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Co-operative BankingCo-operative BankingCo-operative BankingCo-operative BankingCo-operative Banking in ain ain ain ain a
Competitive Business Environment
Bhagwati Prasad*
1. Background
Cooperative Banking Structure, which is now a
century old, has a unique position in the rural credit
delivery system of India. Having made significant
strides in the field of rural credit through its short
and the long-term structures, it continues to play a
crucial role in dispensation of credit for agriculture
and rural development. Though commercial banks
after nationalisation and later on RRBs have entered
the rural areas, but cooperative banks still continue
to enjoy an important place in the rural credit
scenario.
The cooperative credit societies at the grassroot
level are intended not only to cater to the credit
requirements of the members but also to provide
several credit linked services like input supply,
storage and marketing of produce, supply of
consumer goods etc. Keeping in view the importance
of cooperative banks and credit societies, several
committees, from the All India Rural Credit Survey
Committee to the latest Vaidyanathan Committee,
have stressed the need for major role of
cooperatives in providing credit and allied services
in the rural sector.
The process of economic reforms began in India
during 90’s and the cooperative banking though
being the integral part of the financial system of the
country, was kept insulated from the effects of these
reforms. Realising that a healthy financial system
being the pre-requisite for the success of
globalisation process, Govt. of India initiated several
steps to reform the financial system by appointing
Narsimhan Committee and implementing its
recommendations. But the cooperative banking was
left out of the gambit of this process. However, the
financial discipline such as the recommendation of
Basel Committee on Bank Supervision, prudential
norms, NPA norms Capital Adequacy norms etc. were
expected to be complied with on par with other
commercial banks. In case of cooperative banking
system also attempts were made for its reform by
appointing Kapoor Committee, Vikhe Patil Committee
and Vyas Committee but no serious attempts were
made to implement the recommendations of these
committees. Keeping in view, the distinct nature of
cooperative banking, it is the need of the hour to
assess the regulatory, structural, operational and
financial requirements to restore their growth and
development on sound lines in the competitive
business environment.
*Chief Executive, National Cooperative Union of India, New Delhi. This is abridged version of the paper presented at the Round
Table on Cooperative Banking held at CAB, Pune on December 10, 2005.

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2. Cooperative Credit and Banking Structure
The organisational structure of cooperative credit and banking institutions consists of :
v The Short Term Credit Structure with 30 State Cooperative Banks, 367 District Central Cooperative
Banks and 112,309 Primary Agricultural Cooperative Societies.
v The Long Term Credit Structure with 20 State Cooperative Agriculture and Rural Development Banks
having 887 branches and 768 Primary Cooperative Agriculture and Rural Development Banks.
3. Performance Review of Cooperative Credit and Banking Structure
(A) Short-Term Credit Structure
The financial information of SCBs and DCCBs in 3 and 2 tier is given below:
Resources
The composition of total resources, i.e. owned funds + deposits + borrowings, of the short-term cooperative
credit structure indicated that deposits constituted a major segment of the resource-base of the SCBs and
DCCBs, which is depicted in the table 3 :
31-3-2001 31-3-2002 31-3-2003 Growth Rate %
3Tier 2Tier 3Tier 2Tier 3Tier 2Tier 3Tier 2 Tier
Number 17 12 18 12 17 13 - -
Owned Funds 5395 319 4838 370 7144 528 47.66 42.82
Deposits 300047 2207 33752 2508 36400 2935 7.85 14.29
Borrowings 28115 103 11562 111 12065 143 4.35 29.68
Loans Issued 31767 665 34013 650 37909 733 11.45 12.80
Loans Outstanding 28608 1063 31564 1146 33466 1292 9.12 12.69
Table - 1 Financial Information of SCBs
(Rs. in crores)
Source : Statistical Data on PACS - NAFSCOB - 2003
(Rs. in crores)
31-3-2001 31-3-2002 31-3-2003 Growth Rate %
Number 367 368 367 -
Owned Funds 10916 11288 16573 46.82
Deposits 61875 68586 73879 7.72
Borrowings 16772 18772 19635 4.60
Loans Issued 51798 55915 64665 15.65
Loans Outstanding 52428 59283 64048 8.04
Table - 2 Financial Information of DCCBs

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Credit
The aggregate loans issued by SCBs and DCCBs showed increased growth rate of 12% and 16% respectively.
However, there were large regional variations in credit disbursements by DCCBs; four States, i.e. Maharashtra
(23%), Tamil Nadu (23%), Gujarat (8%) and Punjab (8%) amounted for 62% of total loans issued followed
by Haryana (6%), Uttar Pradesh (5%), Karnataka (5%), Kerala (4.5%), and Andhra Pradesh (4%). The
remaining ten States accounted for 12.8% of total loans issued by DCCBs.
Financial Results Of SCBs & DCCBs
The analysis in table - 5 indicates that there are 5 State Cooperative Banks and 130 DCCBs which are
suffering losses with total accumulated losses amount to Rs.281 and 4,401 crores respectively.
The summary of financial results of SCBs and DCCBs is given in following table.
(Rs. in crores)
SCBs - Three Tier 7144(13) 36400(65) 12065(22) 55609(100)
SCBs - Two Tier 525(15) 2935(81) 143(4) 3606(100)
DCCBs 16573(15) 73879(67) 19635(18) 110087(100)
Total 24245(14) 113214(67) 31843(19) 169302(100)
Owned funds Deposits Borrowings Total
Note : Figures in Brackets represent percentages
Table - 3 Resource Position of Cooperative Banks as on 31-3-2003
Table - 4 Financial Results of SCBs and DCCBs
Tier 2000-01 2001-02 2002-03
No. of SCBs 29 30 30
No. in Profits 24 24 25
No. in Losses 5 6 5
SCBs No. that have eroded 6 9 8
net worth
Total Accumulated 492 567 281
Losses (Rs. in crores)
No. of DCCBs 367 368 367
No. in Profit 247 243 237
No. in Losses 120 125 130
DCCBs No. that have eroded 139 139 144
net worth
Total accumulated 3,177 3,770 4,401
losses (Rs. in crores)

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Recovery Rates and NPAs
The basic reason for the losses in SCBs and DCCBs can be traced mainly to the overall poor recovery
position of each of the tiers, which is stated in the table 5 :
Compliance of RBI Norms
In 2002-03, 8 out of 30 SCBs and 144 out of 367 DCCBs are not complying with Section-11 of the Banking
Regulation Act, which means that they had completely eroded their net worth. The erosion of deposits was
at Rs.3,100 crores at the level of DCCBs and Rs.142 crores at the level of SCBs.
The performance of SCBs and DCCBs vary across States and Regions. While the number of loss making
DCCBs out numbered the profit making ones in the eastern region, however, the performance in the northern
reigon seems to be much better. In southern and western India, the number of profit and loss making
DCCBs were even.
Primary Agricultural
Cooperative Societies
(PACS)
PACS is the foundation of the
Cooperative Credit System on
which the super structure of the
short-term cooperative credit
system is built. It is the PACS
which has a direct interface with
individual farmers, provides short
term and medium term credit,
supplies agricultural inputs,
distributes consumer articles and
arranges for marketing of produce
of its members through a
cooperative marketing society.
This vital link in the ST Cooperative
Credit has been financially weak.
The growth of the PACS over last
17 years is given in the table 6:
Table - 6 Growth of Primary Agricultural
Credit Societies (PACS)
Source : ACRC (1985-86) & NAFSCOB (2002-03)
Particulars as on 31-3-1986 31-3-2003
Number (in lakhs) 0.92 1.12
Membership (in lakhs) 721 1236
Borrowing Membership 197 639
(in lakhs)
Borrowing Membership (%) 27 52
Owned Funds 1128 8198
Deposits 572 19120
Borrowings 2927 30278
Loan Outstanding 4323 42411
Loan Issued 3140 33996
(Rs. in crores)
Table - 5 Recovery and NPA percentages of SCBs & DCCBs
Tier 2000-01 2001-02 2002-03
SCBs Recovery (%) 82 82 79
NPA (%) 13 13 18
DCCBs Recovery (%) 67 66 61
NPA (%) 28 22 20

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Of the total 1.12 lakhs PACS, 58,683 PACS are in profit and 53,626 PACS are in losses, while the total
accumulated losses amounted to Rs.4,596 crores as on 31st March 2003.
The cooperative banking system is undergoing certain disturbing trends like:
v Poor recovery has resulted in a peculiar phenomenon, often called ‘imbalances’, which are the difference
between the amounts outstanding from a PACS in the books of a higher tier entity (DCCB) and the
amounts shown as being recoverable from borrowers in the books of the borrowing entity (say the
PACS). Such imbalance occurs on account of defective accounting system, where the total amount
received by the DCCB from the PACS, is shown first to the total interest due, instead of reducing
proportionate principal and interest components due from PACS.
v Ratio of borrowing members of PACS as a percentage of total members, was below the All India
percentage of 52% in several states, which is stated in the following table:
Sr.No. State 2001-02 2002-03
1 Assam 4 3
2 Bihar 1 1
3 Himachal Pradesh 11 11
4 Jammu & Kashmir 4 4
5 Meghalaya 1 17
6 Goa 17 17
7 Tripura 1 1
Table - 8 Percentage of Borrowing Members
to Total Members
It is noteworthy that PACS continue
to face declining recovery
performance and high level of
overdues. In some states, low
recovery has drastically reduced the
eligibility of a large number of
members for fresh borrowing and
hampered the growth in borrowing
membership. The ratio of borrowing
members as percentage to total
was above the All India percentage
in the states of Haryana, Madhya
Pradesh, Punjab, Tamil Nadu and
Uttar Pradesh.
Deposits of PACS
Deposit mobilisation continued to be a major area of weakness of the PACS. At present, most of the PACS
are totally dependent on the finance provided by DCCBs. In case of weak DCCBs, affiliated PACS are
starving of finance. The majority of PACS had very little to show by way of deposit mobilisation except in a
few states like Kerala, Tamil Nadu, Andhra Pradesh, Himachal Pradesh, Karnataka. The PACS in Kerala and
Tamil Nadu mobilised deposits amounting to Rs.7160 crores and Rs.3873 crores respectively as on 31st
March 2003 which works out to 58% of the total deposits mobilised by all the PACS in the country. The
(Rs. in crores)
Table - 7 Financial Performance of PACS
2000-01 2001-02 2002-03
No. of PACs in Profit 46,807 45,292 58,683
No. of PACs in Losses 41,941 43,541 53,626
Total Accumulated Losses 2112 N.A. 4596

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amount of deposit mobilised by PACS in the country stood at Rs.19120 crores as on 31st March 2003. The
deposits of the PACS ranged from Rs.7160 crores (Kerala) to a mere Rs.0.50 crore (J&K).
Advances of PACS
The total loans outstanding as on 31st March 2003 stood at Rs.42,412 crores accounting for 55% of the
total advances of the entire cooperative credit system, wherein SCBs (36%) and DCCBs (49%) provide
loans to their respective agencies. Of the total 42,412 crores, PACS have outstanding Agriculture loan of
Rs. 23153 crores, Non Agricultural loan of Rs.7,668 crores and other loans of Rs.11,591 crores as on 31st
March 2003.
Viability of PACS
Out of 1,12,039 PACS as on 31st March 2003, 69725 (62%) were viable, 33375 (30%) were potentially
viable 3979 (4%) were dormant and 1882 (2%) were defunct. It is reported that 58,683 PACS earned profit
of Rs.404 crores and 53,626 PACS incurred loss of Rs.1862 crores. The percentage of recovery to demand
was 62%.
v Lack of diversification in business portfolio
v Low volume of business
v Declining percentage of borrowing membership
v High cost of Management
v Imbalances in loan outstanding
v Unskilled staff
v Lack of professionalism
v Weak MIS
v Involvement in less profitable PDS business
v Low Interest Margin.
Critical Problems of PACS
(B) Long Term Credit Structure
As on 31st March 2003, the long term cooperative credit structure consisted of 20 State Cooperative
Agricultural and Rural Development Banks (SCARDBS) and 768 Primary Cooperative Agriculture And Rural
Development Bank (PCARDBS). Of the 20 SCARDBS, eight are in unitary structure with branches, twelve
are federal/mixed in nature with affiliated PCARDBs.
31-3-2001 31-3-2002 31-3-2003 Growth Rate %
Federal Unitary Federal Unitary Federal Unitary Federal Unitary
Number 11 9 12 8 12 8 - -
Branches 111 1138 125 762 118 740 -
Owned Fund 1781 1033 1336 1148 1586 1305 18.7 13.7
Deposits 381 132 431 141 422 123 -1.9 -124
Borrowings 10026 3388 11002 3843 4183 6.6 8.8
Loans Issued 1825 781 1952 795 2136 828 9.4 42
Loans outstanding 9354 3242 10600 3547 11506 3879 8.6 9.3
Table - 9 Financial Information of SCARDBs
(Rs. in crores)

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(Rs. in crores)
31-3-2001 31-3-2002 31-3-2003 Growth Rate
Number 732 768 768 -
Branches 714 1091 1008 -
Owned Fund 1482 2494 2730 9.5
Deposits 160 256 222 -13.2
Borrowings 8310 1034 11217 8.5
Loans Issued 1866 2045 2151 5.2
Loans outstanding 8276 9982 10775 7.9
Table -10 Financial Information of PCARDBs ( Federal/Mixed Structure)
(Rs. in crores)
SCARDBs (Unitary) 1305 123 4183 5611
% to Total (23) (2) (75) 100)
SCARDBs (Federal/Mixed) 1586 423 11727 12736
% to Total (12) (3) (85) (100)
SCARDBs (Total (A) 2891 546 15910 19437(
% to Total (15) (3) (82) (100)
PCARDBs (B) 2730 222 11217 14169
% to Total (19) (2) (79) (100)
Total (A+B) 5621 768 27127 2516
(17) (2) (81) (100)
Owned funds Deposits Borrowings Total
Note : Figures in Brackets represent percentages
Table -11 Resource Position of Long Term Structure as on 31.3.2004
Credit
The loans outstanding as on 31st March 2003 stood at Rs.15,385 (387 + 11,506) (SCARDBs) and Rs.10,775
crores (PCARDBs). Nine States viz. M.P. (27%), Haryana (19%), Chattisgarh (21%), U.P. (14%), H.P. (11%),
West Bengal (18%), Rajasthan (6%), Tamil Nadu (6%), Kerala (5%) accounted for 71% of the total term
credit disbursement by SCARDBs. On the other hand there was a decline in the amount of loans issued by
Gujarat (-3%) Jammu & Kashmir (-3%) and Bihar (-5%) during 2002-03 as compared to 2001-02. Loans
issued by SCARDBs and by PCARDBs during 2002-03 increased by 8% and 5% respectively. The Share of
the credit by cooperative Banks in long term structure has been severally affected and reducing from 43%
in 1992-93 to 17% in 2002-03, when compared to RRBs and commercial banks at all India level.

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Financial Results of SCARDBs and PCARDBs
The financial results of SCARDBs and PCARDBs are summarized in Table below.
Tier 2000-01 2001-02 2002-03
SCARDBs No. of SCARDBs 19 20 20
No. in Profits 10 9 8
No. in losses 9 11 12
Total accumulated Losses 125 180 162
( Rs. in Crores)
PCARDBs PCARDBs 732 768 768
No. in Profits 220 191 226
No. in losses 572 577 542
Total Accumulated Losses 196 291 330
(Rs. in Crores)
Table No. - 12 Financial Results of SCARDBs and PCARDBs
During 2002-03, 8 SCARDBs earned profit and 12 SCARDBs suffered accumulated loss amounting to Rs.162
crores. During the same period 226 PCARDBs earned profit and 542 PCARDBS have accumulated losses of
Rs.330 crores. The financial performance is showing downward trends, over the period especially in PCARDBs.
Recovery
The recovery performance of SCARDBs and PCARDBs is stated in table:
ARDBs Recovery Percentage Overdues (Rs. in crores)
as on 30th June
2001 2002 2003 2001 2002 2003
SCARDBs 56 55.7 49.2 2090 2350 2866
(All India)
PCARDBs 53.1 48.1 43.9 1676 2486 2934
Table - 13 Recovery Performance of SCARDBs & PCARDBs
Ratio of aggregate recovery of SCARDBs declined marginally from 56% in 2000-01 to 49% in 2002-03, while
the level of recovery reduced from 53% to 44% during the same period in case of PCARDBs. The poor
recovery was noticed in the states of Bihar (51%) followed by Chattisgarh (42%), Rajasthan (28%) and
Tamil Nadu (27%). Similarly, there was a decline in recovery of PCARDBs except in Orissa where recovery
increased from 21% to 36% while there was decline in other states like Rajasthan (43%), followed by
Maharashtra (29%) & Tamil Nadu (17%) and West Bengal (13%). It is a matter of serious concern that at
the PCARDBs level 34% of the total overdues were for more than 3 years, while in case of SCARDBs it stood
at 20%.

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Non-Performing Assets (NPA) / Erosion in Assets
As on 31st March 2003 Gross NPAs constituted 21% (SCARDBs) and 33% (PCARDBs) of their total loans
outstanding as on that date. SCARDBs of Punjab and Haryana reported ‘NIL NPAs”. The aggregate NPAs
as on 31st March 2003 were estimated at Rs.3134.49 crores (SCARDBs) and Rs.3568.96 crores ( PCARDBs).
The overall accumulated losses of 12 SCARDBs was Rs. 654 and those of PCARDBs was Rs.2325 crores (11
States) as on 31st March 2003. Accumulated losses at the SCARDBs level as on 31st March, 2003 constituted
4% of the total loans outstanding while in PCARDBs accumulated losses constituted 22% of the total loans
outstanding.
4. Prevailing Environment
The economic development emerging out of liberalization, globalization and WTO has resulted in creation
of very competitive environment. Due to this prevailing environment of competition, the role of public
sector is on decline and private sector is emerging as very strong. More and more MNC’s are replacing the
domestic enterprises. In rural financing sector also multinational banks like ICICI etc. are making greater
in-roads. In addition to that, Govt. of India is stressing nationalised banks to make greater penetration
into rural areas. As such, rural credit and banking has remained no more monopolistic domain of cooperatives.
Therefore, cooperatives have no option but to compete with these highly professionalized institutions in
providing rural credit to the farmers.
5. Need For Revitalisation
The Cooperative credit institutions till now have played a key role in meeting growing agricultural & non-
agricultural needs of rural India. No doubt, the quantum of credit planning from these institutions has
increased, but the performance of these institutions has been deteriorating drastically. Hence there is a
need for revolutionary and practical reforms, which could restructure the entire cooperative banking so as
to enable the sector to face challenges of globalisation and privatisation.
6. Measures Required For Revitalisation
The cooperative credit and banking system has to be thoroughly scanned & debated considering the
above major issues, so as to initiate steps to revitalise the entire system. Accordingly, the following measures
are required to be given due attention :
(i) Policy Related Measures
The Cooperatives are preferred instruments of socio-economic development. Their contribution in the national
economy of the country is quite significant.
Credit and Banking Cooperatives are integral part of the financial system of the country. Hence, cooperative
credit and banking should become the integral part of any policy formulation for financial sector reform and
they may not be seen in isolation. Government should also need to recognize the role and importance of
cooperatives and involve them in planning process of economic development. In the past, there used to be
a separate chapter on cooperatives in the Five Years Plan, this was diluted from 8th
Five Year Plan and since
then there has been no policy direction in the successive five year plan for cooperative development. For
the first time, the new Central Government has included in their common minimum programme the aspects
of strengthening rural and urban credit cooperatives and also constitutional amendment to make
cooperatives more autonomous, democratic and professionalized. For sustainable development of
cooperatives in general and credit cooperatives in particular, it is imperative on the part of Government to
spell out policy options in the plan documents and in formulation of economic policy from time to time to
enable cooperatives to play more proactive role in the economic development of the country.

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(ii) Legislative Measures
The cooperative sector. being state subject is governed by Cooperative Societies Act of respective States.
These Cooperative Societies Acts are full of restrictive provisions which prevent cooperatives to function in
a democratic, autonomous and professional manner. Since 1991, Government of India has made lot of
efforts to impress upon State Governments to amend their cooperative legislation on the lines of Model
Cooperative Societies Act formulated by Chaudhary Brahm Prakash Committee. But, instead of amending
the existing cooperative legislations, nine State Governments enacted parallel laws on the lines of Model
Law which did not make much impact on the movement of the State. Government of India also amended
Multi State Cooperative Societies Act in 2002 on the lines of Model Law. Now Govt. of India has initiated
the process of bringing constitutional amendment to make cooperatives more autonomous, democratic
and professionally managed organizations. The provision of constitutional amendment with respect to size
and tenure of the board, election of office bearer, holding of timely AGM, no supersession of boards, timely
and quality audit, right of member to information, submission of certain returns to prescribed authorities
and offences and penalties etc. shall be uniformally applicable to all States.
With a view to strengthen and revitalize cooperative credit and banking system, removal of restrictive
provisions from the statute would be quite vital and the above initiative of constitutional amendment may
go a long way in creating enabling environment for their proper functioning.
(iii) Structural Measures
Cooperative credit and banking for short term is 2-tier or 3-tier structure. But long term credit structure is
either 2-tier or unitary. In both the cases some units at different tiers have become so weak that there are
no chances of their revival. Such units need to be wound up. Similarly keeping in view the utility and
viability of certain tiers, certain adjustments can be thought of in larger interest of the system and farmers.
Integration of short term and long term credit structure does not seem to be workable option. Merger of
weak structure into strong and viable structure can also be tried to take advantage of economy of scale.
Retaining weak, ineffective, and unviable structure shall be counter productive for the growth of the system.
(iv) Operational Measures
Competitive business environment necessitates increasing operational efficiency. Infusion of professionalism
is the pre-requisite of efficiency and effectiveness. In case of cooperative credit and banking system, the
adoption of following measures may help in increasing operational efficiency and bringing professionalism
in order to facilitate it in facing the challenges of competitive environment.
v Good Governance
v Adoption of information technology
v Upgradation of technology
v Improvement in quality of service
v Reducing transaction and management cost
v Adherence to strict financial discipline
v Managing NPA to desired level
v Effective recovery management
v Adoption of risk management
v Diversification of activities
v Prudent investment management
v Application of prudential norms
v Effective communication system
v Human resource development
m Members m Board of Directors m Employees
v Quality audit
v Asset liability management
v Regular inspection by RBI/NABARD
v Reform in accounting system to avoid
imbalances
v Strengthening of internal control system
including internal audit.

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(v) Financial Measures
Cooperative credit and banking has completed 100 years in India. Due to various reasons, the financial
health of this sector has deteriorated over the years and has reached a stage where it is struggling to
survive. With a view to bail out these institution from the financial crisis, time and again Government of
India constituted several committees such as Kapoor Committee, Sri Vikhe Patil Committee and Vyas
Committee etc. but nothing significant was done so far, to implement the recommendations of these
committees. Now the Government of India has committed to implement the recommendation of Prof.
A.Vaidyanathan Committee which was constituted by the present Govt. for this purpose. This committee
besides others, has suggested a recapitalization package of Rs.15000 crores approximately for short term
credit with certain conditionalities. Financial package for recapitalization of long term structure is also
being worked out by the same committee. The recommendations are likely to be made public very soon.
Objective of doubling of rural credit by cooperative credit system and their financial stability can be ensured
only if the revival package is implemented immediately and other related reform measures are adopted
and implemented in time bound manner. Any loss of time may add to further deterioration of their health
and weakening of the system.
7. Concluding Remarks
Technology has made tremendous impact on entire banking sector, which has thrown new challenges, due
to which cooperative banks are constantly exposed to competition and risk management. Therefore, they
need a combination of new technologies and better processes of credit and risk appraisal, treasury
management, product diversification, internal control and external regulation along with infusion of
professionalism.
In the present business environment, the cooperative banks should be backed by democratisation,
depoliticisation & decentralisation so as to make them competitive. Thus, there is urgent need for
transformation in the mindset, identity, business operations, governance and systems & procedures, which
will definitely boost the morale of cooperative banks to face environmental challenges.
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