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CHAPTER 1 (Session 2)

COOPERATIVE BANKS IN CHANGING BANKING SCENARIO GOI REVIVAL PACKAGE FOR STCCS

With one of the largest acreage of cropland in the World and 11%of worlds land

under agriculture, India continues to be one of the most prominent agricultural

economies of the world. There is a huge untapped potential in the Indian market

for food and agribusiness, both in mature sectors such as agri-inputs, edible oil

and sugar, as well as the emerging sectors like dairy, poultry, fruits & vegetables

and biotechnology.

India is the seventh largest and second most populous country in the world.Population of India rose from 361 million in 1951 to 846.3 million in 1991,

breaching the billion marks in the year 2000. The population is expected to

increase at the rate of 1.54% per annum until 2010, or another 162 million people.

The estimates made by the Planning Commission indicate that the Indian

population will be of the order of 1.6 billion by the year 2050.

A new spirit of freedom is now stirring the country, bringing sweeping changes in

its psyche. Today, India is one of the most exciting emerging markets in the world.Skilled managerial and technical manpower that match the best available in the

world and a large middle class provide India with a distinct cutting edge in global

competition.

The Indian economy recorded a growth of 5.4% during 2001-02 and has grown at

the level of 9% for three years since 2005-06 and the accelerated growth

performance was attributed mainly to agriculture sector which grew at a rate of

4%. Agriculture accounted for about 22% of the Indian GDP with 65% of

population engaged in agriculture.

Cropland in India accounts for almost half the geographical area of 328.8 million

hectares. The production of food grain in India during 2001-02 was 209.2 million

tons and has crossed 230 million tons during 2007-08. India is the worlds


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second largest producer of wheat and paddy and the leading producer of fruits

and vegetables. However, the productivity of Indian crops remains at 40-50% of

global average, largely due to lack of adoption of modern agriculture technology

and inputs. To keep pace with the needs of the expanding population, India needs

383.2 million tons of food grains at current levels of per capita availability by 2020

and it may even go up since economic growth translates into higher purchasing

power and hence higher consumption.

Credit is one of the crucial inputs for propelling the growth of agriculture. For the

past few decades, institutional finance is coming in a big way to help the Indian

farmer in increasing the productivity and production. All Rural Financial Institutions

have played a crucial role and the role of Cooperatives was laudable till the end of

20th century as the largest purveyor of agricultural credit. However, with the

liberalization and the reforms that had swept the banking industry in the past

decade and half had diminished their leadership position and made the way for

the new players to fill the gap. The share of the cooperatives in agriculture which

used to be around 70% even in late 90s had slipped down to less than 30% due

mainly to inertia to keep pace with the changes and efforts not matching with

those of competitors especially from Commercial Banks of Public and Private

sectors. A table illustrating the scenario is given below:

Flow of Institutional Credit to Agriculture from 1992-93 to 2004-05

Agency 1992-93 1997-

98

2000-01 2001-

02

2002-

03

2003-

04

2004-

05

Cooperative

Banks

9378

(62%)

13975

(44%)

20718

(39%)

23524

(38%)

23636

(34%)

26875

(31%)

31231

(25%)

RRBs 831

(5%)

2040

(6%)

4219

(8%)

4854

(8%)

6070

(9%)

7581

(9%)

12404

(10%)

Commercial

Banks

4960

(33%)

15831

(50%)

27807

(53%)

33587

(54%)

39774

(57%)

52441

(60%)

81481

(65%)

Total 15169 31846 52744 61965 69480 86897 125116

Note: Figures in brackets indicate its % over the total

Source: NABARD Annual report, 2005-06


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When the cooperative banks share in the agricultural sector is declining, public

sector commercial banks & private sector banks are emerging as new champions

in agricultural and rural banking. ICICI bank experienced a 37% growth in rural

and agricultural portfolio from Rs.146.87 billion to Rs.201.79 billion during 2006-

07. Agricultural lending accounts for around 10% of SBIs loan book in the

financial year 2007 at a year-on-year growth of 33%. (Business Outlook, July 20,

2007)

The present banking scenario in India is witnessing sea changes. Adoption of policy

reforms in Indian economy has resulted in the change of economic order towards

the process of Liberalization, Privatization and Globalization (LPG). The

Liberalization of the financial sector in India is exposing Indian banks to a new

economic environment that is characterized by increased competition and new

regulatory requirements. As a result, there is a transformation in every sphere of

activities of the banks in India, especially in Governance, nature of business, style

of functioning and delivery mechanisms. The new generation banks brought the

necessary competition into the industry and are spearheading changes towards

higher utilization of technology, improved customer service and innovative products.

In spite of their huge and monolithic and bureaucratic organizational structure,

public sector banks also proved to be surprisingly nimble and flexible to meet the

emerging needs of customers. Thus, there is a paradigm shift form the sellers

market to buyers market in the industry which forced the bankers to change their

approach from conventional banking to convenience banking and mass banking to

class banking. The shift has also increased the degree of accessibility of bank to

common man for his varied of needs andrequirements.

The business of banking revolves around effective mobilization and efficient

application of funds of the bank. Changes taking place in the banking business in

recent years as a result of the financial sector reforms are too fast and challenging

to the bankers. This has created a complex business climate on the one side and

opened up wide opportunities in the area of investments, advances, services and so

on. The approach to the credit policy of the banks has also changed. Besides, the

services so far offered by the bankers have taken a new leaf and experiencing


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drastic developments. Banking Sector has been dealing with only paper currency till

the third quarter of 20th century. Excepting the mode of telegraphic transfer, the

transfer of funds in banking has been either through currency or instruments like

cheque, demand draft etc. The final phases of 20th century had witnessed plastic

currency in the form of Credit cards, Charge cards, Money cards etc. Cards are

gradually being used by a large number of people as it avoids carrying of paper

currency and its connected risks. As the situation changes, the issues confronting

the bankers are also new, unique and not experienced before. Though Cooperative

banks are also operating in the same environment, they became mute spectators to

rapid changes happening in the present banking sector as illustrated below:

Customer Focus: Hectic competition in the banking sector put the customers on

the drivers seat by getting their required products and services. As the business

environment changes across industries, the customers expectations are also

growing. The facilities and options put forth by banks to customers made the

present customers demand more through customer service. Customer service is

the main guiding factor to enhance banks reputation and ensure their survival in

the competitive environment. Increased competition, technology driven services,

lower entry barriers leading to new entrants, less protective regulation, increased

autonomy for the banks etc are some of the features of the new trend. These

characteristics have resulted in introduction of various reform measures. Thus in

the bankers point of view, the customer service had undergone metamorphosis

over the years beginning with Serving followed by Pleasing, Delighting and now the

ultimate challenge for all is Retaining the customers. Shamrao Vittal Cooperative

bank, Mumbai recently had taken a decision to send all the office assistants,

attenders of its head office to its branches in order to give better attention to the

customers.

Branch Banking: Expansion of branch network is one of the means to augment

business. The new generation private sector banks and foreign banks have started

exploiting business potential through other strategies as well. Traditionally public

sector commercial banks have been able to augment the business level by

increasing their branch network.


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Transparency and Disclosures: With a view to ensuring meaningful disclosure of

the true financial position of banks and to enable the users of financial statements

to study and have meaningful comparison of their positions, a number of measures

were taken by RBI.These disclosure norms covered aspects like capital adequacy,

asset quality, profitability, country risk exposure, risk exposure in derivatives

segment etc. In the context of implementation of Basel II norms, RBI has proposed

enhanced disclosure norms for implementation by banks.

Capital Adequacy Norms: Norms stipulated by the Basel Committee on Banking

regarding measures for capital augmentation and capital standards were

accepted by RBI and the same have been under implementation. The main

objective of capital adequacy norm is to strengthen the soundness and stability of

the banking system, Capital adequacy ensures that the financial fundamentals of

the banks are strong. Capital adequacy ratio is the ratio of capital fund to risk

weighted assets expressed in terms of percentage.

Best Practices Code: The Best Practices Code represents detailed procedural

rules for entering into transactional relations within the banks. The objective of

BPC is to ensure that all procedures, especially in sensitive areas are well

documented, compared with national and international best practices and

improved upon in the light of the experience gained. Best practices Code involve

examination of all procedures, products, activities and systems. It needs to be

integrated with the over-all risk management strategies of the bank. RBI issued

guidelines for ensuring minimum level of uniformity in content and coverage of

Best Practices Code.

Business Process Re- engineering: Business Process Re-engineering

represents transformation of select processes and procedures with a view to

empower the bank with contemporary technologies, business solutions and

innovations that enhances the competitive advantage. It is the fundamental

reconsideration and radical redesign of organizational processes in order to

achieve drastic improvement of current performance. It seeks to enhance the

value of services to the customers. Four important aspects are (i) Customer (to

give him enhanced value), (2) Competition (to meet successfully), (3) Change (to


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meet it) and (4) Cost (to reduce). There are three key parameters (i) Customer

Service, (ii) Product innovation and (iii) Operational excellence. BPR seeks to

further the strategic goals of the bank.

Corporate Governance: Corporate Governance refers to conducting the affairs

of a banking institution in such a manner that gives a fair deal to all the

stakeholders, i.e.. Shareholders, bank customers, regulatory authorities, society at

large and employees.

Corporate governance is important for bankers as majority of them are in public

sector, where they are not only competing with each other but with other players

in the banking system. Corporate Governance is to create an environment to help

the management to enhance the stake holders value.

Liberalized Branch Authorization Policy: RBI has liberalized and rationalized

the policy for authorization of branches and it has put in place a framework for

branch authorization policy which would be consistent with the corporate strategy

of banks. While considering applications for opening branches, RBI shall give

weightage to the nature and scope of banking facilities provided by banks to

common persons, credit flow to priority sector, pricing of products and banks

efforts towards promotion of financial inclusion and enhanced services.

The system of granting authorization for opening individual branches from time to

time, is replaced by a system of giving aggregated approvals, on an annual basis,

through consultative and interactive process. The authorization given would be

valid for one year from the date of communication.

Banks are not required to approach RBI for license and instead submit proposals

for opening of branches and on the basis of consolidated authorization granted,

they may proceed to open branches.

Insurance business by Banks- Banc assurance: Banks may undertake

insurance business either on risk participation basis (underwriting) or do insurance

business as an agent of insurance companies on fee basis. Insurance business

offers an opportunity to banks to increase fee based income thereby improving

profitability. Banks may undertake insurance business (underwriting) on fulfillment


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of certain parameters relating to net worth, capital adequacy, continuous profit,

low NPA etc. The insurance activity shall be undertaken by forming a subsidiary.

Banks equity stake can be 50% of the insurance entity.

Banc assurance helps the banks to build synergy between insurance business

and bank branch network to sell insurance products through banking channel.

RRBs, Urban Cooperatives and DCCBs are also allowed to undertake banc

assurance business. With the tie up of HDFC Standard Life Insurance Company

Ltd, Saraswat Cooperative Bank, Mumbai sells the life insurance products of

HDFC. With the tie up with Bajaj Allianz General Insurance Company Ltd,

Saraswat Cooperative bank sells the general insurance policies of Bajaj Allianz.

Universal Banking: Universal Banking represents all kinds of activities of

banking, development financing subject to compliance with statutory and other

requirements prescribed by RBI, GOI and other enactment. Activities include

accepting deposits, granting loans, investing in securities, credit cards, project

finance, remittances, payment systems, project counseling, merchant banking,

foreign exchange operations, insurance etc.

Retail Banking: Increase in purchasing power and emergence of strong middle

class, development of retail market have increased the scope for retail banking in

India.

Retail Banking has three main features;

Multiple products

- deposits, credit cards, insurance, investments etc

Multiple delivery channels

- call centers, branch, internet, Kiosk etc

Multiple customer groups

-consumer, small business, corporate etc.

Public sector commercial banks and new generation private sector banks have

been successful in creating strong retail banking segment. Focus on retail

banking has contributed to increasing market share of private banks in total

advances. Retail loan account for a significant portion of the loan portfolio of new


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private sector banks. It formed 53% of HDFC banks and close to 65% of ICICI

banks advances as on 31st March, 2007. Still there is wider scope for expansion

of retail banking for other banking sector in India.

Retail loans have been a prime driver of credit growth in recent years, witnessing

a growth of over 40% in 2004-05 and 2005-06. As a percentage of gross

advances, it increased from 22% in 2003-04 to 25.5% in 2005-06. The objective

of retail banking is to increase penetration by providing increasing level of

services and access, by offering value added services to customers. It consists of

three elements, viz, deposit products, loan products and other products. Other

value added services are also being offered by banks. The key retail loan

categories are mortgage finance, auto finance, personal finance, credit cars and

consumer durable finance. Cross selling of various retail products also takes

place.

Cross Selling: It represents additional services offered to existing customers,

with a view to expand banking business. It results in reduction of cost and

enhances satisfaction level of customers. While public sector banks have not

gone deep into the concept, new generation private sector banks are embarking

upon cross selling to maximize income. The main benefit is reduction of cost as

the cost of contracting a new customer is much higher than to serve an existing

customer. Cross selling enables creation of brand value. The existing customer

base of the banks is used for the purpose of cross selling. It is not a transaction

based activity but is primarily a relationship building exercise.

Outsourcing of work by Banks: Outsourcing represent utilisation of services of

another entity or outside service provider to perform certain functions/activities,

continuously which otherwise would have been normally undertaken by the bank

itself. This may be through an affiliated entity (say a subsidiary) or an external

entity like a marketing agent. The outside service provider is an entity undertaking

the outsourced function on behalf of the bank. Outsourcing enables them to

economise their cost of operations. It however involves certain risks like strategic

risk, reputation risk, compliance risk, operational risk, exit strategy risk, counter

party risk, contractual risk, access risk, concentration risk, systemic risk etc. The


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failure of service provider in providing quality service, breach in

security/confidentiality, non compliance with legal and regulatory requirement etc

may lead to financial losses to the outsourcing bank and hence they should guard

against such risks. There is need for adoption of proper risk management

practices in this regard. As per latest RBI guidelines, outsourcing of certain

functions like core management functions, internal audit, compliance, decision

making etc is not allowed.

Business Facilitators Model : NGOs, Farmers' clubs, Cooperatives, Community

based organizations, IT enabled rural outlets, post offices, insurance agents,

panchayats, village knowledge centers, ACABC units, KVKs, KVIC/KVIB units

may be involved in the models.

Activities / Services

Identification of borrowers and activities

Collection and processing of loan applications

Creating awareness about various bank products

Advice on managing money and debt counselling

Processing and submission of applications to banks

Promotion and nurturing of SHGs and JLGs

Post sanction monitoring

Monitoring and handholding of SHGs/JLGs

Follow up for recovery

No approval of RBI is required for using intermediaries for these services

Business Correspondents Model: NGOs, MFIs, Societies registered under Co-

operative Societies Act, Sec 25 companies, registered NBFCs and post offices

are eligible to be covered. While engaging these agencies, banks may ensure that

they are well established, enjoying good reputation and having the confidence of

local population. Banks are to give wide publicity and avoid being

misrepresented.

Services/activities

all activities listed under Business Facilitators model

disbursal of small value of credit

recovery of loan


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collection of small value deposits

sale of micro insurance, mutual fund products, pension products

receipt and delivery of small value remittances/other payment instruments

Computerization: Another segment which tries to revamp the various sectors in

general and banking sector in particular, is the introduction of computers in the

functioning of the banking system. Management Information System of the banks

is fully utilizing the benefits of computerization. The controlling units of the bank

offices are connected to the Head Office of the bank and also amongst

themselves. All types of communications are now by way of computerized output

of letters, statements etc.

One of the areas of computerization is total branch computerization. Under this

package, all the sections of the bank branch, viz., cash, deposits, advances,

minor heads of subsidiaries, day book, trial balance, etc. are computerized. The

data given as input in one section is getting recorded in the contra section. The

system normally does not admit any entry in which the amounts of debit and credit

do not tally with each other. Thus the differences on account of transfers are

totally eliminated.

Another package under branch computerization is called as ALPM which means

advanced ledger posting machines. In this package, the deposit sections, current

account. Savings bank, overdraft, day book etc. are computerized. This package

does not cover cash, advances, etc for computerization.

ELECTRONIC BANKING

One of the most exciting growth phases for the banking sector is the emergence

of technology-enabled business models, which led to geographic expansion,

wider product offerings and newer revenue streams. Perhaps no other sector has

been affected by advances in technology as much as banking. Almost all

segments of the banking sector witnessed phenomenal growth. The share of

private sector banks in total assets increased from 10% in 1998 to 23% in 2006.

Electronic banking means banking done electronically. Transaction handling,

cash management, account reporting are done through electronic media. Banks


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today reach their customers through ATMs, Point of Sale Devices, Telephone

Banking, Internet banking etc. Thus, bank is getting itself presented as a

technology driven unit in the banking sector with the means of electronic banking.

Customer visits are reduced and thereby human intervention and their

consequences are avoided resulting in the reduction in the establishment cost to

a greater extent. Electronic Banking comprises of the following:

a) Electronic Funds Transfer

b) Electronic Clearing System

c) Tele-banking

d) Automated Teller Machines

e) Shared Payment Network System

f) Credit Cards/Debit Cards

g) Corporate Banking Terminals

h) Point of Sale Terminal.

i) Electronic Data Interchange

a) Electronic Funds Transfer:

Transfer of funds has been made hither to in India by demand draft, mail transfer

and telegraphic transfer. RBI has devised Electronic Funds Transfer

(EFT)SYSTEM TO FACILITATE SPEEDER TRANSFER OF FUNDS

ELECTRONICALLY. This will enable transfer of funds from bank accounts of one

customer to the bank account of another customer. The sender and the receiver

may be located in different cities or they may even bank with different banks. EFT

is presently operative in Mumbai, Calcutta, New Delhi and Chennai. All the 27

public sector banks are participating under EFT System.

b) Electronic Clearing System

This covers ELECTRONIC CREDIT CLEARING and ELECTRONIC DEBIT

CLEARINGservices.

i) Electronic Credit Clearing:

It is a simple, reliable and cost effective solution for bulk and repetitive payment

transactions of Companies and Government departments. Companies who have


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to make bulk payments to a large number of beneficiaries prepare the credit

instructions on the magnetic media and submit it to RBI. RBI processes the date,

arrive at inter bank settlements and provide bank and branch-wise reports. This

Credit Clearing services is available in 46 centres in India.

The institution who wants to avail this facility has to register with the sponsor

bank. The sponsor bank will forward a copy of the registration to RBI after

allotting a registration number. The Institution has to prepare a magnetic media

and submit to the sponsor bank. The sponsor bank would present it to the local

clearing house. Clearing house debits the institutions bank account and credit the

various destination bank accounts where the beneficiaries maintain their

accounts.

ii) Electronic Debit Clearing:

It covers payment to utility companies like telephone and electricity bills. The

customer on getting the telephone/electricity bill approaches his banker and

authorizes the bank to debit his account and transfer the amount to the bank

account of the utility company. The bank branch prepares a floppy and sends it to

the service branch which ultimately reaches the clearing house. RBI debits the

individual bank/s and credit the sponsor bank of the utility company. This service

is available in Mumbai, Chennai, Calcutta and Delhi.

c) Telebanking:

The automatic voice recorder is used for simpler queries, which will get activated

for certain specific and routine queries. Manned phone terminals are provided for

answering complicated queries and transactions. The customer can actually do

entire non cash related banking on telephone.

d) Automated Teller Machines:

The customer is provided with an ATM card which enables him to have his routine

banking transactions done without interacting with a human teller. The card

holder can withdraw money 24 hours a day on all days. Some cities are

interconnected under this service so that the cardholder can withdraw cash at one

city by getting access to his account in another city.


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e) Shared Payment Network System:

This is large network of ATMs spread in the city of Mumbai, Vashi and Thane.

This is established as per the requirement of IBA. The participating banks issue

universal cards to their customers for transactions. SPNS offers services like

cash transactions, extended hours service, across the bank payments, utility

payments, statements, cheque book request, standing instructions etc.

f) Credit Cards/Debit Cards :

CREDIT CARDS : This is a facility of making post payment, viz., purchase now

and pay later. The customer can use his credit card within the fixed limits

prescribed by his bank with various member establishments who display the

acceptance of the cards in their office. The member establishments cover

airlines, hotels, railway stations, shops etc. Most credit cards carry the facility of

cash withdrawals every month which can be availed with any or selective bank

branch of the issuing bank.

DEBIT CARDS : This is a facility of prepaid system. Every time this card is used,

the person who provides the service gets the money transferred from the account

holders account. The buyer of the service who is the card holder, gets his

account debited at his branch. The individual has to approach the issuing bank

for getting a debit card. The bank issues the card with a Personal Identification

Number. The Card is normally operated through an electronic terminal and the

transaction authority, approval etc. are known when the card is swiped through.

The account holder can never overspend beyond the balance in his account

because the system will reject the transaction simultaneously. Citibank and Times

Bank have so far launched debit cards.

g) Corporate Banking Terminal:

Large Corporate customers can log into the bank data base and have access to

their accounts/transactions from their business places. Only some banks have so

far provided this service to their corporate clients and that too to a limited extent.


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h) Point Of Sale Terminal :

A computer terminal is linked online to a computerized customer information file in

a bank. A plastic magnetically encoded transaction card identifies the customer to

the computer. During a transaction, the customers account is debited and the

retailers account is credited by the computer for the amount of purchase.

i) Electronic Data Interchange :

EDI is the electronic exchange of business documents like purchase order,

invoices etc. in a standard, computer processed, universally accepted format

between trading partners. EDI can be used to transmit financial information and

payments in electronic form. Recently some banks have provided the facility of

using the standard formats for opening the accounts by downloading the same

into the customers computer, generate the formats and use the same with the

concerned bank for opening the account.

Real Time Gross Settlement (RTGS)

Under the present system whenever any person wants to make payment to

another person, he draws a cheque in favour of that person and delivers it t him.

The recipient deposits the cheque in his account. He will receive the clear

payment after the cheque gets cleared for payment through clearing system. Ifboth parties maintain account in the same city, the cheque is cleared in

comparatively short duration. If the parties maintain accounts in different cities,

the clearance time is longer. It may go beyond 7 days also. Under RTGS instead

of cheque, the message is delivered to the banker of the remitter. Eg. If Mr. X

who is maintaining account with SBI Chiplun Branch wants to make payment to

Mr.Y who is maintaining account with Corporation bank, Mangalore branch then

Mr. X will give instruction to his branch to debit his account and remit the money to

Mr.Ys account., giving the account number and unique IFSC code (which is very

essential) of the Ys account. The Chiplun branch will debit his account and send

the instruction to the nodal branch. The treasury department in turn inputs the

message in the RTGS system provided by RBI. The RTGS settlement account

of the SBI with RBI is debited and the RTGS settlement account of the

Corporation Bank is credited. The message with full particulars will appear in the


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RTGS system of corporation bank. Corporation bank in turn passes on the

message to Mangalore branch and the account of Mr.Y will be credited. The time

required for all this process will not be more than few minutes. Thus the

settlement is now made on real time basis. Other than many commercial banks

and private banks, Cooperative banks like Saraswat Cooperative Bank, Cosmos

Bank are the members of RTGS.

Automation in Cooperative Banks:

The recent developments in banking technology and expansion of

telecommunication network have ushered in new banking experience. Customers

have benefited by way of quick and efficient service delivery. The increase in level

of efficiency has been translated into higher profits for the banks. Most of the

technology initiatives have been taken by new generation banks and the Public

Sector Banks have also followed suits. Of late technology has penetrated into the

Regional Rural banks as well. However, the cooperative banks have by and large

remained in the periphery of this rapid technological development. Only a few

cooperative banks have been able to adopt technology in a big way.

Computerization is no doubt investment oriented and cooperative banks may not

have the complete need or sources to go ahead with computerization.

Nevertheless, when the entire country is marching ahead with computerization in

the banking sector, cooperative banks cannot lag behind. Ernakulum DCCB in

Kerala has implemented Core Banking Solutions. It also has mobile ATMs

mounted on bus and boats. Lessons may be drawn from such banks and

computerisation may be attempted by the cooperative banks. The revival

package of Vaidyanathan Committee advocates computerisation in a big way.

The package has provisions for providing computers to the PACS. With the

introduction of computerisation, efficiency will increase, staff can be deployed for

more field work and new products can be introduced by the banks.

Cooperative Banks can consider using some of the software packages. Some are

given below for adoption by cooperative banks:


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a) Deposit accounts module; Opening of deposit accounts will be standardized.

Pension accounts can be segregated in a single ledger which will be convenient

for operations. Term deposit accounts package can be used for generation of

printed deposit receipts, which will be attractive to be depositor customers.

b) Back Office Package: Transfer waste entries can be captured under this

system which will help tallying of debits with credits as a whole. The details will

automatically be transferred to the respective subsidiaries. General Ledger

System and also for Day Book. Trial Balance can be generated at any point of

time to find out the closing balance under the various assets and liabilities.

c) MICR Clearing and clearing package: This system will help for MICR

instruments clearing. The system will automatically segregate bank-wise details

of receipts and payments. Generation of information for individual banks will bring

down the manual labour and time.

d) Establishment package: This system will help centralization of payment of

salaries, Deduction particulars, and credits to the branches where the loan

accounts are maintained, payments to Stores and Credit Society etc. Dearness

Allowance calculations can be made automatic. Generation of increments to staff

on the due dates can be programmed.

Position of Cooperatives

Most of the developments taking place in the banking sector have bypassed

cooperatives since they are financially not so strong and technically ill-equipped

due to aging and not so qualified human resources. In order to remedy the

situation and bring back the cooperatives to their glory a series of measures to

Increase efficiency and ability of Cooperatives to give better services to rural

clients had been initiated by Government of India and the following gives the

package devised for revitalization of cooperatives:

Govt. of India Revival Package for STCCS (Vaidyanathan Committee)

The Government of India (GoI) is committed to increasing the flow of credit to

agriculture, especially to small and marginal farmers. The short term rural

cooperative credit structure (CCS), which should play a central role in this respect,

is unable to do so. This structure is severely impaired financially and


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institutionally. Its share in total credit flow to agriculture has been declining.

Concerned at this state of affairs, the GoI had set up a special Task Force in

August 2004 under the Chairmanship of Prof.A.Vaidyanathan to suggest an

implementable action plan for reviving the CCS. The Task Force submitted its

report to the GoI on 04 February 2005. The Government, after due consideration,

accepted their recommendations in principle. The recommendations are now

being implemented.

The package is aimed at reviving the short-term rural cooperative credit structure

(STCCS) and make it a well-managed and vibrant medium to serve the credit

needs of rural India, especially the small and marginal farmers. It seeks to (a)

provide financial assistance to bring the system to an acceptable level of health;

(b) introduce legal and institutional reforms necessary for their democratic, self-

reliant and efficient functioning; and (c) take measures to improve the quality of

management. It is to be emphasised that all three components are equally

important and should be treated and implemented as an integrated package.

Financial assistance under the package would cover accumulated losses in the

CCS. This however, does not mean writing off of the loans which are yet to be

repaid by the borrowers. The cooperatives will have to continue to make efforts to

recover these loans and thereby improve their financial health further.

Financial Package

Financial restructuring will start with first bringing the PACS to an acceptable level

of financial health through cleansing of their balance sheets and strengthening

their capital base and then move on to upper tiers. This step will enable PACS to

clear their dues to the upper tiers and thereby reduce the accumulated losses of

DCCBs. The DCCBs will thereafter be provided assistance to clear the remaining

balance of accumulated losses, if any, and to reach a minimum norm of capital

adequacy. The same process will apply to the SCBs.

Financial restructuring will include criteria for determining the eligible purposes

and institutions, quantum of assistance required, pattern of sharing the liability,

conditionalities attached and the time frame.


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Financial assistance under the package will be available for wiping out

accumulated losses, covering invoked but unpaid guarantees given by the state

governments and other dues to the CCS from them and increasing the capital to a

specified minimum level. In order to ensure that the CCS continues on sound

financial, managerial and governance norms. Technical assistance will also be

provided to upgrade institutional and human resources of the CCS.

Sharing Pattern

The liability for funding the financial package will be shared by the GoI, State

governments, and the CCS based on origin of loss and existing commitments.

The Central Government will bear 100% of the losses arising out of direct credit

business of PACS, 100% losses out of the agricultural credit business of DCCBs

and SCBs and a portion of their losses out of non agricultural credit business,

50% of the losses due to PDS and input distribution undertaken in pursuance of

national policy, the requirement of resources to raise CRAR to 7% and the full

cost of technical assistance for human resource development, computerisation

and improving accounting systems.

State governments will bear 50% of the losses on account of PDS and input

distribution, all dues pertaining to invoked guarantees and other receivables, and

a small portion of losses out of non agricultural business of DCCBs and SCBs.

The CCS will bear losses for activities like direct advances taken up on their own

and losses due to frauds etc.

Regulation

The fiduciary nature of relationship between the RBI and a cooperative bank

which accepts public deposits entails, by definition, that the regulator should have

the authority not only to lay down prudential norms but also in regard to those

aspects of management which have a bearing on the financial health of the

institution. It is also essential to ensure that the directives of the Regulator are

implemented strictly and expeditiously. The BR Act and the respective


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Cooperative Societies Acts would accordingly be suitably amended to empower

the RBI to lay down the guidelines for the fit and proper criteria for the CEOs and

the professional Directors on the Boards of cooperative banks, prescribe a panel

and the prudential guidelines requiring audit by Chartered Accountants. The RCS

will implement and monitor these guidelines within a given timeframe.

Legal and Institutional Reforms

A) Reforms in the Cooperative Societies Act : As making legal amendments is

time consuming process, the state governments may issue Executive Orders

under the existing powers to bring in the desired reforms which will relate to:

i. Ensuring full voting membership rights on all users of financial services

including depositors in cooperatives other than cooperative banks

ii. Removing state intervention in all financial and internal administrative

matters in cooperatives

iii. Providing a cap of 25% on government equity in cooperatives and limiting

participation in the Boards of cooperative banks to only one nominee. Any state

government or a cooperative wishing to reduce the state equity further would be

free to do so and the cooperative will not be prevented from doing so

iv. Allowing transition of cooperatives registered under the CSA to migrate

under the Parallel Act (wherever enacted)

v. Withdrawing restrictive orders on financial matters

vi. Permitting cooperatives in all the three tiers freedom to take loans from any

financial institution and not necessarily from only the upper tier and similarly

placing their deposits with any regulated financial institution of their choice.

vii. Permitting cooperatives under the parallel Acts (wherever enacted) to be

members of upper tiers under the existing cooperative societies Acts and vice

versa

viii. Limiting powers of state governments to supersede Boards

ix. Ensuring timely elections before the expiry of the term of the existing Boards

x. Facilitating regulatory powers for RBI in case of cooperative banks as

mentioned earlier

xi. Prudential norms including CRAR for all financial cooperatives including

PACS.


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B) Reforms in the BR Act 1949: Amendments to the BR Act would cover the

following:

i. All cooperative banks would be on par with the commercial banks as far as

regulatory norms are concerned.

ii. RBI will prescribe fit and proper criteria for election to Boards of cooperative

banks. Such criteria would however not be at variance with the nature of

membership of primary cooperatives which constitute the membership of the

DCCBs and SCBs.

iii. However, as financial institutions, these Boards would need minimum

support at the Board level. Thus, the RBI will prescribe certain criteria for

professionals to be on the Boards of cooperative banks. In case members with

such professional qualifications or experience do not get elected in the normal

electoral process, then the Board will be required to co-opt such professionals in

the Board and they would have full voting rights

iv. The CEOs of the cooperative banks would be appointed by the respective

banks themselves and not by the state. However, as these are banking

institutions, RBI will prescribe the minimum qualifications of the CEO to be

appointed and the names proposed by the cooperative banks for the position of

CEO would have to be approved by RBI

v. Cooperatives other than cooperative banks as approved by the RBI would

not accept non-voting member deposits. Such cooperatives would also not use

words like bank, banking, banker or any other derivative of the word bank in

their registered name.

If a State Government and the CCS units in that state are enthusiastic in

implementing the package, fulfilment of all the above conditionalities and

consequently release of the entire financial assistance could be completed even

within a year.

Implementation Mechanism

NABARD has been designated as the implementing agency for the scheme.

However, for guiding and monitoring the implementation of the scheme at

national, state and district levels, Implementing and Monitoring Committees would

be constituted. At national level this committee comprises Secretary (Financial


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Sector), Secretary (Agriculture), RBI, NABARD, state governments under review

in any meeting, and two eminent co-operators. This committee reports to the

Finance Minister on a quarterly basis. At the state level, the committee comprises

the Secretary (Finance), Secretary (Cooperation), RCS, NABARD, SCB and a

Chartered Accountant. At the district level, similar committees have been

constituted.

With the implementation of the recommendations of Vaidyanathan Committee, it is

expected that the rejuvenated cooperative credit structure will play a vital role in

the banking sector of the country.

Banking services have penetrated only 68 million of the 192 million households

(i.e. 35% of total households) indicating a huge untapped potential. The

cooperative banks have to utilize this untapped household by finding out their

requirements and make the business in terms of mobilization of deposits and

lending of loans. Better service quality, innovative products, better bargains are all

greeting the Indian customers. An increasing size of the banking pie itself

indicates that there is a lot of untapped potentials in the market for banking. Even

though the challenges ahead are of great, the Indian banking system is optimistic

in facing the challenges head-on, by adopting proactive changes. Positively, the

new era beckons Customer Delight and builds up a new banking horizon.

Conclusion

Due to stiff competition for other payers in the rural credit, cooperative banks are

facing serious challenges at this juncture. The enhanced role of the banking

sector in Indian economy and the increasing levels of competition have placed

numerous demands on

co-operatives. Globalization has also resulted in improved risk management

practices. In such circumstances, the cooperatives shall have to shoulder greater

responsibilities:

1. To step up their network of services to ensure sustainable growth in

agriculture production

2. Generate potentials for rural employment in view of shifting policy of the

government.


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The cooperative banks have to face the latest challenge in the form of technology

adoption. Ironically to mention, many cooperative banks do not even have

computers in many of their branches. Presently, the role of cooperatives, no

longer remains confined to their traditional activities, but expanded to new

economic ventures as in the case of other enterprises in the public or the private

sector. It is high time for the cooperative banks to understand the changing

environment in banking and rise with suitable strategies to meet the future

confidently. The revival package offered by the GOI is to rejuvenate the rural

cooperative credit structure. The cooperatives which are the beneficiaries of the

financial package, should therefore, utilize it effectively, change according to the

present days requirement and offer according to the customers expectations so

as to withstand the competition.


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CHANGE MANAGEMENT, LEADERSHIP DEVELOPMENT ANDROLE OF DIRECTORS

Change Management

Introduction

The only thing permanent in this world is change. This however does not stop

people from resisting change. We tend to remain in the comfort of our present

activity zone even when we are sure that the comfort will not continue. Once a

child put a frog in the water kept in a vessel. Just as a childs play, he started

heating the water on a stove. The frog first smelt danger but preferred not to

change. Slowly it started feeling discomfort in the hot water. Gradually the heat

became unbearable but it was too late to jump out because by that time the frog

had lost all the energy to jump out. It thus died a slow death. The frog killed itself

because of the resistance to change.

Readiness to Change

Readiness to change emerges from our ability and willingness. Ability to change is

acquired from our knowledge, skills and imagination. Willingness to change

comes from our perception which in turn is the result of our feelings and the anglefrom which we view things.

Perception is the sum total of the experience of our self enhancing and self

destroying feelings. Our perception is also moulded from the goal we keep and

the commitment we show to the goal. It is told that Mahatma Gandhi once met

Acharya Kriplani during one of his holiday trips. During their conversations Shri

Kriplani mentioned to Mahatma Gandhi that there is no history of any nation

getting its independence through non-violence. Mahatma Gandhi replied to Shri

Kriplani Professor, you are a professor, you teach history, I shall make history.

The perception of Mahatma Gandhi finally begot independence to us.


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Change the World

When I was a young man I wanted to change the world.

I found it was difficult to change the world, so I tried to change my nation

When I found I could not change the nation, I began to focus on my town.

I could not change the town and as an old man I tried to change my family.

Now as an elderly person I realize that the only thing I can change is myself.

And suddenly I realize that if long ago I had changed myself,

I could have made an impact on my family,

My family and I could have made an impact on our town,

Their impact could have changed the nation.

And I could have changed the world.

Positioning oneself in the changing scenario

It is important to assess and evaluate, where we position ourselves in the

changing scenario. This is brought out by the matrix on the next page. In the

matrix, if my efforts are high, though I do not agree with the change, I am a

follower. In extreme cases they become Yes boss! Men. Such people tend to

become careerists. When my efforts and my agreement both are low, I am a

dissenter and I will oppose the change. When my agreement with the change is

high and my effort is low, I am a pretender. In such a case I do not put any effort

to effect the change. When both my agreement with the change and my efforts to

make the change are high, I will be the leader.

It is not that one has always to be the leader. If the perceived change is not going

to meet the goals of the leader, the follower and the corporate or the society, one

is justified in being a dissenter opposing the change. Similarly it is also possible

that in the initial stages when one does not fully accept the impact of the change,

one could be a follower or a pretender. But this should remain a passing phase

during which one becomes a leader or dissenter.


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Change Management Matrix

High LOW HIGH

Pretender

Pretends to agree with the change

and work for it

Leader

Capacity and Efforts to identify the

Pretenders, Followers and

Dissenters

M

Y

A

G

G

R

E

E

M

E

N

T

Dissenter

Will work against the change, We

should be more practical attitude

Follower

Does what the boss wants, Career

minded

Low

MY EFFORTS

Role of a Leader

One of the main roles of a leader is to create more leaders. Thus in a changing

scenario, if the leader finds followers, the leader recognizes that the followers do

put in efforts though they do not agree with the change. If the leader could make

them agree with the change through suitable awareness programme, the

followers will end up agreeing with the change and putting efforts automatically

making the m leaders.

The pretenders on the other hand agree with the change, but do not put in efforts.

The leader could participate with them and make them put in efforts when they

also could be made leaders as in that process they too end up agreeing with the

change as also putting efforts for the change.


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A dissenter could be made a leader for the change by first making him a follower

or a pretender and then transform him into a leader.

Team Building

Leaders alone cant do the job. They may lead, but they need others to follow. It

is, therefore, important to focus on how we work with others and build unity among

them.

Working groups have their own sense of identity and successful leaders

understand that working groups have their own personality, power, attitudes,

standards, and needs. Leaders who take these things into account can achieve

success because they respond to those group needs.

To meet group needs and to keep their morale high, leaders:

set and maintain group objectives and group standards;

provide regular opportunities for briefing groups on current plans and future

developments;

involve groups as a whole in the achievement of objectives;

provide regular opportunities for genuine consultation before reaching

decisions affecting groups;

maintain the cohesiveness of groups and effectively deal with differences,

arguments, and conflicts.

To function effectively as a team, group members must also be aware of the

factors that contribute to, or hinder, a teams functioning. Team members should

have the opportunity to agree on the particular factors they need to work on in

their own team.

Below is a list of characteristics of effective teamwork, shown in ideal conditions.


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1. Group Goals/Objectives: All team members must clearly understand group,

goals. Teamwork also requires ownership of team goals, therefore, members

need to participate in setting team goals and commit to them.

The effective coordination of a teams resources depends largely on leaders

abilities to specify the objectives they want to achieve. They waste time and

energy if:

(a) the team does not clearly understand and agree on those objectives, or

(b) they do not agree on the priorities.

2. Roles and Responsibilities: Who does What in the Team. When team members

have clear understandings, acceptance of and commitment to team goals and

priorities, the team next asks: Who is going to do what? What are our

responsibilities? Do all members understand what they and others are to do to

accomplish the task?

As group members work together, they also build expectations of one another.

Conflict over roles and responsibilities may occur because of differing

expectations. Many problems arise simply because people are not clear about

what they expect of each other.

Beside differing expectations, overlapping roles and responsibilities create

tensions, especially when two or more members see themselves as responsible

for the same task.

Discuss these role expectations and overlaps. Teams frequently waste energy

because people have not developed clear and agreed-upon role definitions.

3. Group Procedures or Work Processes:This focuses on how the group works

together. Effective teamwork requires clear and agreed-upon procedures in

several key areas:

How do we make decisions? Who is responsible for the decisions? How do all

team members participate in the decision? Clearly define these answers so that

teams make high-quality decisions that all members accept. Teams usually make


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decisions by consensus. However, leaders may reserve the right to make final

decision after consulting with all or some part of the team. It is also necessary to

be clear as to what should be communicated within the team, to whom, how

frequently and by what method.

Group members generally complain among themselves that team meetings are

dull, repetitive, ineffective, too long, too frequent, dominated by a few, cover the

wrong subjects and a waste of time. To help change this attitude, team meetings

need to confront the questions such as - what is the team trying to accomplish in

this meeting? what topics will we cover? who should attend? how will we conduct

the meeting? Generally, we use group procedures or work processes as means to

do things such as share information or to make decisions to assure coordinated

team activity.

4. Interpersonal Relationships: When people have to work closely together to

achieve a common task they naturally develop feelings toward each other. The

extent to which they mutually trust, support, communicate, and feel comfortable

greatly influences the way they work together. Teamwork requires trust and

openness so that members can state their views and differences openly without

fear of ridicule or retaliation. When group members have a strong sense of

belonging and of mutual support, they get and give help from one another without

setting conditions. They do not have to protect their roles against others.

If there is a mutual support, the members dont have to guard their communication

and can freely say what they feel and how they react to each other. When they

communicate, they know the rest of the team listens and will work hard to

understand. The groups ability to examine its process to improve itself

characterizes teamwork. Group members accept differences as inevitable and

sometimes desirable. They dont suppress them or pretend they dont exist. They

work through them openly as a team.

5. Group leadership Needs:Teamwork requires that they share leadership needs

(such as initiating or clarifying), among the group so that all grow through the

group experience. Leadership styles used by group leaders greatly affect the

teams communication and work processes. Team leaders must frequently


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examine the impact of their styles and be open to feedback from members

regarding how such styles contribute to, or detract, from the teams effectiveness.

6. Using Member Resources: Teamwork requires the maximum use of the

different resources of individuals in the group, such as abilities, knowledge, and

experience. They accept and give advice, counsel, and support to each other,

while recognizing individual accountability and specialization.

7. Organizational Environment:When groups have flexibility, sensitivity to each

others needs, and they encourage differences, and members dont feel pushed to

conform to rigid rules, they have achieved teamwork. Teamwork means they work

hard at keeping their team climate free, open, and supportive.

Role of Board of Directors Some Dos and Donts

Board of Directors of the Cooperative Bank should ensure that proper loan

policies are adopted and followed. It should be ensured that all circulars and other

material relating to policies issued by RBI/NABARD/GoI/State Government are

seen by every member of the Board and also placed before the Board for suitable

action. A list of Dos and Donts for guidance of the directors of Cooperative Banks

is given below. The list is illustrative and not exhaustive and is not to be regarded

as a substitute to the specified duties, responsibilities or rights of the Board of

Directors as enunciated in the cooperative law and / or Bye-laws of the respective

banks.

Dos

Discipline & Involvement :

The Directors should :

i. Attend the board meeting regularly and effectively. They should work in a

spirit of Cooperation.

ii. Study the board papers thoroughly and use the good offices of the Chief

Executive Officer for eliciting any information at the Board Meeting.

iii. Ask the CEO to furnish the board papers and follow up reports on a definite

time schedule.

iv. Be familiar with the broad objectives of the bank and the policy laid down by

the Central and State Government, Reserve Bank of India and NABARD.


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v. Involve themselves thoroughly in the matter of formulation of general policy

and also ensure that performance of the bank is monitored adequately at board

level.

Constructive & Development :

i. Welcome all constructive ideas for the better management of the bank and for

making valuable contribution.

ii. Try to give as much of their wisdom, guidance and knowledge as possible to

the management.

iii. Analyse the trends of economy, assist in the discharge of managements

responsibility to public and formulation of measures to improve customer service

and be generally of constructive assistance to the bank management.

iv. Work as a team and not sponsor or be prejudiced against individual proposals.

Management on its part is supposed to furnish full facts and complete papers in

advance.

Business Specific Contribution :

The Directors should bestow attention on the following aspects of the banks

working:

i. Compliance with monetary and credit policies of Central and State

Government, RBI and NABARD.

ii. Observance of cash reserve and statutory liquidity ratio.

iii. Efficient management of funds and improving profitability.

iv. Compliance with guidelines on income recognition, asset classification,

provisioning towards non performing assets.

v. Deployment of funds to priority sector/ weaker sections.

vi. Diversification in business

vii. Overdues and recovery - ensure that recoveries are made promptly and

overdues reduced to the minimum.

viii.Review of action taken on NABARD inspection/ statutory audit reports.

ix. Vigilance over frauds and misappropriation.

x. Strengthening of internal control system and housekeeping viz. proper

maintenance of books of accounts and periodical reconciliation.


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xi. Reviews on different items as prescribed by NABARD and other higher

agencies.

xii. Service to Members/Customers.

xiii.Development of a good management information system.

xiv. Computerisation.

Donts

Non-Interference :

The Directors should not :

i. Interfere in the day-to-day functioning of the bank.

ii. Involve themselves in the routine or every day business and in the

management functions.

iii. Send instructions / directions to any individual officer/ employee of the bank in

any manner.

No Sponsorship :

The Directors should not

i. Sponsor any loan proposal, buildings and sites of banks premises, enlistment

or empanelment of contractors, architects, doctors, lawyers, etc.

ii. Approach or influence for sanction of any kind of facility.

iii. Participate in the Board discussions, if a proposal in which they are directly or

indirectly interested, comes up for discussions. They should disclose their interest,

well in advance, to the Chief Executive Officer and the Board.

iv. Sponsor any candidate for recruitment or promotion or interfere in the process

of selection/ appointment or in transfers of staff.

v. Do anything which will interfere with a / or be subversive of maintenance of

discipline, good conduct and integrity of the staff.

vi. Involve themselves in any matter relating to personnel administration - whether

it is appointment, transfer, posting, promotion or a redressal of individual

grievances of any employee.

vii. Encourage the individual officer/ employee or unions approaching them in any

matter.


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Confidentiality

i. The Directors should not reveal any information relating to any constituent of

the bank to anyone as he is under oath of secrecy and fidelity.

ii. The Directors are expected to ensure confidentiality of the banks agenda

papers / notes.

iii. The Directors should not directly call for papers/ files/ notes recorded by

various departments for scrutiny etc. in respect of agenda items to be discussed in

the meetings. All information/ clarification that they may require for taking a

decision should be made available by the CEO.

iv. A Director may indicate his directorship of the bank on his visiting card or letter

head, but the logos of distinctive design of the bank should not be displayed on

the visiting card/ letter head.

v. The Directors should ensure that the banks funds are utilised in a proper and

judicious manner for the benefit of general members.

Note: The list is only illustrative and not exhaustive


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IMPORTANT PROVISIONS OF VARIOUS ACTS

BANKING REGULATION ACT, 1949 AS APPLICABLE TO COOPERATIVES

INTRODUCTION

The Banking Regulation Act (1949) came into being in 1949. Prior to that, certain

provisions of Companies' Act 1913 were applicable to Banking Companies. The

need for the act was felt because there was little control and regulation over

banks, with many banks getting into trouble due to poor management loan /

investment portfolio and non-maintenance of adequate liquidity. This was also

further complicated by mushroom growth of banks and closure and failure of some

banks.

Strictly speaking the whole of BR Act is applicable only to Banking Companies or

the Private Sector Banks. The sections of the Act applicable to nationalized

banks including State Bank of India and its subsidiaries, and RRBs are indicated

in section 51 of the Act.

In 1965 considering the important role being played by cooperative banks in the

banking system, certain provisions of the BR Act were modified and made

applicable to cooperative banks. These are discussed in section 56 of the Act.

The salient features of the act are discussed in following paragraphs.

BR Act is not applicable to PACS and LDBs.

Section-11 Requirement as to minimum paid-up capital and reserves

No cooperative bank shall commence or carry on the business of banking in India

unless the aggregate value of its paid-up capital and reserves is not less than one

lakh rupees. Value means "Real or Exchangeable Value" (REV) as approved by

RBI / NABARD during the inspection of the bank. This is illustrated as under:


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For any bank balance sheet, Total Assets = Total Liabilities. Assets could begood or bad and Liabilities comprise Outside Liabilities and Owned Funds.i.e. Realizable Assets + Erosion = Outside Liabilities + Owned funds

i.e. the Realizable Assets Outside Liabilities = Owned funds Erosion = REV

In other words, The Real or Exchangeable value of the bank could be calculatedas Realizable Assets less Outside Liabilities or Owned Funds less Erosion

Section-18 Cash Reserve

Every cooperative bank, not being a scheduled SCB, shall maintain by way of

cash reserve with itself, or by way of balance in current account with RBI or SCB

of the state concerned, or by way of net balance in current account a sum

equivalent to at least 3 % of its Demand and Time Liabilities (DTL) as on last

Friday of the second preceding fortnight. Scheduled cooperative banks will have

to maintain CRR as per RBI Act.

Section 19 Restriction on holding shares in other cooperative societies

No cooperative bank shall hold shares in other cooperative societies except to

such extent and subject to such conditions as RBl may specify. This does not

apply to shares acquired through funds provided by the State Govt. on that behalf

and DCCBs holding shares of affiliated SCB.

Section 20 Restriction on Loans and Advances

No cooperative bank shall make loans and advances on the security of its own

shares or grant unsecured loans or advances to any of its directors or to any firm

or private company in which the director has interest.

This above clause shall not apply to grant of unsecured loans or advances made

by a cooperative bank against bills for supplies or services made or rendered or

bill of exchange arising out of bonafide commercial or trade transactions or trust

receipts furnished to the cooperative bank or Loans made by primary cooperative

banks on terms approved by RBI.


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Section-22 Licensing of banking company

All cooperative societies doing banking business in India except a primary credit

society will have to hold a licence issued by RBI. This Section shall not apply to a

cooperative bank which was carrying on banking business on 01 April 1966 at the

commencement of the Banking Laws for a period of one year from such

commencement. Cooperative banks functioning prior to the commencement of

the Act were required to apply for licence to RBI and may continue to do banking

business until they are notified by the Reserve Bank that licence cannot be

granted.

Section-23 Restriction on opening of new and transfer of existing places of

business

Without prior permission of RBI, no cooperative bank shall open a new place of

business in India or change otherwise than within the same city, town or village,

the location of an existing place of business;

Section-24 Maintenance of Statutory Liquid Assets

Every cooperative bank, in addition to the cash reserve required to maintain under

section 18 of the BR Act, shall maintain in India in cash, gold or unencumbered

approved securities an amount which shall not, at the close of business on any

day, be less than 25 % or such other percentage, not exceeding 40 % of the total

of its Demand and Time liabilities in India, as on the last Friday of the second

preceding fortnight. For the purpose of this section, cash maintained in India shall

include any cash or balances maintained by a cooperative bank, other than a

scheduled state cooperative bank, with itself or with the state cooperative bank of

the state concerned or in the current account with the RBI or by way of net

balances maintained in current Account in excess of the aggregate of the cash or

balances required to be maintained u/s 18 of the Act.

Sections-29, 30 & 31 Balance Sheet

Cooperative banks to prepare the Year-end Balance Sheet and Profit and Loss

Account and submit the same to RBI and NABARD within six months from the end

of the year.


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Section-35 Inspection

NABARD has been empowered to inspect the cooperative banks other than

primary cooperative banks, without prejudice to the powers of RBI, to conduct

such inspection.

Section 53 Power to exempt

The Central Govt. may, on the recommendation of RBI, can exempt any banking

company or any class of banking companies from any or all provisions of this Act.

RESERVE BANK OF INDIA ACT, 1934

INTRODUCTION

The most important section of RBI Act applicable to cooperatives is section 42.

The salient features of this section are as under:

Section-42 CashReserves of Scheduled Banks to be kept with RBI

42(1) Every bank included in the Second Schedule shall maintain with the RBI

an average daily balance the amount of which shall not be less than three per

cent of the DTL in India of such bank. RBI may by notification, increase the

rate which shall not be more than twenty percent of the DTL.

42(2) Every scheduled bank shall send to the RBI a return signed by two

responsible officials showing the amount of DTL and amount of borrowings

from banks in India and other relevant details.

42(3) If the average daily balance held at the RBI by a scheduled bank during

any fortnight is below the minimum prescribed, such bank shall be liable to pay

to RBI penal interest at the rate of three per cent above bank rate on the

amount of shortfall from the prescribed minimum.

For default during next succeeding fortnight, penal interest shall be increased

to five per cent above bank rate. For further defaults, every director, manager

or secretary of the scheduled bank shall be punishable with fine which may


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extend to Rs 500 and more stringent penalties also. The bank may be

prohibited to receive deposits.

42(6) (a) Inclusion in the Second Schedule

The RBI shall by notification in the Gazette of India, under Section 42(6) (a)

direct the inclusion in the second schedule of a bank which carries on the

business of banking in India, provided it has a paid -up capital and reserves of

an aggregate value of not less than five lakhs of rupees and satisfies the RBI

that its affairs are not being conducted in a manner detrimental to the interest of

the depositors, or it is a state co-operative bank or an institution notified by the

Central Government in this behalf.

Any bank included in the second scheduled of RBI Act is generally known as

scheduled bank. In 1966 when BR Act was made applicable to cooperative

banks, RBI took a policy decision to include the then existing SCBs in the

second schedule. However these banks were required to apply for license to

RBI. There are some SCBs which are not considered eligible for issue of

license. These SCBs are thus scheduled banks but not licensed.

42(6) (b)

RBI shall direct exclusion of any scheduled bank from second schedule

provided the aggregate value of whose paid-up capital and reserves becomes

at any time less than five lakhs of rupees, or in the opinion of the RBI, after

making an inspection under section 35 of BR Act, 1949, the conduct of the

affairs of the bank is detrimental to the interest of its depositors.

Section 42(7) RBI may grant to any scheduled bank such exemptions from the

provisions as it may deem fit.


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CO-OPERATIVE SOCIETIES ACT

(The provisions given below are prior to the amendments suggested by

Vaidyanathan Committee. The suggested amendments are given in the

Annexure. Many of the states have already carried out the amendments

mostly on the suggested lines)

IMPORTANT PROVISIONS

Certain Definitions:

Agricultural Credit society - means a credit society, majority of ordinary

members whereof are primarily engaged in agricultural operations.

Credit society - means a society which has its primary objective of raising of

funds to be lent to its members.

Authorities

Matters relating to every co-operative society shall be subject to the supervision

and control of the RCS of the state. Director of Cooperative Audit (DCA)

appointed by the State Govt. DCA is responsible for audit of the cooperatives.

Registration of coop. Societies

A society which has as its objective, the promotion of the economic interest of its

members, in accordance with co-operative principles; or a society established with

the objective of facilitating the operations of such a society, may be registered

under the Act. One registered the cooperative society becomes a legal person. It

becomes a body corporate.

Application for Registration: -

In prescribed form and to contain certain information and specifications such as:

three copies of bye-laws

no of applicants , if individuals, not to be less than 10

individual member not to be below 18 years

If a credit society, then the applicant should be ordinary members of the

society.


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Amendment of bye-laws of a co-operative society:-

No amendment of any bye-laws of a cooperative society shall be valid unless

suchamendment has been registered under the Act.

How the Registrar is satisfied about the proposed amendments ?

Amendments sought are:-

not contrary to the provisions of the Act and rule

does not conflict with cooperative principles

will promote economic interest of the member

is not inconsistent with the principles of social justice

RCS shall forward to the society a copy of the registered amendment together a

certificate signed by him. Such certificate shall be conclusive evidence that

amendment has been duly registered. If the amendment sought is not desirable

in the opinion of the RCS, the RCS may call upon the cooperative society to make

amendments as proposed by him, in such a manner as may be prescribed and

within such time as he may specify.

RCS has powers to direct amendment in bye-laws:-

Where the RCS is of the opinion whether on representation of a member of a

cooperative society or otherwise, he may direct amendment of bye -laws.

In the event of failure of a society to amend as proposed by RCS, then what?

If a society fails to make an amendment within the time specified, the RCS may,

after giving the society an opportunity of being heard, register such amendment

and issue the society, by registered post, a copy of the amendment certified by

him as a copy.

MEMBERS OF COOPERATIVE SOCIETIES

Persons who may become members?

an individual competent to contract under section 11 of Indian Contract Act

any other cooperative society

the State Govt.

the Central Govt.

the state warehousing corporation.


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Classes of Members

A cooperative society, in addition to ordinary members, may have following kinds

of members-.

a) Sympathiser members,

b) Nominal members

c) Associate members

Sympathiser Member

A person may be admitted as a sympathiser member, if he is genuinely interested

in the promotion of the objective of the society or the welfare of the member

workers. Number of sympathiser members should not more than 5 percent of the

total number of ordinary members.

Nominal Members

A person with whom the cooperative society has or proposes to have business

dealings may be admitted as a nominal member. A nominal member shall have

no right to share in the profits of the society nor shall be eligible for membership of

the Committee of Management.

Associate Member

Associate member may hold shares but no right to share in profits otherwise than

as wages and bonus. He will not be a member in the Committee of Management.

An individual including a minor can be an associate member.

Member not to exercise rights till due payment is made

No member of a cooperative society shall exercise the rights of a member unless

he has made such payments to the society in respect of membership or has

acquired such interest in the society, as may be specified in the bye-laws.

MANAGEMENT OF CO-OPERATIVE SOCIETIES

Final authority in a cooperative society:-

Final authority of a cooperative society shall vest in the General Body of the

members. An Annual General Body meeting of a cooperative society shall be

held once in a year within a period of 3 months after the date fixed for making up


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its accounts for the year for the purpose of approval of the programme of

activities, election, if any and consideration of annual report audit report and

disposal of net profit

Committee of Management:-

Management of a cooperative society vests in a Committee

Committee shall consist of not less than 9 members

one reservation for women, one for SC/ST

Term of office of the Committee three years

Elections to be held for the entire committee other than the nominated

members.

Nominee of the Government on the Committee of a Cooperative society:-

How the Govt. gets such right of nomination?

Government has subscribed to the share capital

assisted in formation or augmentation of the share capital

guaranteed repayment of principal and payment of interest on debentures

guaranteed debt repayments

How many nominees ?

State Govt has the right to nominate as its representatives not more than 3

persons or 1/3 rd of the total number of members of the Committee of the

Cooperative society, whichever is less.

Conditions forSuppression of the Committee

In the opinion of the Registrar, If the committee is negligent, makes default,

commits any act prejudicial to the interest of the society or society is not

functioning in accordance with the provisions of the Acts, Rules and bye-

laws; then RCS may remove the said committee and appoint an

Administrator for such period not exceeding one year.

More than 70 % of total dues of any primary society, which is a credit

society, against its members during any cooperative year remain unpaid at

the end of such year;


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The number of defaulting members exceeds 70 % of the total number of

indebted members of such society at the end of such year; then the

chairman and all the members of the committee shall vacate their offices.

Appointment of Special Officer:-

Upon the report of the RCS or otherwise, the State Govt. may appoint a

special officer

Maximum period of 2 years

can be extended by another year

Special officer subject to control of RCS/State Govt

shall perform all functions of the Committee

Special officer shall before expiry of the term, arrange for constitution of a

new committee

Powers with State Govt. to give direction -

In public interest

affairs of the society being conducted detrimental to the interest of the

members

that will be binding on the society

The above powers of the Govt. can be delegated to the RCS, by a specific

notification.

PRIVILEGES OF COOPERATIVE SOCIETIES

First charge of cooperative society on certain assets

Charge on land owned by members or held as tenants by members

borrowing loans from certain cooperative societies

Deduction from salary, to meet society's claim in certain cases- the

employer shall be competent to deduct from the salary, or wages and pay, to the

society in satisfaction of any debts

Charge and setoff in respect of shares or interest of members in the capital

of a cooperative society:- a cooperative society shall have charge upon the share

or interest in the capital etc. payable to a member and may setoff any sum

credited or payable to a member


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It shall not be necessary for any member of a committee, secretary or any other

officer to appear in person or by agent at any registration office in any

proceedings connected with registration of any instrument

STATE AID TO COOPERATIVE SOCIETIES

Direct partnership of state Govt in cooperative societies- subscribes to share

capital, not entitled to any dividend at a rate higher than that is payable to any

other share holder.

Indirect partnership of state govt in cooperative societies;-- state govt to provide

moneys to Cooperative societies ( Apex society) for purchase of shares in other

cooperative societies.

PROPERTIES AND FUNDS OF A COOPERATIVE SOCIETY

Net profit and its disposal:-

Out of net profits, transfer an amount not less than 25 % to Reserve Fund.

No society shall pay a dividend to its members on their paid up capital at a rate

exceeding the prescribed limit.

Balance of net profit to be utilised for all or any of the following purposes:-

Payment of dividend to members on paid up share capital at a rate not

exceeding 9%.

Payment of bonus to the extent and in a manner as specified in the Rules

and bye-laws.

Constitution of or contribution to bad debt fund, building fund, rural

improvement fund or any other fund.

Donation of amounts not exceeding 5 % or 10% for charitable purpose

Payment of bonus to the employees of the society.

Investment of Funds

in Government saving bank

in trustee securities

shares/ securities of any cooperative society

any cooperative bank or scheduled bank approved by Registrar


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Restriction on Borrowings-> Government may prohibit or restrict the power

to borrow from a credit agency

Restriction on Loans

cooperative soc

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