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Usha ThoratKula Lumpur Chairperson, DICGC and November 01, 2007 Deputy Governor, Reserve Bank of India

Issues and Challenges in Regulating, Supervising and providing Deposit Insurance

to Rural Banks and Cooperatives in India

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Outline of presentation

Indian Financial Intermediaries

Deposit Insurance in India

Rural and Cooperative Banking -Issues, Challenges and Strategies:

Regional Rural Banks (RRBs)Rural Cooperative BanksUrban Cooperative Banks (UCBs)

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(Figures in brackets indicate number of insured deposit accounts in millions)Indian Financial Intermediaries

Banks(683) NBFCs PACS

Commercial Banks (552)

Coop. Banks (131)

Public Sector Banks (451)

Private Sector Banks /LABs

(48)

Foreign Banks(2)

RRBs(51)

Urban Co-Op Banks(55)

State Co-Op Banks(5)

Central Co-op Banks(71)

Deposit Taking Non-Deposit Taking

Deposits insured (mandatory)

Depositsnot insured

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Indian Deposit Insurance – a quick view

DICGC (Since1962) - Wholly owned by RBI.

Pure Pay Box System of deposit insurance

Limited to INR 100,000 (US $ 2,500) per depositor.

Mandatory cover & uniform flat rate premium.Fully Protected: 95% of total deposit accounts; Insured Deposits: 59% of total assessable deposits; (coverage: 2.72 times of per capita GDP )Insured accounts : 683 million; Insured deposits : U.S $ 352 billion;Reserve Ratio : 0.80 %

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Co-operative Banks Vs. Commercial Banks(Share as of March 2007)

28.76 %2.08 %Recovery Rate(Overall 5.13 %)

11.00 %89.00 %Claims Settled

85.25 %14.75 %Insured Deposits

CommercialBanks

Co-operativeBanks

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Aptly summarized

“We are adopting a three-track approach with regard to capital adequacy rules. On the first track, the commercial banks are required to maintain capital for both credit and market risks as per Basel I framework; (urban) cooperative banks on the second track are required to maintain capital for credit risk as per Basel I framework and surrogates for market risk; RRBs (and rural cooperative banks) on the third track which though subject to prudential norms do not have capital requirement on par with the Basel I framework”

- Governor Dr.Y.V.Reddy

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in India

Rural Banking

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Rural / Cooperative Banking - Salient Features

Key role in Financial Inclusion

Limited area of operations; Local flavour

Client profile: Typically farmers, small business establishments, small scale industries, retail traders, professionals, self employed persons

New outreach: Self Help Groups / Joint Liability Groups and other micro credit vehicles.

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Rural Cooperative Credit Structure - 3 Tiers

State Cooperative Banks

(SCBs)27

District Cooperative Banks

(DCCBs)363

Primary Agricultural Credit Societies

(PACs)109,000

5 Million Accounts Insured for USD 3,080 Million

71 Million Accounts Insured for USD 14,125 Million

128 Million AccountsNo Deposit Insurance availableNot regulated by RBI

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Regional Rural Banks (RRBs)Since 1976; Owned by Central/State Govts./Sponsor Banks.

196 RRBs (Sept. 2005); now, 95 following Mergers.

Sponsored by 28 banks in 26 States; 14,519 branches.

Business ranging from US $ 6 Million to US $ 1,200 Million each

Local flavour; a major vehicle for inclusive growth.

Higher Cost-income ratio & NPAs; lower profitability.

Recap of RRBs having negative net worth – GOI plan.

Challenges – Governance, Skills, IT, Payment systems.

Deposit Insurance available; No impact on DICGC as yet.

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Task Force for Revival of Rural Cooperative Credit Structure (CCS)

National level Task Force attributed problems of CCS to:

Impairment in Structure

Impairment in Governance

Impairment in Management

Financial Impairment

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Rural Cooperative Credit Structure

Recommendations of Task ForceSpecial financial assistance Institutional restructuring; Changes in legal frameworkCapacity building ; Fit and proper criteriaRoad map for CRAR

Current positionImplementation of recapitalisation package underway in MoU States.No challenges posed to DICGC by Rural cooperative banks.

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Urban Co-operative Banks - a few large failures

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Dual Control – Cooperative Banks

Multi State Co-operative Banks

State Subject

Federal Subject

RCS State Govt. BR Act (AACS) -RBI

Central Act

Registration / Audit / Liquidation Licensing / Supervision / DI

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Urban Cooperative Banks (UCBs)Mushrooming of UCBs.(1993-2001)Weak governance, managerial failures, poor financial health.Dual Control.

Failure of a few large UCBs since 2001.

Out of total claims of US $ 650 million admitted for all banks so far, over 88% was in respect of 176 UCBs alone.

Current concern to DICGC.

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Confidence in UCBs shaken!!

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Addressing UCBs Problem – Our Approach

Bank / branch licensing on hold since April 2005.Vision Document.MoU/TAFCUB mechanism.

Merger guidelines.Fit and proper criteria for CEOs.Twin tracked Regulatory/Supervisory regime.Incentives for stronger banks in MoU States.Graded Supervisory Action.

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UCBs - Current Challenges and Strategies

Restructuring of problem banks- our experiences.

Avenues for raising Capital: working group recommendations.

Scheme of amalgamation.

Restructuring liabilities of problem banks.

Expeditious settlement of claims: revised guidelines.

Coordination mechanism between DICGC and RBI.

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UCBs Emerging Trends

Rising Strength & Public Confidence

17.027.6 732 19262004

Advances(US $ billion)

Deposits(US $ billion)

Of which:Weak banks

No. of UCBs

As on Mar 31,

(Figures in brackets indicate YoY Growth)

16.7▼(-1.6%)

26.3▼(- 4.8%)

725▼18722005

17.9▲(7.1%)

28.5▲(8.6%)

677▼18532006

19.7▲(9.8%)

30.2▲(6.1%)

563▼18132007

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