Bhima Subrahmanyam at the International Co-operative Alliance Global Conference in Cape Town, November 2013.

1. COOPERATIVES CONTRIBUTE TO
BUILD A BETTER WORLD WITH PARTICULAR
REFRENCE TO ‘TACKLING THE ECONOMIC CRISIS’
(ICA General Assembly -Workshop, Cape Town, 2-3 November, 2013)
BY
BHIMA SUBRAHMANYAM
Managing Director
NATIONAL FEDERATION OF STATE COOPERATIVE BANKS (NAFSCOB)
J.K. CHAMBERS, PLOT NO. 76, SECTOR-17, VASHI,
NAVI MUMBAI – 400 703, INDIA
Phone: 91-22-27892741/27892697/27892738.
Fax: 91-22-27892604
E-mail: nafscob@nafscob.org, nafscob@gmail.com
Website:http://www.nafscob.org
1

2. • Coverage of Presentation:
– Strength & Weaknesses of Indian Cooperative Credit &
Banking Institutions.
– Regulatory/Supervisory/Statutory Authority.
– Provisions Applicable (BR Act 1949 of RBI) to Cooperatives.
– Applicability of Basel Norms-Prudential Norms.
– Recommendations of Committee on Financial Sector
Assessment (CFSA).
– Global Financial Crisis, Survival of Cooperative
Banks/Lessons.
– Issues Concern/Future opportunities/Initiatives.
– Potential for Cooperatives to Build a Better World to tackle
Economic Crisis.
2

3. •
•
Mr. Ban Ki-moon, Secretary –General, United Nations, rightly mentioned the
importance cooperatives during recent global financial crisis as “With the
world facing multiple crises, and with natural disasters testing even the most
robust economies and communities, cooperatives have meanwhile maintained
high credit ratings, increased assets and turnover, and expanded their
membership and customer base. After disasters such as earthquakes, tsunamis
and floods, cooperatives have shown their ability to mobilize solidarity for
reconstruction; agricultural cooperatives improve the productivity of farmers
by facilitating access to markets, credit, insurance and technology. Social
cooperatives can provide an important safety net in the face of declining or
minimal public welfare. They also show considerable potential for
empowering youth and alleviating the growing global youth jobs crisis”.
Mr. Guy Ryder, Director-General, UN International Labour Organization (ILO)
also highlighted the importance of cooperatives as “As global attention focuses
on the challenge of sustainable development, cooperatives can and must play
a key role as creative enterprises expanding into new and innovative areas recycling and renewable energy, providing people with know-how, inputs,
finance and markets at fair prices with low-environmental impact. In so doing,
they will be making a valuable contribution to a just transition to a low-carbon
sustainable development path. From the world of work perspective,
cooperative enterprises are well placed to be leaders in advancing the decent
work dimension of a just transition,”
3

4. Strengths and Weaknesses of Indian
Cooperative Credit & Banking Institutions
Sl.
No.
Strength
Weaknesses
Opportunities
Threats
1
More than 100 years Poor Management/ Strong state participation
old movement
Governance
2
Democratic/
Autonomous
3
Leadership Vacuum
Lack
of Challenges of Financial Politicisation
Professionalism/
Sector Reforms
Approach
Large outreach/ 100% Lack of Freedom of Diversification of Lending Populist Measures
village coverage
Autonomy
– Innovative Approaches
4
Farmers’ Institutions – Government
Member Participation Interferences
Resource Mobilisation - Duality of Control
Independence
5
Resource Mobilisation Low Interest Margin
Linking
Credit
Marketing
6
Strong
Centre
7
Innovative Approaches Inadequate / non- Redefining the role and Proposals
active
Member responsibilities
delayering
Participation
Balancing Lack of Adequate Professionalisation/
Resources
Modernisation
with Competition
Restrictive
Provisions of BR Act.
of
4

5. REGULATORY/SUPERVISORY/STATUTORY
AUTHORITY
1. Reserve Bank of India
* Regulatory, Supervisory & Monitory Authority
* RBI Act – 1934
* BR Act – 1949(AACS)
2. NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT (NABARD)
* Delegated Powers of RBI
* Supervisory Role
* Refinance Role
* Promotional Role
* Developmental Role
* Initiated Micro-System through NGOs/SHGs.
3.
Government of India
* Multi-State Cooperative Societies Act, 2002
4.
State Governments
* State Cooperative Societies Act
5.
Registrar of Cooperative Societies
5

6. Provisions Applicable (BR Act 1949 of RBI (AACS))
to Cooperatives
•
•
•
•
•
•
•
•
Issues relating to interest rates, loan policies, investments,
prudential exposure, norms, forms of financial
statements, reserve requirements, appropriation of profits
etc.
Bank and Branch Licensing, area of operation,
Acquisition of Assets incidental to carrying on banking
functions,
Policy regarding remission of debts,
Audit,
Change of Management and appointment of CEO
Appointment of Administration,
Any other banking related function to be notified by RBI
from time to time.
6

7. • Reduction in Cash Reserve Ratio (CRR):
Policy Rates
Bank Rate
Repo Rate
Reserve Ratios
Reverse Repo
Rate
CRR
SLR
2011* 2013** 2011* 2013 $ 2011* 2013 $ 2011* 2013^ 2011*
2012
^^
25.00
%
25%
6.00% 9.00%
8.50% 7.50% 7.50% 6.50% 6.00% 4.00%
*As on 2-11-2011, **As on 07-10-2013, $ 19-03-2013, ^ As on 9-02-2013, ^ ^ As on 12-04-2012
(As on 11-08-2012 SLR for Scheduled Commercial Banks – 23.00%)
Source: RBI
7

8. PRUDENTIAL NORMS
• Prudential Norms for Income Recognition, Asset
Classification and Provisioning have been
introduced for SCBs and DCCB from the year
1996-97.
MADE APPLICABLE
•
CAPITAL TO RISK ASSETS RATIOS (CRAR)
RECOMMENDED CRAR TO COOPERATIVES
•
•
•
INITIALLY WITH CAPITALISATION
WITHIN THREE YERS OF CAPITALISATION
NEXT TWO YEARS
: 7%
: 9%
: 12 %
8

9. • Major Recommendations of the Committee on
Financial Sector Assessment (CFSA):
– Low resources of SCBs/DCCBs,
– Duel control of RBI, NABARD and RSC,
– Board of supervision by NABARD for SCBs/DCCBs,
– Compliance,
– Licensing of cooperatives,
– Capital adequacy,
– Regulation and supervision,
– Corporate governance etc.
9

10. • BASEL - I: Focused mainly on credit risk by creating a bank
asset classification system.
• BASEL – II: Created standards and regulations to reduce the
risks associated with its investing and lending practices.
• Basel – III: is a comprehensive set of reform measures,
developed by the Basel Committee on Banking Supervision, to
strengthen the regulation, supervision and risk management
of the banking sector.
– These measures aim to:
• improve the banking sector's ability to absorb shocks
arising from financial and economic stress, whatever
the source
• improve risk management and governance
• strengthen banks' transparency and disclosures.
10

11. Assessment of 25 Basel Core Principles -SCBs/DCCBs
Sr. No.
Assessment
Number of BCPs
1
Compliant
3
2
Largely Compliant
10
3
Materially Non-compliant
6
4
Non-Compliant
2
5
Not Applicable
4
SCBs: State Cooperative Banks,
DCCBs: District Central Cooperative Banks
11

12. COOPERATIVES Vs. BASEL CORE PRINCIPLES (25)
Compliant
(C)
Largely Compliant
(LC)
Materially Noncompliant (MNC)
Non-Compliant
(NC)
i. Major acquisitions
ii. Large exposure limits
iii. Exposure to related
party
i. Objective is independence,
powers, transparency &
cooperation
ii. Permissible activities
iii. Licencing criteria
iv. Credit Risk
v. Problem Assets,
Provisions and reserve
vi. Supervisory Approach
vii. Supervisory Techniques
viii. Supervisory Reporting
ix. Accounting & disclosure
x. Corrective & Remedial
power of supervisors
i. Capital adequacy
ii. Risk management
process
iii. Market Risk
iv. Liquidity Risk
v. Internal control & audit
vi. Abuse of financial
services
i. Operational risk
ii. Interest rate risk in
banking book
3
10
6
2
Not Applicable
(NA)
i. Transfer of
significant
ownership
ii. Country &
transfer risk
iii. Consolidated
supervision
iv. Home - Host
relationship
4
12

13. Global Financial Crisis:
• September, 2008, biggest investment bank, Lehman Brothers
in United States of America (USA) collapsed and set off
financial crisis in the entire globe.
• The regulatory failure was rated as a reason for global financial
crisis.
• This crisis has had its impact on both developed and
developing countries.
• Bank credit growth in major economies such as US, UK, and
the Eurozone secularly declined throughout 2009. The asset
quality has also been adversely impacted with NPA (as % of
total loans) rising to higher levels. The NPAs in the UK and US
have risen from 0.9 per cent and 1.4 per cent in 2007 to 4.0
per cent and 4.9 per cent in 2009 respectively.
13

14. • The Indian banking sector has, however, withstood the
spillover effects of the global financial crisis as was evident in
the robust Capital to Risk Weighted Assets Ratio (CRAR) and
Tier 1 CRAR which remained far above the stipulated regulatory
minimum of 9 per cent.
• Commercial Banks are required to maintain a minimum CRAR
of 9%.
• Cooperative Credit and Banking Institutions Viz., PACS, DCCBs &
SCBs are expected to achieve a minimum CRAR of 7% with the
external financial support from the date of implementation of
the Revival Package provided by Government of India.
• Gradual increase in CRAR to 9% and 12% with recapitalisation
support (as suggested by Task Force).
• As on March, 2012 – Gross Non-Performing Assets(NPAs):
– Commercial Banks-2.9%, SCBs-6.88, DCCBs-9.26% and
Urban Cooperative Banks- 7%
14

15. How Indian Banks Survived the Global
Crisis ?
• India has displayed the ability to recover from recession faster than the US
or any other developed country.
• The cautious approach of Reserve Bank of India in the last two to three
years advising banks to go slow on their exposure to sensitive sectors.
• The regulatory authorities had shown vision to forsee the dangerous
signals ahead.
• The Indian Banking system was not affected severely by the global crisis
because its parameters have remained strong.
• The present financial system itself is adequate enough to allow both public
and private sector banks to play an active role.
• The economic reforms since 1991 has had a salutary impact on the
financial health of the banking system.
• The reforms have also improved the profitability of banks.
• The banking sector reforms also emphasized the need to improve
productivity.
• A variety of initiatives taken by the banks, including adoption of
technology, has resulted in increased productivity .
15
Source:(Financial Express-July 24, 2009)

16. MAIN REASON FOR SURVIVAL
• Favourable large net-work and outreach,
• Deep roots with rural areas,
• Member driven, democratic organisation in
character,
• Support from Governments,
• Appropriate regulatory, supervisory and monitoring
mechanism, initiatives taken by Union Government,
State Government and the cooperative banking
structure towards revival, reform and restructuring
etc.
16

17. Cooperative Banks and Global Financial Crisis:
The main reason for the survival of Indian
Cooperative Banks may be attributed to their
(a) favourable large net-work and outreach,
(b) in-depth roots with rural areas, (c) member
driven, democratic organisations in character,
(d) support from Governments, (e) appropriate
regulatory,
supervisory
and
monitoring
mechanism, initiatives taken by Union
Government, State Government and the
cooperative banking structure towards revival,
reform and restructuring etc.
17

18. Lessons from Global Financial Crisis
• Safeguarding Financial Stability:
“Financial stability is a condition in which the
financial system can withstand shocks thereby
reducing the probability of disruption or breakdown
of the system.”
– Initiatives of India:
• Committee on Financial Sector Assessment (CFSA)March, 2009 (Chairman- Dr. Rakesh Mohan)
• Establishment of Financial Stability & Development
Council (FSDC)- December, 2010.
• Financial Sector Legislative Reforms Commission
(FSLRC) – March, 2013 (Chairman- Justice (Retd.) B. N.
Srikrishna).
18

19. Dr. D Subbarao, Former Governor, RBI –
“The RBI has always held that ‘Financial
Stability’ cannot be its exclusive mandate, and
that all Regulators and the Government have to
share the responsibility for ‘Financial Stability’,
that coordination is important and that the
Government has a more active role to play in a
crisis time than in normal times”.
19

20. Issues of concern:
a) Business management
b) Funds management
c) Recovery management
d) Human Resource Management
e) Others
20

21. FUTURE OPPORTUNITIES/INITIATIVES
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Member-driven – Members centred organization/Member education
Efficient banking institutions as per the statutory requirements/BASEL norms
Contribution towards Financial Inclusion
Strengthen the area of Insurance Protection System / Institutional Protection
System
Human Resource Development
Involve Government intervention rather than invite Government interference
Adherence of KYC Guidelines / Money laundering standards
Risk Management
Consolidation/Merger
Research and Studies/Training
Corporate governance
Cooperative Bank of India to bridge the existing systemic gap in the cooperative
banking system
Formulation of Institutional Protection System
Legal / Statutory reforms to ensure freedom of autonomy in the management
Conti…….
21

22. FUTURE OPPORTUNITIES/INITIATIVES (Cont..)
•
•
•
•
•
•
Strong state participation
Challenges of financial sector reforms
Diversification of lending – innovative approaches
Resource mobilisation – independence
Linking credit with marketing
Professionalization/ modernisation, redefining the role and
responsibilities
• Leadership
• Net-working
* HRD
* Best Practices
* Exchange of Expertise: Arrangement for Replication
* Create Awareness & to combat adverse effects of climate change
* Promotion of IYC - 2012
22

23. • Discussion Paper on ‘Banking Structure in India - The
Way Forward’ (2013), RBI:
– One of the important issues covered in the discussion paper:
– Indicative reorientation of the banking structure: The
reoriented banking structure would comprise four
tiers. The first tier may consist of three or four large
Indian banks with domestic and international
presence along with branches of foreign banks in
India. The second tier is likely to comprise several midsized banking institutions including niche banks with
economy-wide presence. The third tier may
encompass old private sector banks, Regional Rural
Banks, and multi state Urban Cooperative Banks. The
fourth tier may embrace many small privately owned
local banks and cooperative banks.
23

24. • Indian Banking System is
Safe Secure & Sound.
• Cooperatives
Globally
Help to Tackle Economic
Crisis.
• They have potential to
build a ‘Better World’.
24

25. 25