotion of IYC - 2012

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• Discussion Paper on ‘Banking Structure in India - The Way Forward’ (2013), RBI:– One of the important issues covered in the discussion paper:

– Indicative reorientation of the banking structure: The reoriented banking structure would comprise four tiers. The first tier may consist of three or four large Indian banks with domestic and international presence along with branches of foreign banks in India. The second tier is likely to comprise several mid-sized banking institutions including niche banks with economy-wide presence. The third tier may encompass old private sector banks, Regional Rural Banks, and multi state Urban Cooperative Banks. The fourth tier may embrace many small privately owned local banks and cooperative banks.

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• Indian Banking System is Safe Secure & Sound.• Cooperatives Globally Help

to Tackle Economic Crisis. • They have potential to

build a ‘Better World’.

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