Co Operative Bank Movement

Co-Operative Bank Movement
Concept of Banking
Section 5(b) defines banking as accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Section 49 A of the Act prohibits any institution other than a banking company to accept deposit money from public withdrawable by cheque. Students may note that the essence of banking business is the function of accepting deposits from public with the facility of withdrawal of money by cheque. In other words, the combination of the functions of acceptance of public deposits and withdrawal of the money by cheques by any institution cannot be performed without the approval of Reserve Bank. The origin of modern banks is traced to three important sources. They are, (i) the goldsmiths (ii) the moneylenders and (iii) the merchant bankers. The goldsmith by virtue of dealing in Gold, which is a very valuable item, had facilities for the safe keeping of valuables. He accepted for safe custody the money, another important valuable item, belonging to his customers. The goldsmiths began to lend the money knowing that all the depositors do not withdraw their savings at a time. The moneylender lent his surplus funds to the needy and earned the income by way of interest. The merchant bankers were primarily trader and had to oblige his customers by accepting their money for safe custody. He was doing the banking business as a side occupation. Modern banks retain all the characteristics of these three types of institutions/functions. Banking made its first appearance as a public enterprise in the year 1157 in Italy with the establishment of 'Bank of Venice'. The 'Bank of Barcelona' was started in 1401. The 'Bank of Genoa' in 1407 and the Bank of Amsterdam' in 1609. The Lombards who migrated to Europe and England from Italy were responsible for the development of modern banking. When severe restrictions were imposed on them by the King Charles II, their business was affected at large. The goldsmiths were gradually replaced by private bankers. After the Banking Act was passed in 1833 in England, the growth of joint stock commercial banking was accelerated. Foundations were laid for the growth of modern commercial banking during the 19th century.
MEANING AND DEFINITION OF BANKING

A bank is an institution which deals in money and credit. Thus, bank is an intermediary which handles other people's money both for their advantage and to its own profit. But bank is not merely a trader in money but also an important manufacturer of money. In other words, a bank is a factory of credit. Let us see the definitions of bank and banking, given by various authorities. Crowther defines a bank as, "one that collects money from those who have it to spare or who are saving it out of their income and lends the money so collected to those who require it". Dr. L. Hart, says that the bankers are "one who in the ordinary course of business honours cheques drawn upon him by persons from and for whom he receives money on current accounts". Prof. Sayers says "Banks are not merely purveyors of money but also in an important sense, manufacturers of money". Although the above definitions have described the meaning of bank, none of them precisely defined, 'Banking' incorporating its entire functions. However, an attempt has been made in Section 5(1) (b&c) of the Banking Regulation Act, 1949 to define 'Banking' and 'Banking Company'. According to Section 5(l)(b), "Banking means accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise". Section 5(l)(c) defines banking company as, "any company which transacts the business of banking in India".
Introduction of Co-operative Bank INTRODUCTION

The Co-operative bank has a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfil, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary co-operative banks While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc. along with some small scale industries and self-employment driven activities, the co-operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units, home finance, consumer finance, personal finance, etc. Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. According to NAFCUB the total deposits & lendings of Co-operative Banks is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co-operative Banks is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
HISTORY
Co-operative movement is quite well established in India. The first legislation on co-operation was passed in 1904. In 1914 the Maclagen committee envisaged a three-tier structure for co-operative banking viz. Primary Agricultural Credit Societies (PACs) at the grass root level, Central Co-operative Banks at the district level and State Cooperative Banks at state level or Apex Level. The first urban co-operative bank in India was formed nearly 100 years back in Baroda.
Co-operative Institutions are engaged in all kinds of activities namely production, processing, marketing, distribution, servicing, and banking in India and have vast and powerful superstructure. Co-operative Banks are important cogs in this structure. In the beginning of 20th century, availability of credit in India, more particularly in rural areas, was almost absent. Agricultural and related activities were starved of organised, institutional credit. The rural folk had to depend entirely on the money lenders, who lent often at usurious rates of interest. The co-operative banks arrived in India in the beginning of 20th Century as an official effort to create a new type of institution based on the principles of co-operative organisation and management, suitable for problems peculiar to Indian conditions. These banks were conceived as substitutes for moneylenders, to provide timely and adequate short-term and long-term institutional credit at reasonable rates of interest. In the formative stage Co-operative Banks were Urban Co-operative Societies run on community basis and their lending activities were restricted to meeting the credit requirements of their members. The concept of Urban Co-operative Bank was first spelt out by Mehta Bhansali Committee in 1939 which defined on Urban Co-operative Bank. Provisions of Section 5 (CCV) of Banking Regulation Act, 1949 (as applicable to Cooperative Societies) defined an Urban Co-operative Bank as a Primary Co-operative Bank other than a Primary Co-operative Society were made applicable in 1966 .
With gradual growth and also given philip with the economic boom, urban banking sector received tremendous boost and started diversifying its credit portfolio. Besides giving traditional lending activity meeting the credit requirements of their customers they started catering to various sorts of customers viz.self-employed, small businessmen / industries, house finance, consumer finance, personal finance
CO-OPERATIVE BANKING IN INDIA

The Co-operative Movement in Indian Banking was started with the objective of providing finance to the agriculturist and thus relieving him from the clutches of the village moneylenders, i.e., to solve the problem of rural indebtedness by supplying credit at low rates of interest. In India, the Co-operative Societies Act was passed in 1904. A new Cooperative Societies Act was passed in 1912. Though the movement has completed more than 90 years, the progress has been slow.. STRUCTURE OF CO-OPERATIVE BANKING IN INDIA The Co-operative Credit Institutions in India can be classified as under :
From the chart, it can be seen that the organisation of the Co-operative Credit Societies is Pyramidal in nature. It has a three-tier structure.
1. Primary Credit Societies at the bottom. 2. Central Co-operative Bank at the middle. 3. State Co-operative Bank at the top. That is, the primary societies are functioning in the various towns and villages, the Central Banks at the district headquarters and the State Co-operative Banks at the state capitals forming the apex of the system. The Reserve Bank of India assist the cooperative structure by providing concessional finance through NABARD in the form of General Lines of Credit or lending to agricultural activities. Thus, the whole system is integrated with the Banking structure of the country. Let us discuss about these institutions one by one.
1) The Primary Agricultural Credit Societies:

A primary society is an association of borrowers and non-borrowers residing in a particular locality and taking interest in the business affairs of one another. As membership is practically open to all inhabitants of a locality, people of different status are brought together into the common organisation. The affairs of those organization are managed by honorary secretaries and presidents assisted by boards of directors, all these officials being elected from amongst the shareholders on the principle 'of one man, one vote'. Most of the societies are organised and working on the principle of unlimited liability. The society may be started with ten or more persons of a village. In March 2001, nearly 1,00,000 PACs were operating in various states in India. They had a total membership of nearly 10,00,00,000 (Ten Crore) as on. That date. Their deposit base is very poor at Rs. 13,481 crore as at end March 2001. Total outstanding loans of all PACs art totally dependent on CCBs for their financial needs. NABARD has also been extending funds to develop the infrastructure of PACs,
Capital
The primary society derives its funds from entrance fees, share capital, reserve funds deposit or loans from non-members, from central and provincial co-operative banks and from the Government. The deposits of the society may be either fixed, savings or recurring. Unfortunately, the deposits of primary societies are not sufficiently large. The society provides short-term credit to its members ordinarily on the personal security of the borrower with the personal surety or sureties of other members. It may also lend on mortgages.
2) Central Co-operative Banks:

A Central Co-operative Bank is a federation of primary societies in a specified area. Where membership of a Central Co-operative Bank is restricted to primary societies only, it is known as a 'banking union'. Nowadays, individuals are also admitted as members of almost all Central Co-operative Banks. Central Co-operative Bantu are generally situated at the headquarters of district and have on their boards of management individuals of sufficient influence and business capacity in addition to representatives of primary societies. The CCBs form an important part in the short-term structure of Cooperative Credit Institutions. As at March 2001 there were 367 district central cooperative Banks with 12580 branches in various states in India. The total deposits of CCBs as at end March 2001 amounted to Rs. 61,786 crore as compared to Rs. 54,248 crore in March 2000. The CCBs also borrow money from NABARD for their operations. The recovery performance of CCBs in March 2001,245 made profits while 112 CCBs made losses during 2000-2001.
Capital
A Central Co-operative Bank obtains its funds from share capital, reserve funds, deposits (current, fixed, savings, recurring) and loans from the State Co-operative Bank or other joint stock banks. Sometimes primary societies deposit their surplus funds with the Central Co-operative Banks to which they are affiliated and this forms another source of funds for the Central Co-operative Banks.
Operation of the Bank

The primary business of Central Co-operative Banks consists of financing primary societies. In some cases, they attract the surplus funds of certain primary societies, to supply the same to others. Thus, Central Co-operative Banks Act as balancing centres to the
primary societies. Again, the deposits of urban areas are made available to the rural areas through the agency of these banks. Although normally Central Co-operative Banks do not transact many (banking business as such, they do it in Mumbai and Chennai. The deposits with Central Banks have recently grown so great in volume that Central Banks are not able to employ them within the co-operative movement. They do not, as a rule, lend for commercial purposes and therefore are compelled to invest their funds in Government Securities. However, with the growth of other types of co-operative movement the various types of co-operative societies may absorb these funds.
3) State Co-operative Banks:

At the top of the co-operative banking, there are State Cooperative Banks, organised with the object of attracting deposits from the rich urban classes. These Banks are also more suitably equipped to serve as channel between the co-operative movement and the joint stock banks. There are at present 30 such banks, .The constitution of these banks differs from one another, but generally speaking, their membership comprises representatives of Central Banks as well as individual shareholders. A logical development of these banks would have been the establishment of all-India Co-operative bank. But there is no such institution, although the Indian State Co-operative Banks Association has been coordinating their activities and performing certain services to all these Banks. NABARD maintains contact with the State Co-operative Banks. In addition to offering them rediscount facilities, collects and disseminates useful information regarding co-operative movement. As at end March 2002, there where 30 SCBs with 831 branches in India. The total deposits of all SCBs as at end March 2001 aggregated to Rs. 32626 crore as compared to Rs. 29557 crore in March 2000. Among the states, Maharashtra mobilised maximum deposits of Rs. 9136/- crore, followed by Tamil Nadu at Rs. 2745 crore. Tamil Nadu came third with Rs. 1635 crore of deposits in March 1997 of the 30 SCBs in 2001,23 made profits while 6 made losses during 2000-01.
Capital and Operation of the Bank

The State Co-operative Banks attract deposits from the richer urban classes and grant financial accommodation to Central Co-operative Banks and through them to primary societies. They form the only link between the co-operative organisations on the one hand and the money market and joint stock banks on the other. They are the balancing
factors as between Central Co-operative Banks; for they transfer the surplus funds available with some Central Banks to the needy ones. The State Co-operative Banks derive their funds from share capital, reserve fund, deposit from the public, loans from the State Bank, joint stock banks and deposits of surplus funds from some of the Central Banks affiliated to them. Generally speaking, it may be stated that the organisation of the State Co-operative Banks is very efficient and, inspite of competition from joint stock banks, they do very good business. They are prohibited from transacting all types of commercial banking business and so their funds are not at present being fully employed. With the growth of Co-operative movement these funds may in due course be more effectively and efficiently employed within the movement. Many a times students get confused about the banking business and the principal reason for establishment of different banking institutions at base level. Let us see the basic distinguishing features of these banking institutions in the Co-operative Sector in India.
Co-operative Banks
Banks established under the co-operative system are called Co-operative Banks. These are State Co-operative Banks, Central Co-operative Banks and Primary Cooperative Banks. SCB is an apex level bank for a state. CCBs are apex level banks for each district. Primary Cooperative Banks are rural or Semi-Urban Level Co-operative Banks
Co-operative Credit Societies

These are financial institutions whose primary object is to provide credit facilities i.e, loans and advances to its member only. These societies are formed in large organisations or Government Departments or at certain regions. The members are those working in the particular organisation/region. They collect subscriptions, deposits, etc., from members and loans from co-operative banks and extend credit facilities to its members only.
Primary Agricultural Credit Society

These are similar to credit societies explained above, but these credit societies can extend loans to its members only for the purpose of agriculture connected activities. Credit societies are not permitted to undertake all banking business. In other words, they cannot provide cheque book facility to members and they cannot deal with persons other than their members.
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LAND DEVELOPMENT BANKS

The long-term finance required by the agriculturists for the purchase of agricultural machinery and for effecting permanent improvements on land cannot be provided by commercial banks and co-operative banks for the reason that these institutions obtain most of their funds in the shape of short-term deposits. The necessary, Before has arisen for the establishment of the Institutions with the object of providing long-term credit to agriculturists at moderate rates of interest and providing for the repayment of loans in easy annual or semiannual instalments spread over a number of years. These institutions are the Land Development Banks. Land Development Banks have developed a special technique for conducting their business. They obtain their funds, not in the shape of short-term deposits like commercial banks but by the issue of long dated debentures sometimes carrying State Government guarantee with regard to payment of interest and repayment of principal. Thus, they are able to lend their money for long periods to agriculturists. On account of their importance to the nation they enjoyed special powers for the recovery of defaulted loans, exemption from taxes and in some cases state guarantee for these bonds. Land Development Banks differ from one another in their functions and their constitution. Some Land Development Banks specialise in providing fund against agricultural properties, some continue their business to advancing loans against urban properties, some advance loans to public bodies and municipalities. Some have combined all these different kinds of functions. Land Development Banks also differ from one another in their constitutions. Some are organised on co-operative basis, some on joint stock basis and some on quasi co-operative basis, incorporating the co-operative and joint stock principles.
Land Development Banks in India

Land Development Banks in India are of quasi-commercial type. Although they are all registered under the Co-operative Societies Act, they are associations of borrowers as well as non-borrowers organised on the principle of limited liability. The borrowing capacity of a member is generally determined according to the number of shares he holds in the bank, though each member has only one vote according to cooperative principle, irrespective of the number of shares he holds.
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Even though the first Land Development Bank was started in Punjab in 1920, the real progress began when The Land Development Bank was established in Chennai in 1929. The Land Development Bank are Co-operative Institutions established on limited liability principle with borrowers and non-borrowers as members to supply long-term capital against development of land and building.
Capital
The Land Development Banks derive their funds from share capital reserves, deposits and debentures. The debentures, which account for most part of the funds on the bank may be issued by the banks themselves or by the State Co-operative Banks on their behalf. They are subscribed for by the public or the Government in some cases, the principal and interest of these debentures are guaranteed by the Government. In Mumbai and Chennai Central Land Development Banks were established to finance Primary Land. Development Banks by centralised debenture issues. These debentures are classified as trustee securities.
Loans and Advances

The loans granted by land development banks are repayable within 20 to 30 years. I Normally, loans are granted up to 50% of the value of the land or up to 30 times the revenue. Loans are granted only after a thorough verification of security title-deeds as well as the necessity for the loan.
Defects of Land Development Banks

1. Land development banking made little progress in India. Many states are without a single Land Development Bank. The following have been noticed in the working of Land Development Banks, 2. Loans given by them are predominantly for discharging of prior debts and not for Purpose connected with land improvements 3. These banks do not have the necessary specialised staff for assessing the technical soundness of scheme and adequate' supervising staff for verifying that the schemes are in fact executed. Although State Government possess such staff, there is coordination between them and Land Development Banks.
4. These banks do not prescribe different periods for different types of loans.
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5. They are not able to raise sufficient funds although their debentures are guaranteed by the State Governments. 6. There is no co-ordination between the activities of State Co-operative Bank and the Land Development Bank 7. Delay in granting loans. 8. The Land Development Banks are now called (State Co-operative) Agriculture and Rural Development Banks (ARDBs) since they are providing long-term funds for various agriculture related projects besides development of land.
STATE CO-OPERATIVE AGRICULTURE AND RURAL DEVELOPMENT BANKS

These co-operative banks were earlier known as Land Development Banks. They are now called Agriculture and Rural Development Banks. They operate under a two-tier system known as (a) State Co-operative Agriculture and Rural Development Banks (SCARDB) and b) Primary Co-operative Agriculture and Rural Development Banks (PCARDB). SCARDBs have now been permitted to accept term deposits for a maturity period of 1 year and above like that of commercial banks. However, the aggregate outstanding deposits should not exceed the net owned Funds (Capital plus free reserves and surplus profits minus losses, if any) of SCARDBs. The ARDBs make long-term lending for schemes associated with increasing the agricultural output such as digging of bore-well. In March 1998, 19 SCARDBs and 738 PCARDBs were operating in India. They generally provide loans for a maximum period of 10 to 15 years. While the SCARDBs charge interest around 10 per cent on their loans, PCARDBs interest on their lending average about 11% per annum. These institutions Get refnance facilities from NABARD usually around 3 per cent lower than their lending rates.
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Features of Cooperative Banks

1. Co-operative Banks are organised and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of "one member, one vote". Function on "no profit, no loss" basis. Co-operative banks, as a principle, do not pursue the goal of profit maximizations. 2. Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities 3. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. 4. UCBs provide working capital loans and term loan as well. 5. The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures also. 6. Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural. 7. Co-operative banks are perhaps the first government sponsored, governmentsupported, and government-subsidised financial agency in India. They get financial and other help from the Reserve Bank of India NABARD, central government and state governments. They constitute the "most favoured" banking sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance. 8. Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans.
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9. Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are (a) central and state government, (b) the Reserve Bank of India and NABARD, (c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank 10. Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other cooperative banks are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act. 11. Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are. However, their requirements are less than commercial banks. 12. Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India 13. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have been exercised only after 1979 in respect of non-agricultural advances they were free to charge any rates at their discretion. Although the main aim of the co-operative bank is to provide cheaper credit to their members and not to maximize profits, they may access the money market to improve their income so as to remain viable.
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CO-OPERATIVE BANKS
1.Structure of system:
COMMERCIAL BANKS
1.They are functioning on branch banking
Federal Structure in nature i.e.at the top system and the branches are located in all level State co-operative banks, at the areas such as rural, urban etc. The head district level, central co-operative banks, office control all branches through zonal and at the village level Primary Co- office. operative credit societies. 2.Purpose of credit; They are generally concentrating on rural credit and provide credit facilities to agricultural and rural activities. 3.Voting Rights : In co-operative banks, members living in a particular area are usually shareholders. One shareholder has one vote. 4.Interest Rates: In co-operative banks, the rate of interest is When comparing with co-operative bank, usually high and for the loan is lower. This position is in comparision with commercial bank 5.Borrowers: In co-operative banks the borrowers are usually their members Borrowers can be any one including individual and institution. the interest rate on loan is high and for deposit is low. In joint stock commercial banks one share one vote system is followed. Shareholder dispersion is very wide and member can be from any part of the country They are mainly concentrating on the credit requirements of trade and industry.
Progress of Co-operative Credit Movement in India
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(Amount in Rs. crore, ratio in Percent)

SR..
Type Institution
of Item
As at end March 1999 4 1,587 7,314 52,617 1,040 66,985 2000 2001 5 6 1,784 1,618 9,314 71,189 1,475 90,301 2002 7 1,854 13,797 93,069 N.A. 1,15,59 % 62,060 67 30 N.A 35,929 11,480 N.A, 34,221 32,706 N.A 91 369 N.A. 64,900 17,799 NA 45,257 56,554 N.A. 87
No. 1 2 1 Urban Co-operative Banks
3 Number Owned Funds Deposits Borrowings Working Capital Loans Outstanding C-D Ratio Number
State Co-operative Banks (StCBs)
10,826 80,840 2,069 1,03,04 2 34,172 45,995 54,389 65 65 67 29 29 30 4,911 29,557 10,858 44,035 37,368 25,709 83 87 367 10,116 54,248 14,658 77,679 46,619 44,538 70 82 5,837 32,606 11,685 49,490 34,307 29,848 84 92 367 12,180 61,786 16,935 87,821 45,016 52,491 67 85
District Central Co-operative Banks (CCBs)
Owned Funds 4,135 Deposits 25,788 Borrowings 9,739 Working Capital 39,222 Loam 32,834 Loans Outstanding 21,909 Recovery Performance (as per cent of 81 demand) C-D Ratio 85 Number 367 Owned Funds 7,652 Deposits 40,112 Borrowings 12,871 Working Capital 65,466 Loans Issued 40,397 Loans Outstanding 36,949 Recovering Performance (As per cent of 70 demand) C-D Ratio 81
CLASSIFICATION OF UCBS
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Hereafter, the Urban Co-operative Banks would be classified into four Grades viz: Grade I, II, III and IV, instead of 'weak' and 'sick', as indicated below. I) Grade-1: They are sound banks, i.e., banks having satisfactory financial position not having any liquidity problems not involved in any other serious irregularities. The norms for classifying banks under Grade I would be as under: (i) Compliance with CRAR norms for the year just ended, and (ii) Net NPAs is less than 10% of the net loans and advances as on 31st March or as identified by the RBI subsequently, and (iii) Net profit (after making adequate provisions against NPAs and other asset losses as per the latest inspection report or statements/ returns submitted by the Bank) for the financial year just ended, and (iv) No default in maintenance of CRR/ SLR in the previous year (unless the default was inadvertent or for any other acceptable reason) Where a bank meets the conditions (ii) to (iv) but the shortfall in CRAR is less than 1 %. Such banks would be classified under Grade II. ii) Grade-II: Banks would be classified under Grade II, if they meet any one of the following norms: (i) CRAR is 1% below the prescribed norms, or (ii) Net NPAs is 10% or more but below 15% of the net loans and advances as on 31st March, or as identified by the Reserve Bank subsequently, or (iii) Incurred net losses (after making adequate provisions for impairment of all assets) for the financial year just ended, or (iv) Defaulted in maintenance of CRR/ SLR in the previous financial year (unless the default was inadvertent or for any other acceptable reason) and/ or there is more or less continuous default in maintenance of CRR/ SLR during the current year. (iii) Grade - III: The banks will be placed under this category if they meet any two of the following three norms: (i) If CRAR is below 75% of the minimum prescribed level, but 50% or above
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(ii) Net NPA is 10% or more but less than 15% of net loans and advances as on 31st March, or as identified by RBI subsequently. (iii) Incurred net losses for two years out of the last three consecutive financial years after making adequate provision for asset losses as indicated by the statutory auditors / RCS and/ or RBI (iv) Grade - IV: UCBs will be placed under this category. (i) If their CRAR falls below 50% of the minimum prescribed level and (ii) If Net NPA is 15% or more of net loans and advances as on 31st March or as identified by the RBI subsequently. or (iii) If they show net losses (as per balance sheet) for the last three consecutive financial years. (i.e. the condition on CRAR together with anyone of the two other conditions relating to Net NPA and net losses). However, there could be cases where the banks fulfill any one of the conditions (that is, having CRAR below 50% or Net NPAs of 15% or above or have incurred net losses for the last three years continuously). Since these banks do not meet the two conditions required for classification as Grade- IV, these banks will be classified under Grade- III.
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CALL/NOTICE MONEY MARKET OPERATIONS:

1. Introduction: The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days. 2. Participants: Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds (Annex I). Of these, banks and PDs can operate both as borrowers and lenders in the market. Non-bank institutions, which have been given specific permission to operate in call/notice money market can, however, operate as lenders only (Tablel). Table 1: Eligibility for Transactions in Call/Notice Money Market Borrowing 1. Scheduled Lending Commercial 1. Scheduled Commercial Banks 2. 3. 4. 5. 6. 3. Prudential Limit The Narasimham Committee (1998) recommended that call/notice money market in India should be made purely an inter-bank market. Accordingly, RBI initiated the process of phasing out of non-bank institutions (i.e., all-India Financial Institutions, Insurance companies and Mutual Funds) from call/notice money market in a gradual manner since May 5, 2001. Further, in order to preserve integrity of the financial market as also to achieve balanced development of various segments of money market, RBI has Co-operative Banks Primary Dealers (PDs) Select all-India Financial Institutions Select Insurance Companies Mutual Funds
Banks 2. Co-operative Banks 3. Primary Dealers (PDs)
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put in place prudential limits in respect of both borrowing and lending in call/notice money market for banks and PDs since October 5, 2002.
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FUNCTIONS OF CO-OPERATIVE BANK A. Acceptance of Deposits 1. Time Deposits: These are deposits repayable after a certain fixed period. These
deposits are not withdrawable by cheque, draft or by other means. It includes the following.
a) Fixed Deposits: The deposits can be withdrawn only after expiry of certain
period say 3 years, 5 years or 10 years. The banker allows a higher rate of interest depending upon the amount and period of time. Previously the rates of interest payable on fixed deposits were determined by Reserve Bank. Presently banks are permitted to offer interest as determined by each bank. However, banks are not permitted to offer different interest rates to different customers for deposits of same maturity period, except in the case of deposits of Rs. 15 lakhs and above. These days the banks accept deposits even for 15 days or one month etc. In times of urgent need For money, the bank allows premature closure of fixed deposits by paying interest at reduced rate. Depositors can also avail of loans against Fixed Deposits. The Fixed Deposit Receipt cannot be transferred to other persons.
(b) Recurring Deposits: In recurring deposit, the customer opens an account and
deposits a certain sum of money every month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along with interest is paid to the customer. It is very helpful to the middle and poor sections of the people. The interest paid on such deposits is generally on cumulative basis. This deposit system is a useful mechanism for regular savers of money.
(c) Cash Certificates: Cash certificates are issued to the public for a longer
period of time. It attracts the people because its maturity value is in multiples of the sum invested. It is an attractive and high yielding investment for those who can keep the funds for a long time. It is a very useful account for meeting future financial requirements at the occasion of marriage, education of children etc. of RS 10,000 payable after 10 years can be purchased now, say for Rs. 20,000. Cash certificates are generally issued at discount to face value. It means a cash certificate
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2. Demand Deposits: These are the deposits which may be withdrawn by the depositor at any time without previous notice. It is withdrawable by cheque/draft. It includes the following:
(a) Savings Deposits: The savings deposit promotes thrift among people. The
savings deposits can only be held by individuals and non-profit institutions. The rate of interest paid on savings deposits is lower than that of time deposits. The savings account holder gets the advantage of liquidity (as in current a/c) and small income in the form of interests. but there are some restrictions on withdrawals. Corporate bodies and business firms are not allowed to open SB Accounts. Presently interest on SB Accounts is determined by RBI. It is 4.5 per cent per annum. Co-operative banks are allowed to pay an extra 0.5 per cent on Its savings bank deposits
(b) Current Account Deposits: These accounts are maintained by the people
who need to have a liquid balance. Current account offers high liquidity. No interest is paid on current deposits and there are no restrictions on withdrawals from the current account. These accounts are generally in the case of business firms, institutions and co-operative bodies. Nowadays, banks are designing and offering various investment schemes for deposit of money. These schemes vary from bank to bank. It may be stated that the banks are currently working out with different innovative schemes for deposits. Such deposit accounts offer better interest rate and at the same time withdrawable facility also. These schemes are mostly offered by foreign banks. In USA current Accounts are known as 'Checking Accounts' as a cheque is equivalent to check in America.
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B. Advancing of Loans
The co-operative banks provide loans and advances in various forms. They are given below:
1. Overdraft: This facility is given to holders of current accounts only. This is an arrangement with the bankers thereby the customer is allowed to draw money over and above the balance in his/her account. This facility of overdrawing his account is generally pre-arranged with the bank upto a certain limit. It is a short-term temporary fund facility from bank and the bank will charge interest over the amount overdrawn. This facility is generally available to business firms and companies.
2. Cash Credit: Cash credit is a form of working capital credit given to the business
firms. Under this arrangement, the customer opens an account and the sanctioned amount is credited with that account. The customer can operate that account within the sanctioned limit as and when required. It is made against security of goods, personal security etc. On the basis of operation, the period of credit facility may be extended further. One advantage under this method is that bank charges interest only on the amount utilised and not on total amount sanctioned or credited to the account. Reserve Bank discourages this type of facility to business firms as it imposes an uncertainty on money supply. Hence this method of lending is slowly phased out from banks and replaced by loan accounts. Cash credit system is not in use in developed countries.
3. Discounting of Bills: Discounting of Bills may be another form of bank credit.

The bank may purchase inland and foreign bills before these are due for payment by the drawee debtors, at discounted values, i.e., values a little lower than the face values. The Banker's discount is generally the interest on the full amount for the unexpired period of the bill. The banks reserve the right of debiting the accounts of the customers in case the bills are ultimately not paid, i.e., dishonoured. The bill passes to the Banker after endorsement. Discounting of bills by banks provide immediate finance to sellers of goods. This helps them to carry on their business. Banks can discount only genuine commercial bills i.e., those drawn against sale of goods on Credit. Banks will not discount Accommodation Bills.
4. Loans and Advances: It includes both demand and term loans, direct loans and
advances given to all type of customers mainly to businessmen and investors against personal security or goods of movable or immovable in nature. The loan amount is paid in cash or by credit to customer account which the customer can draw at any time. The
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interest is charged for the full amount whether he withdraws the money from his account or not. Short-term loans are granted to meet the working capital requirements where as long-term loans are granted to meet capital expenditure. Previously interest on loan was also regulated by RBI. Currently, banks can determine the rate themselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate (PLR).
Classification of Loans and Advances

Loans and advances given by bankers can be classified broadly into the following categories: (i)Advances which are given on the personal security of the debtor, and for which no tangible or collateral security is taken; this type of advance is given either when the amount of the advance is very small, or when the borrower is known to the Banker and the Banker has complete confidence in him (Clean Advance). (ii)Advances which are covered by tangible or collateral security. In this section of the study we are concerned with this type of advance and with different types of securities which a Banker may accept for such advances (Secured Advance). (iii) Advances which are given against the personal security of the debtor but for which the Banker also holds in addition the guarantee of one or more sureties. This type of advance is often given by Banker to persons who are not known to them but whose surety is known to the Banker. Bankers also often take the personal guarantee of the Directors of a company to whom they agree to advance a clean or unsecured loan. (iv) Loans are also given against the security of Fixed Deposit receipts.
5. Housing Finance: Nowadays the commercial banks are competing among themselves in providing housing finance facilities to their customers. It is mainly to increase the housing facilities in the country. State Bank of India, Indian Bank, Canara Bank, Punjab National Bank, have formed housing subsidiaries to provide housing finance. The other banks are also providing housing finances to the public. Government of India also encourages banks to provide adequate housing finance. Borrowers of housing finance get tax exemption benefits on interest paid. Further housing finance upto Rs. 5 lakh is treated as priority sector advances for banks. The limit has been raised to Rs. 10 lakhs per borrower in cities.
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6. Educational Loan Scheme: The Reserve Bank of India, from August, 1999
introduced a new Educational Loan Scheme for students of full time graduate/postgraduate professional courses in private professional colleges. Under the scheme all public sector banks have been directed to provide educational loan upto Rs. 15,000 for free seat and Rs. 50,000 for payment seat student at interest not more than 12 per cent per annum. This loan is on clean basis i.e., without calling for security. This loan is available only for students whose annual family income does not exceed Rs. 1,00,000. The loan has to be repaid together with interest within five years from the date of completion of the course. Studies in respect of the following subjects/areas are covered under the scheme. (a) Medical and dental course. (b) Engineering course. (c) Chemical Technology. (d) Management courses like MBA. (e) Law studies. (f) Computer Science and Applications. This apart, some of the banks have other educational loan schemes against security etc., one can check up the details with the banks.
7. Loans Against Shares/Securities: Commercial banks provide loans against the

security of shares/debentures of reputed companies. Loans are usually given only upto 50% value (Market Value) of the shares subject to a maximum amount permissible as per RBI directives. Presently one can obtain a loan upto Rs.10 lakhs against the physical shares and upto Rs. 20 lakhs against dematerialised shares.
8. Loans Against Savings Certificates: Banks are also providing loans upto
certain value of savings certificates like National Savings Certificate, Fixed Deposit Receipt, Indira Vikas Patra, etc. The loan may be obtained for personal or business purposes.
9. Consumer Loans and Advances: One of the important areas for bank
financing in recent years is towards purchase of consumer durables like TV sets, Washing Machines, Micro Oven, etc. Banks also provide liberal Car finance. These days banks are competing with one another to lend money for these purposes as default of payment is not high in these areas as the borrowers are usually salaried persons having
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regular income. Further, bank's interest rate is also higher. Hence, banks improved their profit through such profitable loans.
10. Securitization of Loans: Banks are recently trying to securities a part of their
part
C. Credit Creation
Credit creation is one of the primary functions of co-operative banks. When a bank sanctions a loan to the customer, it does not give cash to him. But, a deposit account is opened in his name and the amount is credited to his account. He can withdraw the money whenever he needs. Thus, whenever a bank sanctions a loan it creates a deposit. In this way the bank increases the money supply of the economy. Such function is known as credit creation.
2. Secondary Functions
The secondary functions of the banks consist of agency functions and general utility functions. A. Agency Functions Agency functions include the following: (i) Collection of cheques, dividends, interests : As an agent the bank collects cheques, drafts, promissory notes, interest, dividends etc., on behalf of its customers and credit the amounts to their accounts. Customers may furnish their bank details to corporates where investment is made in shares, debentures, etc. As and when dividend, interest, is due, the companies directly send the warrants/cheques to the bank for credit to customer account. (II) Payment of rent, insurance premiums: The bank makes the payments such as rent, insurance premiums, subscriptions, on standing instructions until further notice. Till the order is revoked, the bank will continue to make such payments regularly by debiting the customer's account. (iii) Dealing in foreign exchange: As an agent the commercial banks purchase and sell foreign exchange as well for customers as per RBI Exchange Control Regulations. (iv) Purchase and sale of securities: Commercial banks undertake the purchase and sale of different securities such as shares, debentures, bonds etc., on behalf of their customers. They run a separate 'Portfolio Management Scheme' for their big customers. (iv) Act as trustee, executor, attorney, etc. The bank act as executors will, trustees and attorneys. It is safe to appoint a bank as a trustee than to appoint an individual. Acting as
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attorneys of their customers, they receive payments and sign transfer deeds of the properties of their customers. (vi) Act as correspondent: The commercial banks act as a correspondent of their customers. Small banks even get travel tickets, book vehicles, receive letters etc. on behalf of the customers. (vii) Preparation of income-Tax returns: They prepare income-tax prepares provide advices on tax matters for their customers. For this purpose, they employ tax experts and make their services available to their customers. B. General Utility Services The General utility services include the following: (i)Safety Locker facility: Safekeeping of important documents, valuables like jewels is one of the oldest service provided by commercial banks. 'Lockers' are small receptacles which are fitted in steel racks and kept inside strong rooms known as vaults. These lockers are available on half-yearly or annual rental basis. The bank merely provides lockers and the key but the valuables are always under the control of its users. Any customer cannot have access to vault. Only customers of safety lockers after entering into a register his name, account number and time can enter into the vault. Because the vault is holding important valuables of customers in lockers, it is also known as 'Strong Room'. (ii)Payment Mechanism or Money Transfer: Transfer of funds is one of the important functions performed by commercial banks. Cheques and credit cards are two important payment mechanism through banks. Despite an increase in financial transactions, banks are managing the transfer of funds process very efficiently. Cheques are also cleared through the banking system. Correspondent banking is another method of transferring funds over long distance, usually from one country to another. Banks, these days employ computers to speed up money transfer and to reduce cost of transferring funds. Electronic Transfer of funds is also known as 'Chequeless banking' where funds are transferred through computers and sophisticated electronic system by using code words. They offer Mail Transfer, Telegraphic Transfer (TT) facility also.
(iii) Travellers' cheques: Travellers Cheques are used by domestic travellers as well as by international travellers. However the use of travellers cheques is more common by
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international travellers because of their safety and convenience. These can be also termed as a modified form of travellers letter of credit. (iv) Circular Notes or Circular Letters of Credit: Under Circular Letters of Credit, the customer/traveller negotiates the drafts with any of the various branches to which they are addressed. Thus the traveller can obtain funds from many of the branches of banks instead only from a particular branch. Circular Letters of Credit are therefore a more useful method for obtaining funds while travelling to many countries. It may be noted that travellers letter of credit are usually paid for in advance. In other words, the traveller first make payments to the issuing bank before obtaining the Circular Notes. (v) Issue "Travellers Cheques: Banks issue travellers cheques to help carry money safely while travelling within India or abroad. Thus, the customers can travel without fear, theft or loss of money. (vi) Letters of Credit: Letter of Credit is a payment document provided by the buyer's banker in favour of seller. This document guarantees payment to the seller upon production of document mentioned in the Letter of Credit evidencing despatch of goods to the buyer. The Letter of Credit is an assurance of payment upon fulfilling conditions mentioned in the Letter of Credit. The letter of credit is an important method of payment in international trade. There are primarily 4 parties to a letter of credit. The buyer or importer, the bank which issues the letter of credit, known as opening bank, the person in whose favour the letter of credit is issued or opened (The seller or exporter, known as 'Beneficiary of Letter of Credit'), and the credit receiving/advising bank. The Letter of Credit is generally advised/sent through the seller's bank, known as Negotiating or Advising bank. This is done because the conditions mentioned in the Letter of Credit are, in the first instance, have to be verified by the Negotiating Bank. It is mostly used in international trade. (viii) Provides Trade Information: The commercial banks collect information on business and financial conditions etc., and make it available to their customers to help plan their strategy. Trade information service is very useful for those customers going for cross-border business. It will help traders to know the exact business conditions, payment rules and buyers' financial status in other countries. (ix) ATM facilities: The banks, today have ATM facilities. Under this system the customers can withdraw their money easily and quickly and 24 hours a day. This is also known as 'Any Time Money'. Customers under this system can withdraw funds i.e.,
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currency notes with a help of certain magnetic card issued by the bank and similarly deposit cash/ cheque for credit to account. (x) Credit cards: Banks have introduced credit card system. Credit cards enables a customer to purchase goods and services from certain specified retail and service establishments upto a limit without making immediate payment. In other words, purchases can be made on credit basis on the strength of the credit card. The establishments like Hotels, Shops, Airline Companies, Railways etc., which sell the goods or services on credit forward a monthly or fortnightly statements to the bank. The amount is paid to these establishments by the bank. The bank subsequently collects the dues from the customers by debit to their accounts. Usually, the bank receives certain service charges for every credit card issued. Visa Card, BOB card are some examples of credit cards. (xii) Accepting Bills: On behalf of their customers, the banks accept bills drawn by third parties on its customers. This resembles the letter of credit. While banks accept bills, they provide a better security for payment to seller of goods or drawer of bills. (xiii) Merchant Banking: The commercial banks provide valuable services through their merchant banking divisions or through their subsidiaries to the traders. This is the function of underwriting of securities. They underwrite a portion of the Public issue of shares, Debentures and Bonds of Joint Stock Companies. Such underwriting ensures the expected minimum subscription and also convey to the investing public about the quality of the company issuing the securities. Currently, this type of services can be provided only by separate subsidiaries, known as Merchant Bankers as per SEBI regulations. (xiv) Advice on Financial Matters: The commercial banks also give advice to their customers on financial matters particularly on investment decisions such as expansion, diversification, new ventures, raising of funds etc. (xv) Factoring Service: Today the commercial banks provide factoring service to their customers. It is very much helpful in the development of trade and industry as immediate cash flow and administration of debtors' accounts are taken care of by factors. This service is again provided only by a separate subsidiary as per RBI regulations.
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BANKING REGULATION ACT, 1949 (As applicable to Co-operative Societies)

The Banking Regulation Act, 1949 (as applicable to Co-operative Societies), which had come into force from 1st March 1966, has vested the Reserve Bank with various statutory powers of control and supervision over the Co-operative Banks. The powers in regard to incorporation, management etc. of these banks, however, continue to vest in the Registrars of Co-operative Societies of the States concerned. Further the provisions of the B. R. Act, 1949 (as applicable to Co-operative Societies) shall be in addition to, and not, save as expressly provided in the Act, in derogation of any other law for the time being in force. This means that the Co-operative Banks are required not only to comply with the provisions of the B. R. Act, but also other laws applicable to them. In respect of matters specifically provided for in the B. R. Act. The provisions of the said Act will prevail over the provisions of the Co-operative Societies Acts. The salient features of some of the important sections of the Act and Rules are as under:
Sec.5 (ccv): In terms of this Section, a "Primary Co-operative Bank" means a Cooperative Society other than a Primary Agricultural Credit Society : (1) the primary object or principal business of which is the transaction of banking business (2) the paid-up share capital and reserves of which are not less than one lakh of Rupees and (3) the bye-laws of which do not permit admission of any other Co-operative Society as a member. Provided that this sub-clause shall not apply to the admission of a Co-operative Bank as a member by reason of such Co-operative Bank subscribing to the share capital of such Co-operative Society out of funds provided by the State Government for the purpose.
Sec.6: The forms of business in which the Co-operative Bank may engage have been
specified in sec.6. A bank can, however, undertake such other business in which the Central Government may by a notification in the official gazette specify under clause (0) of Sub-sec. (1) of sec.6 of the Act, as a form of business in which it is lawful for a Cooperative Bank to engage itself.
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a) The Government of India by a Notification dated 12.12.1995, has specified "hire purchase" and "equipment leasing" as forms of business in which it is lawful for a Primary Co-operative Bank to engage. b) The Government of India by a notification has notified Insurance as a form of business, which may be undertaken by the Co-operative Banks.
Sec.8: A Co-operative Bank cannot undertake trading activities. Sec.9: A Co-operative Bank is prohibited from holding any immovable property
howsoever acquired except such as is required for its own use, for any period exceeding seven years from the acquisition thereof or from the commencement of the Act, i.e. 1st March, 1966, whichever is later. If a Bank cannot dispose off the property within the stipulated period, it has to seek extension of time. In case of a Primary Credit Society, which becomes a Primary Co-operative Bank, after the commencement of the Banking Laws (Amendment) Act, 1983, the period of 7 years for holding the non-banking assets acquired by it shall commence from the day it becomes a Primary Co-operative Bank. Further, the Reserve Bank can extend the aforesaid period of 7 years by such further period, as it may consider necessary to do so, in cases where it is satisfied that such extension would be in the interest of the depositor of the Co-operative Bank.
Sec.11: No Co-operative 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 Rupees one lakh. For the purpose of this Section, "value" means the real or exchangeable value and not the nominal value shown in the books of the bank. A determination by the Reserve Bank of aggregate value of the paid up capital and reserves of a Cooperative Bank shall be final for the purpose of the Act.
Sec.14A: No Co-operative Bank shall create a floating charge on the undertaking or on

any of its property or on any part thereof, unless the creation of such floating charge is certified in writing by the Reserve Bank as not being detrimental to the interests of the depositors of such Co-operative Bank.
Sec.18: A Co-operative Bank other than a Scheduled State Co-operative Bank/Primary

Co-operative Bank is required to maintain cash reserve with itself or in Current Account (net balance) opened with the Reserve Bank or State Bank of India or State Co-operative Bank of the State concerned or with any other Bank notified by the Central Government not less than 3% of DTL as on the last Friday of the second preceding fortnight and shall
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submit in prescribed form, a return to the Reserve Bank on or before the 15th of the subsequent month showing the amount so held on alternate Fridays of the month. The banks notified under this section are the State Bank of India, the State Associated Banks and the / Nationalised Banks. In the case of a Primary Cooperative Bank, the cash reserve can be maintained in the Central Co-operative Bank of the District concerned or in a Central Co-operative Bank outside the District provided the Urban Bank has its branch in the said District. The balance held by the Co-operative Bank in current account with the State Bank of India or a subsidiary bank or the nationalised banks shall be set off by the balances held by the said banks with such Co-operative Bank and only the net balance in the current account shall be regarded as Cash Reserve.
Sec.19: This Section imposes restrictions on holding shares in other Co-operative

Societies. As per the instructions of the Reserve Bank of India, the total investment of a Co-operative Bank in the shares of Cooperative Institutions (except those of Central/State Co-operative Banks to which it is affiliated) should not exceed 5% of the subscribed capital of the institution. When more than one Co-operative Bank contributes to the shares of a Co-operative Institution, the limit of 5% of the subscribed capital should apply not in respect of the investment of each of the Bank but in respect of all the Banks taken together.
Sec.20: This section prohibits sanction of loans or advances on the security of its own
shares and also unsecured loans and advances to Directors or the firms or private companies in which they are interested. In the case of Primary Co-operative Banks unsecured loans to directors are subject to the Directives issued by the Reserve Bank from time to time.
Sec.20A: Co-operative Banks would have to obtain prior approval of the Reserve Bank
to remit in whole or in part any debt due to it by any of its past or present directors.
Sec.21: This section empowers the Reserve Bank to determine the policy in relation to
advances to be followed by Co-operative Banks generally or by any Co-operative Bank in particular. Under this section, the Reserve Bank may issue directive to Co-operative Banks generally, or to any Co-operative Bank in particular as to: (a) the purpose for which advances may or may not be made; (b) the Margin to be maintained in respect of secured advances;
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(c) the maximum amount of advances or other financial accommodation, which may be made by a Cooperative Bank to any one party; (d) the maximum amount upto, which guarantees may be given by a Co- operative Bank on behalf of any one party; (e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made.
Sec.21A: Notwithstanding anything contained in the Usurious Loans Act, 1918 or any
other law relating to indebtedness in force in any State, transactions between a Cooperative Bank and its debtor shall not be reopened by any court on the ground that the rate of interest charged by the Co-operative Bank in respect of any such transaction is excessive.
Sec.22: The Co-operative Banks, which existed as on 1-3-1966, were required to apply
to the Reserve Bank for a license within a period of three months from the commencement of the Act. Such Banks were permitted to carry on banking business if licences were granted to them or until they were informed that licence couldn't be granted to them. New banks should invariably obtain a licence before commencing banking business. A Co-operative Bank which comes into existence as a result of the division of any other Co-operative Society carrying on business, shall before the expiry of three months from it so coming into existence, apply in writing to the Reserve Bank, for a licence for carrying on banking business under this Section.
Sec.23: State Co-operative Banks and the Primary Co-operative Banks are required to
obtain prior permission of the Reserve Bank for opening new branches. Central Cooperative Banks need not obtain such permission for opening branches within their areas of operation. In terms of new Sub-Sec (4-A), any Co-operative Bank other than a Primary Cooperative Bank requiring permission, shall submit the application for opening of a new place of business or changing the location of an existing place of business, to the Reserve Bank through the National Bank for Agriculture and Rural Development, with an advance copy of the application directly to the Reserve Bank. Urban Co-operative Banks can however submit their application directly to the Reserve Bank.
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Sec.24: Every Co-operative Bank shall maintain in cash or unencumbered approved

securities an amount which shall not, at the close of business on any day, be less than 25 percent or such other percentage not exceeding 40 percent of the total of its Demand and Time Liabilities in India or as the Reserve Bank may specify from time to time.
Sec.24A: This new section empowers the Reserve Bank, without prejudice to the
provisions of sec.53, to exempt by issue of notification in the official gazette any Cooperative Bank or class of Co-operative Banks with reference to all or any of the offices of such bank or banks or with reference to the whole or any part of the assets and liabilities of such Co-operative Bank or Banks from the application of whole or any part of the provisions of Sec. 18 and Sec.24 for such period and on such conditions as may be specified in such notification.
Sec. 27: Every bank is required to submit to the Reserve Bank of India a return in the
prescribed form and manner showing its assets and liabilities as at the close of the business on the last Friday of every month or if that Friday is a public holiday at the close of the business on the preceding working day before the close of the month succeeding that to which it relates.
Sec.29 and 31: In terms of the notification issued under amended sec.29, the banks
are now required to prepare their Profit & Loss account and Balance sheet as at 31st March of each year. The banks will have to submit to the Reserve bank, three typed copies of Profit & Loss account and Balance Sheet together with the statutory auditors report signed by the Principal Officer of the bank and atleast three Directors, before 30th September of each year. The published Balance Sheet should also contain Statutory Auditors Report. The RBI has reiterated that if the audited balance sheet and profit and loss account along with Auditors Report is not submitted before 30th September, every year it will invite penalties u/s.46 and on 47A of BR Act, 1949. The Balance Sheet is also required to be published as required under Rule 10 in one of the local newspapers within a period of 9 months from the end of the period to which they relate i.e. before 31st December. For valid reasons, extension of time may be allowed by Reserve Bank of India, for a further period not exceeding 3 months. An application giving reasons for the delay, accompanied by supporting Board Resolution and information, should be submitted before 30th September of the year. In terms of Rule 10, three copies of the newspaper in which Accounts and Balance Sheet together with Statutory Auditor's
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Certificate has been published should be sent to the Reserve Bank, latest by 31st December of the year
Sec.35: This section empowers the Reserve Bank, to authorise its officers, to inspect
Co-operative Banks and supply to the Co-operative Banks so inspected, a copy of its report. In case of Primary Co-operative Banks, the Reserve Bank may authorise the State Co-operative Bank of the State concerned, to carry out the inspection on behalf of the Reserve Bank. In addition to conducting regular inspection under this Section, the Reserve Bank is also empowered to carry out a scrutiny of the affairs of the Co-operative Bank, at any time it is considered necessary to do so Note: NABARD has also been statutorily empowered to carry out the inspection of Cooperative Banks (excluding Primary Co-operative Banks).
Sec.35A: This section empowers the Reserve Bank to issue directions, to Co-operative
Banks in general and to any Co-operative Bank in particular, regarding any aspect of the working of the Co-operative Banks/ Bank concerned. While sec.21 referred to earlier confer powers to issue directions in regard to advances by Co-operative Banks, sec.35A covers all aspects of the functions of Co-operative Banks. These two sections together give powers to the Reserve Bank to issue directions on all matters concerning the operations of a Cooperative Bank in particular, or all Co-operative Banks, or a group of Co-operative Banks, in general.
Sec.36: The Reserve Bank is empowered to depute, in case it is considered essential to

do so, for the reorganisation or expansion of Co-operative credit on sound lines, one or more of its Officers to watch the proceedings at any meeting of the Board of Directors of any Co-operative Banks or any other body constituted by it and require such bank to give an opportunity to the Officers, so deputed, to be heard at such meeting(s). The Reserve Bank may appoint one or more of its Officers to observe the manner in which the affairs of the Cooperative Bank or its Offices or branches are being conducted, requiring such Officers to make a report thereon.
Sec.45: Under this section, the Reserve Bank can recommend to the Central
Government, to order a moratorium in respect of a Co-operative Bank. The power to issue such a moratorium however rests with the Central Government.
Sec.45Y: This section empowers the Central Government to make rules, in consultation
with the Reserve Bank, specifying the periods for which a Co-operative Bank shall (a)
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preserve its books of account and other documents and (b) keep with itself different instruments paid by it.
Sec.45Z: This section enables the Co-operative Banks to return at the request of the
customer (including Governments and Statutory Corporations), a paid instrument before the prescribed period of preservation, only after making and keeping in its possession a true copy thereof, made by mechanical process or other process which in itself ensures the accuracy of the copy. The Bank is also entitled to recover from the customer the cost of making such copies of the instruments.
Sec.46: In this section, the various penalties that may be imposed on Co-operative
Banks, for non-compliance with the various provisions of the B.R. Act, have been specified.
Sec.46 (4): "If any other provision of this Act is contravened or if any default is made
in complying with any requirement of this Act or of any order, or direction made or condition imposed there under, by any person, such person shall be punishable with fine which may extend to fifty thousand rupees or twice the amount involved in such contravention or default, where such amount is quantifiable, whichever is more, and where a contravention or default is a continuing one, with a further fine which may extend to two thousand and five hundred rupees for every day, during which a contravention or default continues
Sec.47A: Under this section the Reserve Bank is empowered to impose penalties on a
Bank for contravention and defaults of the nature referred to in sub-sec. (3) and (4) of Sec.46 of the Act, ibid, without recourse to the Court of Law. An enquiry is to be conducted and a reasonable opportunity of being heard should be given to the Bank. The procedure for conducting the enquiry is laid down in Rule 11 of the Banking Regulation (Co-operative Societies) Rules, 1966.
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MAHARASTRA CO-OPERATIVE SOCIETY ACT REGISTRATION 1.Application for registration and registration fees :
(1) Every application for registration of a society under Section 8 shall be made in Form 'A' in Marathi, Hindi or English, and shall, subject to the provisions of sub-section (2) of Section 8 and sub-rules (2) and (3), be signed by the applicants and shall, in addition to four copies of the proposed bye-laws of the society, be accompanied by: (a) a list of persons who have contributed to the share capital, together with the amount contributed by each of them, and the entrance fee paid by them; (b) a certificate from the Bank or Banks stating the credit balance therein in favour of the proposed society; (c) a scheme showing the details explaining how the working of the society will be economically sound and, where the scheme envisages the holding of immovable property by the society, the description of such property proposed to be purchased, acquired or transferred to the society: (d) such other documents as may be specified in the model bye-laws, if any, framed by the Registrar; (2) Where any member of a society to be registered is a registered society, a member of the committee of such registered society shall be authorised by that committee by a resolution to sign the application for registration and the bye-laws on its behalf, and a copy of such resolution shall be appended to the application. (3) Where any member of a society to be registered is a firm, company, other corporate body, society registered under the Societies Registration Act, 1860, or local authority or public trust registered under any law for the time being in force for the registration of such trusts, then such firm, company, corporate body, society, local authority or public trust, as the case may be, shall duly authorise any person to sign the application for registration and the bye-laws on its behalf, and a copy of the resolution giving such authority shall be appended to the application. (4) The application shall be sent to the Registrar by registered post or delivery by hand.
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2.Registration by Registrar
(1) On receipt of an application under Rule 4, the Registrar shall enter particulars of the application in the register of application to be maintained in Form 'B', give a Serial number to the application and issue a receipt in acknowledgement thereof. (2) The Registrar may give, wherever necessary, opportunity to the promoters to modify the proposed bye-laws before finally registering the society or rejecting the application for registration of the society. (3) On registering a society and its bye-laws under sub-section (1) of Section 9, the Registrar shall as soon as may be, notify the registration of the society in the Official Gazette and grant to the society, a certificate of registration signed by him and bearing his official seal and containing the registration number of the society, and the date of its registration. The Registrar shall also furnish the society with a certified copy of the byelaws approved and registered by him.
3.Form of report under Section 9(2)

The report to be made by the Registrar to the State Government under sub-section (2) of Section 9 shall be in Form 'C'.
4. Refusal of Registration
Where any society does not furnish the information in regard to the society as required by the Registrar or fulfil any of the conditions laid down in the Act or these rules, the Registrar may refuse to register that society.
5. Matters in respect of which Registrar may direct society to make byelaws or society may make by-laws
(1) The Registrar may require a society to make bye-laws in respect of all or any of the following matters, that is to say (a) the name of the society and address of the society and its branches; (b) the area of operation; (c) the objects of the society; (d) the manner in which and the limit up to which the funds of the society may be raised, the maximum share capital which any one member may hold and the purpose to which the funds would be made applicable; (e) the terms and qualifications for admission to membership; (f) the privileges, rights, duties and liabilities of members including nominal, associate and sympathiser members;
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(g) the consequences of default in payment of any sum due by a member; (h) conditions regarding sale or disposal of produce of members, wherever applicable; (i) in the case of credit societies (ii) the maximum loan admissible to a member; (iii) the maximum rates of interest on loans to members; (vi) the conditions on which loans may be granted to members and penalties for misapplication of loans so advanced; (v) the procedure for granting extension of time for the repayment of loans and advances; (vi) the consequences of default in payment of any sum due; (vii) the circumstances under which a loan may be recalled; (j) in the case of non-credit societies, the mode of conducting business such as manufacture, purchase, sale, stock taking and other like matters; (k) in the case of a composite society, that is to say, society having both credit and noncredit functions, matters referred to in clauses (i) and (j); (I) the mode of holding meetings, of the general body and of the committee; (m) the procedure for expulsion of members; (n) the manner of making, altering and abrogating bye-laws; (o) the mode of appointment either by election or otherwise and removal of members of the committee and other officer, if any, their duties and powers; p) the Chairman's powers, duties and functions and his removal on his losing support majority; q) the method of recruitment, the conditions of service and the authority competent to vise or regulate the scale of pay and allowances of salaried officers and servants of the ' and the procedure to be followed in the disposal of disciplinary cases against them; r) the mode of custody and investment of funds and mode of keeping the accounts and s) the disposal of net profits; t) the manner in which penalty should be levied on a member who is found to be of breach of bye-laws; u) appointment of a provisional committee, where necessary; v) the mode of appointment and removal of committee and its powers and duties; w) the mode of convening annual and special general meetings, issue of notices, and since which may be transacted thereat; x) in the event of winding up of the society, the purpose for which surplus assets, if nail be utilised;
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y) the conduct of elections to the committee and other bodies of the society as led in the bye-laws, including the number of members to be elected by different uencies and appointment of Returning Officer; z) any other matters incidental to the management of its business.
6. First by-laws of a society

(1) When a society has been registered the bye-laws of the society as approved and registered by the Registrar shall be the bye-laws of the society. (2) If the Registrar alters the classification of a society from one class of society to another, or from one sub-class thereof to another, he shall issue to the society a copy of his order as in the case of an amendment of the bye-laws.
7. Maintenance of register
(1) The register to be maintained by the Registrar under sub-section (4) of Section 9 shall be in Form 'D'. (2) The Registrar shall divide the register into parts, one for each district in the State. A society shall be registered in that part, for a district in which its head office is situate. (3) The Registrar shall assign for each district and each class or sub-class of societies, a code symbol, for giving registration numbers to the societies and the societies shall be registered from the dates specified by him.
8. Amendment of bye-laws.
(1) Subject to the provisions of this rule, bye-laws of a society may be amended by passing a resolution at a general meeting of the society held for that purpose. (2) The society shall give due notice in accordance with its bye-laws to all the members for considering any amendment thereof. (3) An amendment shall be deemed to have been duly passed, if a resolution in that behalf is passed at a general meeting by not less than two-thirds of the members present thereat, and voting. (4) After the resolution is passed, a copy thereof shall, within a period of two months from the date of the meeting at which the resolution was passed, be furnished to the Registrar along with, (a) A copy of the relevant bye-laws in force with amendments proposed to be made in pursuance of the resolution, together with reasons justifying such amendments. (b) Four copies of the text of the bye-laws as it would stand after amendment, signed by the officers duly authorised in this behalf by the committee of the society;
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(c) A copy of the notice given to the members of the society of the proposal to amend the bye-law; (d) Such other information as may be required by the Registrar. (5) On receipt of a copy of the resolution and other particulars referred to in sub-rule (4), the Registrar shall examine the amendment proposed by the society and if he is satisfied that the amendment is not contrary to the Act or the rules and is in the interest of the society and cooperative movement, he may register the amendment and issue to the society a copy of the amendment certified by him under sub-section (2) of Section 13. Where the Registrar is of opinion that the proposed amendment may be accepted subject to any modification, he may indicate to the society such modification after explaining in writing his reason thereof
MEMBERS AND THEIR RIGHTS AND LIABILITIES

Conditions to be complied with for admission for membership, etc. No person shall be admitted as a member of a society unless, (i) He has applied in writing in the form laid down by the society or in the form specified by the Registrar, if any, for membership; (ii) His application is approved by the committee of the society in pursuance ef the powers conferred on it in that behalf and subject to such resolution as the general body of members may in pursuance of the powers conferred on it in that behalf from time to time pass and in the case of nominal, associate or sympathiser member, by an officer of the society authorised in that behalf by the committee; (iii) He has fulfilled all other conditions laid down in the Act, the rules and the by-laws; (iv) in case of a firm, company or body corporate, society registered under the Societies Registration Act, 1860, a public trust registered under any law for the time being in force relating to registration of public trusts or a local authority, the application for membership is accompanied by a resolution authorising it to apply for such membership.
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INSURED CO-OPERATIVE BANK

Order for winding up, reconstruction, supersession of committee, etc., of insured Co-operative bank, not to he made without sanction or requisition of Reserve Bunk of India Notwithstanding anything contained in this Act. in the case of an insured co-operative bank (i) An order for the winding up. or an order sanctioning a scheme of compromise or arrangement, or of amalgamation, or reconstruction (including division or reorganisation), of the bank may he made only with the previous sanction in writing of the Reserve Bank of India; (ii) an order for the winding up of the hank shall he made :[by the Registrar] if so required by the Reserve Bank of India in the circumstances referred to in section 13-D of the Deposit Insurance Corporation Act. 1961; (iii) If so required by the Reserve Bank of India in the public interest ur for preventing the affairs of the bank being conducted in a manner detrimental to the interests of the depositors or for securing the proper management of the bank, an order shall he made by the Registrar for the surperscssion (removal) of the committee and the appointment of an Administrator therefore for such period or periods, not exceeding five years in the aggregate, as may from lime to time be specified by the Reserve Bank of India, and the Administrator so appointed shall, after the expiry of his term of office, continue in office until the day immediately preceding the date of the first meeting of the new committee: (iv) An order for the winding up of the bank or an order sanctioning a scheme of compromise or arrangement or of amalgamation or reconstruction (including division or reorganisation) or an order for the supersession (removal) of the committee and the appointment of an Administrator therefore made with the previous sanction in writing or on the requisition of the Reserve Bank of India shall not be liable to he called in question in any manner; and (v) The liquidator or the insured co-operative bank or the transferee bank, as the case may be, shall be under an obligation to repay the Deposit Insurance Corporation established under the Deposit Insurance Corporation Act, 1961, in the circumstances, to the extent and in the manner referred to in section 21 of that Act.
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Amalgamation of co-operative banks

(1) Where the Registrar is satisfied that it is essential in the public interest, or in order to secure the proper management of one or more co-operative banks that two or more such banks should be amalgamated, then notwithstanding anything contained in section 17, the Registrar may, after consulting such federal society or other authority as may be notified by the State Government in the Official Gazette, by order provide for the amalgamation of those banks into a single bank, with such constitution, property, rights, interests and authorities, and such liabilities, duties, and obligations as may be specified in the order. Such order may provide for the reduction of the interest or rights which the members, depositors, creditors, employees and other persons may have in or S.18) Amalgamation of primary agricultural credit societies against any hank to be amalgamated to such extent as the Registrar considers necessary in the interest of such persons for the maintenance of the business of that bank having due regard to the proportion of the* assets of such bank to its liabilities. Such order may also contain such incidental, consequential and supplemental provisions as may, in the opinion of the Registrar, be necessary to give effect to the amalgamation of the banks. (2) No order shall be made under sub-section (7), unless (a) A copy of the proposed order has been sent in draft to each of the banks concerned; (b) The Registrar has considered and made such modifications in the draft order as may seem to him desirable in the light of any suggestions or objections which may he received by him within such period (not being less than two months from the date on which the copy of the proposed order was received by the banks) as the Registrar may fix in that behalf, either from the banks or any members, depositors, creditors, employees or other persons concerned. (3) On the issue of an order under sub-section (1). Not withstanding anything contained in this Act or in any law for the time being in force or in any contract, award or other instruments for (he time being in force, the provisions thereof, shall be binding on all banks and their members, depositors, creditors, employees and other persons having any rights, assets, or liabilities in relation to all or any of the banks concerned. (4) Notwithstanding anything contained in the Transfer of Properly Act. 1882 or the Registration Act, 1908, the order issued under sub-section (7) shall be sufficient
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conveyance for transfer or vesting the rights, assets and liabilities of the banks concerned as provided in the order. (5) The amalgamation of banks under this section shall not affect any rights or obligations of the banks so amalgamated or render defective any legal proceedings, which might have been continued or commenced by or against any such banks; and accordingly, such legal proceedings may he continued or commenced by or against the amalgamated bank. (6) Where two or more banks have been amalgamated, the registration of the bank in which the other banks are amalgamated may be continued and the registration of the other banks may be cancelled, or where the amalgamated bank is newly registered, the registration of all the amalgamating banks shall be cancelled. (7) Any order made by the Registrar under this section shall be final and conclusive, and shall not be called in question in any Court.
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Present Scenario of Co-operative Bank

1.Co-operative Banks are dual Control : Co-operative Department &Reserve Bank of India: Co-operative Department looks after Management, Formation policies,bye-laws Related to Maharastra Co-operative Society Act. Reserve Bank of India controls Monetary policy,Regulatory body & public interest.
2.Rules & Regulation :

Some Co-operative Banks are failed to follow rules & regulation like Madhav Co-operative Bank.
3.Basle Committee:
Basle Committee report which was taken by M.Narshiman the former governor of Reserve Bank of India. It has effected entire banking sector as well as co-operative bank.
4.Globalisation,liberalisation & privatisation:

There is an impact of globalisation, liberalisation & privatisation on co-operative Bank.
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PROBLEMS OF URBAN CO-OPERATIVE BANKS & PROBABLE SOLUTIONS

1. Maximum limit on unsecured loans as per the existing guidelines of Reserve Bank of India, Urban Co-operative Banks can grant unsecured loan upto a limit of Rs.50,000/-. This is a general purpose loan which is utilised for the various needs of common man. As the cost of living has increased the ceiling of Rs.50,000/- is felt inadequate to meet the demands of the needy people. With changes in market conditions and regulatory environment, the earlier guidelines of unsecured advances and Guarantees have lost relevance and requires review expeditiously.
SOLUTION:
The limit for unsecured advance be raised from Rs.50,.000/- to Rs.2,00,000/-for Scheduled Urban Co-operative Banks and Rs.1,00,000/- to Urban Cooperative Banks.
2. Norms for weak and sick Urban Co-operative Banks :

The present guidelines take into account, norms for assessing Bank's health on the basis of CRAR, NPA levels and profitability. It is observed that there is a difficulty in arriving at correct CRAR which could induce inaccuracy in classification of weak and sick banks. Weak Urban Co-operative Banks - Proposed norms for classification Urban Co-operative Banks which do not meet the required criteria should be classified as weak or sick banks on the basis of the following norms : Parameter CRR Weak Bank Sick Bank If CRAR falls below the level of If CRAR falls below the level of 75% of the minimum prescription 50% of the minimum OR prescription and Net NPA 10% or more but less than 15% of 15% or more of loans and loans and advances outstanding as advances outstanding as on 31st on 31st March OR March OR History of Losses Showing net losses in operation for Showing net losses in operation two years out of the last three for the last three consecutive consecutive financial years. financial years. The profitability of the entire banking sector is under pressure and Cooperative Banks are not an exception. Further the redressal to the NPA problem is yet to attain a satisfactory level owing to absence of effective legal framework. Secondly, the Urban Co-operative Banks do not have access to the Capital Market/ Debt Market to improve their CRAR. All these inadequacies in the systems or environment render the Urban Cooperative Banks incompetitive to comply with the stipulations such as CRAR etc.
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SOLUTION : The nomenclatures weak and sick, damages further health of the banking and its highly counter productivity for the growth of the Urban Co-operative Banking sector and therefore it is necessary to make the classification of the Urban Co-operative Banks on the basis of CAMELS rating- words like 'A-Class 1 Bank, 'B-Class ' Bank OR 'C-Class' Bank may be used to classify the Banks 3. In order to empower banks and financial institutions to fast recover their dues from defaulting borrowers, and in order to reduce their NPA levels as well, the Government of India has promulgated the Securities & Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002. This is a major shift from traditionally established norms of recoveries of assets of defaulting borrowers which involves prolonged litigation to quick disposal of assets for recovery. The salient features of the Ordinance are : 1. It envisages (i) setting up asset reconstruction companies, (ii) empowers the banks/ financial institutions to scrutinise the assets, (iii) empowers banks/ financial institutions for enforcement of security interest. 2. The ordinance empowers banks, financial institutions, companies and securitisation companies to take over the management of a defaulting company or take possession of the mortgaged assets of loan defaulter under police escort if deemed necessary. 3. It diminishes the role of BIFR as well as Courts in recovery of outstanding dues in the financial sector. 4. Under the Ordinance, no appeal would be allowable in any Court or before any authority against seizure by the Chief Metropolitan Magistrate or District Magistrate, as the case may, of assets and documents, and their forwarding to the secured creditors. 5. Ordinance provides for a 60 days notice to a borrower to discharge in full his liabilities before such action is initiated. In case the dues are paid in full by the stipulated date, the creditor may not proceed with the action. 6. The Ordinance provides for creation of Central Registry for registration of security interests. 7. The aggrieved borrowers can appeal before DRT after fulfilling certain conditions, if so desire.
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However, it is surprising that the Urban Co-operative Banks have been kept out of the purview of the ordinance, which is an important step towards effective redressal of NPA SOLUTION: It is suggested that Urban Co-operative Banks be included to take benefit of the ordinance, which will help them to recover their dues faster without intervention of Courts from the defaulting borrowers and to reduce the NPA levels as well.
4. Deposits with other Urban Co-operative Banks :

By virtue of recent RBI guidelines, Urban Co-operative Banks cannot maintain Deposits with other Co-operative Banks. short-term liquidity and reserves. This has created difficulty in managing the
SOLUTION :
It is suggested that this restriction be removed and Urban Co-operative Banks should be freely allowed to maintain deposits with other Co-operative Banks on the basis of some parameters or at the discretion of Reserve Bank of India.
5. Loan against shares of Jt. Stock Companies :

In response to representations received from Urban Co-operative Banks and their Federations, the issue has been reviewed by Reserve Bank of India and it is now proposed to allow Urban Co-operative Banks to grant loans to individuals against security of shares, subject to the following : Loans against primary/ collateral security of shares/ debentures will be limited upto Rs.5 lakhs, if the security is in physical form and upto Rs.10 lakh, if the security is in demat form. Aggregate of all such loans should be within the overall ceiling of 20 per cent of the owned funds of the bank. A margin of 40 per cent should be maintained on all such loans. These limits put Urban Co-operative Banks at disadvantage in attracting high net worth individuals.
SOLUTION :
This ceiling may be enhanced upto Rs.1.00 Crore against share in demat form where the Urban Co-operative Banks have DP set up of their own and in case of other
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Urban Co-operative Banks limits be enhanced to minimum Rs.20 lakhs and maximum Rs.50 lakhs on certain parameters. Secondly, the exposure against these securities as collateral may not be included for the purpose of this ceiling.
6. Investment of SLR funds in Govt. Securities :

The Reserve Bank of India in its directive, enhanced the investment of SLR funds for Urban Co-operative Banks with NDTL of Rs.25 Crores and above in Govt. Securities from 10% to 12.5% to be achieved by March, 31 2002 which.by September 2002 should be 15%. Similarly, for banks with NDTL of less than Rs.25 Crores, which were hitherto totally exempt from investment in G-Sec. were also brought into the investment in G-Sec net with a minimum investment of 10% of the NDTL. For Scheduled Urban Cooperative Banks, it is made mandatory to invest their total SLR funds in G-Sec after April 1,2003. While the Urban Co-operative Banks located in metropolitan and Urban Centers did have some exposure to G-Sec investment and had gathered sufficient experience in dealing in G-Sec, the new entrants in the field i.e. banks with NDTL of less than Rs.25 Crores were strangers to this field and naturally were feeling handicapped without any proper guidance and experience.
SOLUTION :
It is suggested that the Urban Co-operative Banks with NDTL of less than Rs.25 Crores may be allowed to invest their SLR funds with State Cooperative Banks or District Coop. Banks, or large Scheduled Urban Cooperative Banks..7. Dual Control / Supervisory Control : Presently Urban Co-operative Banks are controlled by Reserve Bank of India and Registrar of Co-operative Societies at State level or Central Registrar of Cooperative Societies in case of Multi State Societies. Recently after announcement of Mid Term Credit Policy, the Reserve Bank of India has forwarded its proposal to the Govt. of India for creation of separate supervisory body for Urban Co-operative Banking Sector. The Urban Cooperative Banking Sector is an important part of the Financial Sector and has recorded a phenomenal growth under the able guidance of Reserve Bank of India Malaise comes mainly from the tremendous pressure wilted by politicians through the State Govt. over Co-operative Banks. The creation of a separate regulatory authority
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instead of eliminating this will make the Co-operative Sector more vulnerable to political pressure.
SOLUTION:
In view of the above position, it is suggested that the abolition of dual control is quite necessary and except registration of Co-operative Society, approval and amendment of Bye-laws, election to Managing Committee and protection of Members' rights, the entire control should be given to Reserve Bank of India.
8. Applicability of CRAR norms to Urban Co-operative Banks.

As per the extent Reserve Bank of India's guidelines of Urban Co-opeative Banks are to achieve parity with Commercial banks in respect of CRAR norms by 31 st March, 2005. The Scheduled Urban Co-operative Banks are to attain CRAR as applicable to Scheduled Commercial Banks by 31/03/2004. The issue here is the time frame stipulated as the Urban Co-operative Bank do not have access to capital market for raising Her I Capital and there is no system and avenue of raising Tier II Capital as well. Secondly, the cost of servicing Tier I Capital is also prohibitive from point of view of expectations of the members . PRESCRIBED CRAR Date 31 March 2002 31 March 2003 31 March 2004 31 March 2005 Scheduled UCB 8% 9% As applicable to Commercial Non-Scheduled UCB 6% 7% 9%
Banks As applicable to Commercial As applicable to Commercial Banks Banks.
SOLUTION: 1. Scheduled Urban Co-operative Banks should maintain the same CRAR as would be applicable to commercial banks by 31st March, 2005. 2. Non-Scheduled Urban Co-operative Banks should maintain the same CRAR as would be applicable to commercial banks by 31st March, 2005.
9. Reduction in time period for NPAs.
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The lowering of time period from 2 Quarters to 1 Quarter for classification of an asset as NPA may put Urban Co-operative Banks in some difficulty which may have impact on the classification of Urban Co-operative Banks as weak and sick as per the present guidelines. (RBI Circular BSD. 1. PCB. 12/ 12.05.05/2001-2002 dtd. 05 October, 2001 advised banks with a view to moving towards international best practices and to ensure greater transparency in repayment of loans, banks should adopt 90 day's notices for recognition of loan impairment from 31/03/2004). However, considering the overall slowing down of the economy, elongated debt realisation cycle and the market practices, this lone refinement in banking sector may seem inconsistent.
SOLUTION:
It is suggested that Reserve Bank of India may go slow in implementation of this directive and continue with the earlier norms for classification of an asset as NPA for some time. This request is made in view of the fact that the Urban Co-operative Banks have no access to DRTs and other recovery avenues such as the ordinance of 2002 as discussed above, to reduce the
NPAs.
10 . Income -Tax Issues :

1. U/s. 194 (A) TDS on interest paid on deposits of members of Urban Cooperative Bank. 2. U/s. 133 (C) calling for information of general nature about the account holders of the Bank. Recently, the Income-tax Authorities at various places have taken a view that the provisions u/s 194 (A) of Income-tax Act are not applicable to the member depositors of Urban Co-operative Banks and hence tax on their interest earned on deposits should be deducted at source by Urban Cooperative Banks. At the recent function of NCU1, the then Finance Minister Shri. Yeshwant Sinha categorically stated that the law is clear in this regard and that the interest on deposits of members of Urban Co-operative Banks is exempt from TDS. He also asked the bankers to bring this fact to the notice of the Ministry, any Income-tax office is not following the rule in the way it is stipulated. In regard to Sec. 133 , the banking sector has been fighting up-hill battle with the various Tax Authorities regarding the disclosure of information to them about the
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transactions of the account holders in generalised forms. On this issue, RBI and Indian Banks' Association were in agreement that no rowing enquiries should be made. The CBDT contented that they were competent to call for all the information.
SOLUTION :
1. It is suggested that the authorities/ CBDT should issue earned on deposits of the members of Urban Cooperative Banks. 2. As regards calling for various information of general nature u/s 133 authorities/ CBDT to standardise the format in which the information is required and sufficient time be given to Urban Co-operative Banks to provide such information. This will reduce the scope of harassment by the Income-Tax Authorities. necessary orders to the various Income-tax Offices directing thereby not to deduct any IDS on the interest
11. Credit Card Business :

As per the recent guidelines RBI precluded Urban Co-operative Banks from doing Credit Card business. Credit Card/ Debit Card is a necessary banking product to be offered to retail customer and gives a competitive edge to Urban Co-operative Banks in increasing its income. This also helps in mobilising resources. It has become essential and integral part of retail banking business, especially in Urban and Semi-Urban areas, to offer Debit/ Credit/ATM Cards to the customers. SOLUTION : It is suggested that Urban Co-operative Banks be allowed to have Credit Card tieups with VISA or MASTER or should be allowed to co-brand with leading Commercial Banks on case to case basis at the discretion of Reserve Bank of India.
12. Classification of Gold Loans into NPAs :

Reserve Bank of India has issued guidelines vide its Circular reference No.BSD. 1/11/12.05.00/99-2000 dated 12th October 1999 that gold loans granted for nonagricultural purposes should have monthly or quarterly instalments for repayment and such gold loan accounts may be treated as NPAs if the instalments and/or interest are past due for six months or more. Here the gold loans although secured and liquid they are not treated at par with loan against Bank Deposits. NSCs., LI.C Policies, IVPs and KVPs.
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SOLUTION:
It is suggested that the gold loans be treated at par with other secured and liquid loans such as loans against securities mentioned in the problem and should not be treated as NPAs.
13. Pay Orders issued by Urban Co-operative Banks in favour of Customs Departments:
In the recent developments in Urban Co-operative Banking Sector, the Pay Orders on behalf of their clients issued by the Urban Co-operative Banks in favour of Customs Authorities are not accepted by Customs Authorities on the strength of the letter issued by Reserve Bank of India, Department of Govt. & Bank Accounts, Central Office, Govt. Accounts Division, Bandra (E), Mumbai on the pretext that Pay Orders issued by Scheduled Commercial Banks including Foreign and Commercial Banks will be treated as Value Paid
Instruments while the Pay Orders of Urban Co-operative Banks will not be treated as Value Paid Instrument until they are realized. This is a discrimination created by the Authorities among the Banking Sectors. Most of the valued clients of the Urban Co-operative Banks have now shifted their accounts with the Commercial Banks. This has deprived the Urban Co-operative Banks of fee-based income as well as float and rendered them less competitive in the basic functioning.
SOLUTION :
Reserve Bank Authorities should issue a separate letter to the Customs Authorities withdrawing the above discrimination and treating the Urban Banking Sector at par with Commercial/ Nationalised Banks as far as this issue is concerned.
14. Non -acceptance by Central Govt. Undertakings of Letter of Credit, Guarantees and other instruments issued by Urban Cooperative Banks.
In the wake of Urban Co-operative Banks coming to grief in Gujarat, Andhra Pradesh and Maharashtra, many Govt. and Semi-Govt Departments and Undertakings have put restrictions such as non-acceptance of Cheques, Drafts, Guarantees, Letters of
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Credit and other instruments issued by the Urban Co-operative Banks on behalf of their clients.
It creates difficulties in smooth functioning and throttling the growth of Urban Cooperative Banks. Such action is bound to have serious repurcations on the business f the Urban Co-operative Banks and Urban Co-op. Banks will be deprived of Fee based income and float simultaneously.
SOLUTION :
The Reserve Bank of India should take up the matter with concerned State and Central Govt. so that such instructions issued by various Govt. Departments/ Institutions and Undertakings are withdrawn immediately and all the cheques drafts, pay-orders, guarantees, Letters of Credit etc. issued by Urban Co-operative Banks are accepted by the above authorities as earlier.
15. Public Sector and Private Sector Banks be allowed to form Assets Reconstruction Company.
By forming such Assets Reconstruction Company, these Banks can transfer or write off their NPA balances and start the business with clean slate. The Urban Co-operative Banks may be permitted to write-off the outstanding balances of large NPA amounts against their available profits and to continue the recovery proceedings against the said defaulters till the balances are recovered and recovered amount be allowed to credit Profit & Loss Account or Bad Debt Reserve account as the case may be
16. Scheme for One Time Settlement ( OTS) :

The Scheme for One Time Settlement (OTS) made applicable by Reserve Bank of India to Public/ Private Sector Banks be made applicable to Urban Co-operative Banks. Further, the amendment be made in the present scheme to enable Urban Cooperative Banks to settle account although the said account is not falling under NPA category where the chances of recovery by disposing off available assets are remote, in such cases, Urban Co-operative Banks be allowed to write-off balance amount after adjustment of recovery.
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17. Priority Sector Lending :

As per Reserve Bank of India's guidelines, Urban Co-operative Banks are required to maintain under Priority Sector Advances a minimum of 60% of total advances and under Weaker Section advances minimum of 15% of .total advances, whereas the Commercial Banks have to maintain only 40% of their advances under Priority Sector. Targets for the Priority Sector lending become difficult to attain especially for the Urban Co-operative Banks and put tremendous pressure on the overall profitability. Fulfilment of these targets also becomes a precondition for the RBI to grant certain permissions and concessions. In the competitive era, this takes away the advantage of level paying field from the Urban Co-operative Banks.
RBI therefore may consider by bringing the Urban Co-operative Banks at par with Commercial Banks as far as attainment of these targets of Priority Sector lendings are concerned.
18. Tax Collection:

Authority to collect Income-Tax and Sales-tax revenue on behalf of Govt. is given to the Nationalised and Commercial Banks which helps them to enjoy the float of Govt. funds, thereby bringing down the overall cost of resources. This also helps them to earn fee based income. The Urban Cooperative Banks have not yet been approved for this purpose by the authorities and they are deprived of this banking business. It is suggested that authorities should allow Scheduled Urban Co-operative Banks having good Branch Network and Computerised System in place to accept tax collection work.
19. DICGC Premium:

The premium under the DICGC is calculated on total deposits but the coverage of insurance is given for the deposits upto Rs.1.00 lakh per depositor as final pay out which includes interest. It is suggested that the premium should be calculated as per the coverage available from the deposit insurance or deposit insurance should be made available without any ceiling.
20. Extension Counter:

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Regulation for opening Extension Counter inter-alia permits the Urban Cooperative Banks to open the Extension Counters without prior permission but as prescribed condition of 500 direct beneficiaries attached to the institution in whose premises Extension Counter is sought to be opened. This condition becomes impracticable as in the era of computerization and automation, it is difficult to find 500 direct beneficiaries in one premises. Therefore, this condition may be further reviewed keeping in view the practicability.
21. Nominal Membership :

At present nominal membership is restricted to 20% of regular membership. Nominal membership is given to Guarantors and in permitted cases to the borrowers and it does not give right of dividend and vote to the election of the Society. Nominal Membership also entitles nominal member to avail secured loans upto Rs.1.00 lakh. This provision brings lot of operational benefit to the Urban Co-operative Banks. However restrictions of 20% takes away flexibility. It is therefore suggested that this ceiling of 20% may be removed.
22. Affordabilitv of membership of Infinet, NDS and CCIL.

The RBI has established Infinet which is the backbone of Inter-Bank communication and transfer of funds system in the country. It is a network using VSAT technology that facilitates payment and settlement systems as well as other applications such as NDS etc. It is the foundation for the establishment of Real Time Gross The RBI has already taken up transactions in Settlement System in the country.
Government Securities on the NDS. The Money Market settlements and Forex settlements will have to be done through CCIL, which facilitate a link to the various transactions carried out on the Infinet. From the above, it is imperative that all the banks become members of the Infinet and have a huge infrastructure in terms of hardware and software to be able to use all the applications. The cost of acquisition of this infrastructure and maintenance thereof may be an issue with smaller banks. Although they can have access to all these applications through other banks by maintaining constituent accounts with them, this may not be practicable in view of restrictions on transactions.
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SOLUTION :
It is suggested that the Urban Co-operative Banks having business of Rs. 2000 Crores and complying with the norms to be prescribed by the Reserve Bank of India be permitted to have the necessary infrastructure to open constituent accounts for and on behalf of other Urban Co-operative Banks.
23. Non-availability of LAP to the UCBs (Repo/Reverse Repo).

Liquidity adjusting facility is a mechanism whereby RBI provides liquidity support to the market participants (Reverse Repo) as also absorbs excess liquidity from the market participants at a given interest rate. The RBI desires to solely prune down the Call Money Market and extend the Repo Market. Under the extent provisions of LAP Scheme, only scheduled Commercial Banks and Primary Dealers are eligible to utilise the mechanism. The UCBs can do Repo transactions with other Banks and PDs provided they are agreeable to such transactions and the rates are quoted with some spread over RBI Repo rate. The difficulty faced here is that the UCBs will have to find out from the market, a suitable counterparty and have to bear the intermediation cost for the Repo transactions.
SOLUTION :
It is suggested that the RBI to allow UCBs to participate in the LAF mechanism directly with the RBI.
24. Restrictions on investment in and trading in other securities like Corporate Bonds, Equity Shares, Units of Mutual Funds etc.
The UCBs can only invest in Government Securities and other SLR Securities. Their investment in Non-SLR Securities which is again specified, is restricted to 10% of their total Deposits. This Non-SLR investment is PSU Bonds, State Government Guarantee Papers, Bonds issued by All India Financial Institutions and CPs. UCBs are not allowed to trade/Invest in Corporate Bonds, Equity Shares or Units of Mutual Funds etc. The reason being that the UCBs are not well-equipped and well-informed on these markets as also they do not have expertise to carry out these activities. However, keeping
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in view the emerging markets for these securities and that these markets are now more regulated. It is necessary to suggest a rethinking on this issue.
SOLUTION :
Reserve Bank of India at its discretion on the basis of certain transactions say 5% of the total deposits may allow Urban Co-operative Banks to trade and invest in these securities. This should be over and above the present ceiling of 10% of deposits in NonSLR investments.
25. Restrictions on extending CSGL facilities to other Cooperative Banks.

At the moment, RBI has not allowed opening of CSGL Accounts with other Urban Co-operative Banks. This has created operational issues for smaller Urban Cooperative Banks as the CSGL facilities are not extended by the Public Sector Banks or Private Sector Banks to smaller segments for administrative reasons.
SOLUTION :
Reserve Bank of India to allow funds facility at its discretion to Urban Cooperative Banks to open C.S.G.L. amounts of other Co-operative Banks to ensure consolidation of co-operative banking.
26. Non-availability
of
membership
of
RBI
recognised
self-
regulatory body like FIMMDA.

It is necessary for the Money Market Operators to obtain Membership of the FIMMDA. This is an association of Fixed Income, Money Market Derivatives Dealers. The evaluation rates for the investment securities are given by FIMMDA as also market practices and regulations issued by FIMMDA are binding on all the market participants. At the moment, Cooperative Banks are not eligible to obtain Membership as there is no provision in the Memorandum and Articles of the FIMMDA which is 'Company * Sec.25 under the Companies Act, 1956. FMMDA provides Membership to only Commercial Scheduled Banks and the word " Co-operative Bank " is absent from the Memorandum & Articles of Association. .
SOLUTION :
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It is necessary to direct FIMMDA to allow Urban Co-operative Banks to become Members of the FIMMDA
27. Absence of
guidelines
to
deal in Money Market and Capital
Market derivatives.
Of late, the Money Market and Capital Market have seen few financial derivatives float in the markets. These derivatives serve the headging requirements depending upon the views of the market movements. The construction and the legal premise of these instruments as also the operational issues are complex in nature. Hence, to understand these instruments and to take active participation in the trading of the derivatives, it is requested that the RBI issues guidelines and permits certain UCBs to trade in derivatives on selective basis.
28. Incidental refusal by the Foreign and Public Sector Banks to accept UCBs as counterparties to the Money Market Transactions.
We have also observed that subsequent to stray failures of few weaklings in the Co-operative Banking Sector, the entire Banking fraternity shuts the doors on UCBs for any Money Market Transactions. This is very harsh as they are deprived of Money Market opportunities resulting into losses. It is a must, therefore, to be prevailed upon these banks, to not hold the entire Cooperative Banking Sector on the tenterhooks. As large member of Urban Co-operative Banks are smaller in size of their balance-sheet, the Public Sector Banks, Private Sector Banks and Foreign Banks do not grant them treasury limits whereby smaller banks are not in a position to raise liquidity or carry on Money Market deals with these banks. Thus, Urban Co-operative Banks are deprived of money market opportunities. It is, therefore, pertinent that the other banking fraternity recognises the need of Urban Co-operative Banks and selectively grants treasury limits by properly assessing their credit-worthiness.
29.
Housing Loans - Priority Sector Advance :

As per the R.B.I. Circular Ref.No. UBD.PIan.PCB. 17/09.09.01/99-2000 dtd.
22/12/1999 housing loans upto Rs.10.00 lakhs can be reckoned as Priority Sector advance. In the Metropolitan Cities and also in some of the large urban areas, the cost of a moderate dwelling/ apartment or a flat goes above Rs.10.00 lakhs. Urban housing is a
60
priority in social context and hence loans by Urban Co-operative Banks for housing purpose should be treated as Priority Sector advance without any ceiling.
30. Hotel Industry Advance :

The Ministry of Industry has classified ' Hotel ' activity as an industrial activity. Similarly the Film ' production has attained a status of an industry. It is learnt that the Ministry of Finance has not issued guidelines to RBI to classify the Hotel activity as * Priority Sector activity With the various steps taken by the Government to boost tourism industry, it is necessary to grant priority status to hotel industry. As such all the advances granted to Hotel Industry can be treated as Priority Sector Advance
31. Problems of Cash Manaqement & level of Accountinq Charqes bv Currency Chest Branches :
One of the daunting operational problems of Urban Co-operative Banks is the inadequacy of currency chest facility. As a result of this inadequacy 1. There is reluctance of existing currency chest and even RBI Offices to accept cash deposits on many occasions on the grounds that there is inadequate storage capacity in the Vaults. 2. There is reluctance to accept small denomination notes for the same reason. 3. There is reluctance to issue new currency notes on demand. 4. In some other places, some of the Currency Chest Branches are charging Rs.l/- as counting charge per bundle from the Urban Cooperative Banks. As a consequences of above, the Urban Co-operative Banks are often required to carry as an un-productive assets, far more cash than they need for their day to day requirements, infringing on their profitability.
SOLUTION :
It is therefore suggested that some of the large size Urban Cooperative Banks be allowed to maintain the currency chest on behalf of Reserve Bank of India and reimburse the cost of maintenance to the Banks.
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32.MULTI STATE CO-OPERATIVE BANKS :

There are nearly 31 Multi State Co-operative Banks spread over in India. Some Multi State Co-operative Banks are having full fledged Foreign Exchange operations as well as Treasury operations and working at par with Public Sector Banks. In view of this fact all the Multi State Co-operative Banks be given equivalent treatment with Public Sector Bank for their growth in Banking sector.
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Strength of Co-Operative Banks in India

The purpose and objectives of co-operatives provide the framework for cooperative corporate governance. Co-operatives are organized groups of people and jointly managed and democratically controlled enterprises. They exist to serve their members and depositors and produce benefits for them. Co-operative corporate governance is therefore about ensuring cooperative relevance and performance by connecting members, management and the employees to the policy, strategy and decision-making processes. In fact, the very definition of corporate governance stems from its organic link with the entire gamut of activities having direct or indirect influence on the financial health of corporate entities. For the Nobel Prize-winning economist Milton Friedman, who was one of the first to attempt a definition, corporate governance is to conduct business in accordance with owner or shareholders desires which generally will be to make as much money as possible while conforming to the basic rules of the society embodied in law and local customs. In subsequent definitions, the scope of corporate governance has got expanded. While some experts say corporate governance means doing everything better, to improve relations between companies and their shareholders, to encourage people to think long-term, to ensure that information needs of all shareholders are met and to ensure that executive management is monitored properly in the interest of shareholders, the Former President of World Bank, Mr. James Wolfensohn had said that corporate governance is about promoting corporate fairness, transparency and accountability. A more comprehensive definition has come from the Organisation of Economic Co-operation & Development <OECD> which identifies corporate governance as the system by which business corporations are directed and controlled. Here the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the Board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this, not only does it provide the structure through which the company objectives are set, it also provides the means of attaining these objectives and monitoring performance.
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It will certainly not be out of place here to recount how issues relating to corporate governance and corporate control have come to the fore the world over in the recent past. The seeds of modern corporate governance were probably sown by the Watergate scandal in the USA. Subsequent investigations by US regulatory and legislative bodies highlighted control failures that had allowed several major corporations to make illegal political contributions and bribe government officials. While these developments in the US stimulated debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early 1990s led shareholders and banks to worry about their investments. Several companies in UK which saw explosive growth in earnings in the 80s ended the decade in a memorably disastrous manner. Importantly, such spectacular corporate failures arose primarily out of poorly managed business practices. This debate was driven partly by the subsequent enquiries into corporate governance most notably the Cadbury Report) and partly by extensive changes in corporate structure. In May 1991, the London Stock Exchange set up a Committee under the chairmanship of Sir Arian Cadbury to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. The Committee investigated accountability of the Board of Directors to shareholders and to the society. It submitted its report and associated code of best practices in December 1992 wherein it spelt out the methods of governance needed to achieve a balance between the essential powers of the Board of Directors and their proper accountability. Being a pioneering report on corporate governance, it would perhaps be in order to make a brief reference to its recommendations which are in the nature of guidelines relating to, among other things, the Board of Directors and Reporting & Control. The Cadbury Report stipulated that the Board of Directors should meet regularly, retain full and effective control over the company and monitor the executive management. There should be a clearly accepted division of responsibilities at the head of the company which will ensure balance of power and authority so that no individual has unfettered powers of decision. The Board should have a formal schedule of matters specifically reserved to it for decisions to ensure that the direction and control of the company is firmly in its hands. There should also be an agreed procedure for Directors in the furtherance of their duties to take independent professional advice.
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On Reporting & Control, the Cadbury Report recommended that the Board should ensure that an objective and professional relationship is maintained with the auditors. It is the Boards duty to present a balanced and understandable assessment of the companys position, the report said. The Board should establish an Audit Committee with written terms of reference which deal clearly with its authority and duties. The Directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities. The Directors should also report on the effectiveness of the companys system of internal control. The report also stipulated that the Directors should report that the business is a going concern with supporting assumptions or qualifications as necessary. The Cadbury Report generated a lot of interest in India. The issue of corporate governance was studied in depth and dealt with by the Confederation of Indian Industries (CII), Associated Chamber of Commerce and Industry (ASSOCHAM) and Securities and Exchange Board of India (SEBI). These studies reinforced the Cadbury Reports focus on the crucial role of the Board and the need for it to observe a Code of Best Practices. Co-operative banks as corporate entities possess certain unique characteristics. Paradoxical as it may sound, evolution of co-operatives in India as peoples organizations rather than business enterprises adopting professional managerial systems has hindered growth of professionalism in co-operatives and proved to be a neglected area in their evolution. Professionalism reflects the co-existence of high level of skills and standards in performing duties entrusted to an individual. The absence of a proper system of placement and skill upgradation inputs constrain professional management in cooperative banks. Though there is a system of training in place in many co-operative banks, attempts are seldom made to match them with the current and future staff requirements. It is desirable that the training programmes encompass skill upgradation and aptitude development in full measure. It is also necessary to keep the staff sufficiently motivated through periodic job rotation, job enrichment and recognition of performance. The co-operative banks should indeed work like professional organizations on sound managerial systems in tune with the needs of the time taking care of future projections of requirements to retain and improve their market share and identity in the long run. It is in this context that professionalism and accountability of the banks boards assume such critical significance.
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Regulators are external pressure points for good corporate governance. Mere compliance with regulatory requirements is not however an ideal situation in itself. In fact, mere compliance with regulatory pressures is a minimum requirement of good corporate governance and what are required are internal pressures, peer pressures and market pressures to reach higher than minimum standards prescribed by regulatory agencies. RBIs approach to regulation in recent times has some features that would enhance the need for and usefulness of good corporate governance in the co-operative sector. The transparency aspect has been emphasized by expanding the coverage of information and timeliness of such information and analytical content. Importantly, deregulation and operational freedom must go hand in hand with operational transparency. In fact, the RBI Governors April 2002 Monetary & Credit Policy announcements have made it clear that with the abolition of minimum lending rates for co-operative banks, it will be incumbent on these banks to make the interest rates charged by them transparent and known to all customers. Banks have therefore been asked to publish the minimum and maximum interest rates charged by them and display this information in every branch. Disclosure and transparency are thus key pillars of a corporate governance framework because they provide all the stakeholders with the information necessary to judge whether their interests are being taken care of. We in RBI see transparency and disclosure as an important adjunct to the supervisory process as they facilitate market discipline of banks. Another area which requires focused attention is greater transparency in the balance sheets of co-operative banks. The commercial banks in India are now required to disclose accounting ratios relating to operating profit, return on assets, business per employee, NPAs, etc. as also maturity profile of loans, advances, investments, borrowings and deposits. The issue before us now is how to adapt similar disclosures suitably to be captured in the audit reports of co-operative banks. RBI had advised Registrars of Co-operative Societies of the State Governments in 1996 that the balance sheet and profit & loss account should be prepared based on prudential norms introduced as a sequel to Financial Sector Reforms and that the statutory/departmental auditors of co-operative banks should look into the compliance with these norms. Auditors are therefore expected to be well-versed with all aspects of the new guidelines issued by RBI and ensure that the profit & loss account and balance sheet of co-operative banks are prepared in a transparent manner and reflect the true state of affairs. Auditors should also
66
ensure that other necessary statutory provisions and appropriations out of profits are made as required in terms of Co-operative Societies Act / Rules of the state concerned and the bye-laws of the respective institutions. Appropate internal control systems become even more critical in the context of the growing emphasis on diversification of business products as the prime need at all levels in co-operative credit institutions. It is indeed necessary for co-operative banks to devote adequate attention to maximizing their returns on every unit of resources through an effective funds management strategy and mechanism. One prime component of the investment portfolio of the co-operative banks which has attracted a lot of attention unfortunately for all the wrong reasons - is their transaction in government securities. So much so that it has even triggered the holding of todays Convention. The financial sector reforms in India have sought to achieve, among other things, improvement in the financial health and competitive capabilities by means of prescription of prudential norms. The co-operative banks have also thus been put under the prudential norms regime to bring about the desirable level of transparency in their balance sheets. While urban co-operative banks have been subjected to income recognition, asset classification, provisioning and other related norms in a phased manner beginning April 1992, these prudential norms including asset classification and provisioning (excluding the capital adequacy ratio) were made applicable to the SCBs and DCCBs from the year 1996-97 and extended to ARDBs from 1997-98. RBI had also issued comprehensive guidelines transactions in securities to all cooperative banks - both urban and rural - as early as in September 1992. Detailed guidelines have been given therein on transactions through brokers, Subsidiary General Ledger (SGL) facility, issue of Bank Receipts, internal control systems, audit and review systems, etc. As per the guidelines in force, each bank is required to formulate an investment policy, with the approval of its Board. Banks have been advised that all transactions in Government Securities for which SGL facility is available should be put through SGL accounts only. Certain discipline has also been introduced for transactions through SGL accounts for minimizing settlement risks through a framework for penal action against bouncing of SGL transfer forms for want of sufficient balance in the SGL account or current account.
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THE Role of BFS in the Regulation of Co-operative Banks

The Board for Financial Supervision (BFS) suggested in March 2004 that till such time that appropriate regulatory/legislative framework be put in place, no fresh licences for setting up of UCBs should be issued. The suggestion was accepted and incorporated in the annual policy Statement 2004-05 announced on May 18, 2004. Apart from this, the BFS has proposed a graded response to the issue of granting banking licences to existing unlicensed banks based on their eligibility criteria. Further BFS directed that only financially strong scheduled UCBs should be allowed to keep the deposits of non-scheduled UCBs to avoid contagion effect of failure of one UCB on other UCBs. The need for framing a 'Prompt Corrective Action' mechanism based on certain financial trigger points was also underscored by the Board, and as directed by the Board, a paper on Escalatory Framework of Supervisory Action is under preparation. In case of several scheduled UCBs whose financials were weak, the Board directed that the concerned State Governments be advised to infuse capital in the banks to the extent required to meet the prescribed CRAR level. If capital funds are not infused within the prescribed time, the banks which had placed deposits with these banks (having solvency problem) would require to treat these deposits as NPAs. Supervisory ratings based on CAMELS ratings, as applicable to commercial banks was introduced, initially for the scheduled UCBs with effect from March 2003, on an experimental basis. Simplified rating model for large non-scheduled urban cooperative banks based on CAEL parameters has been introduced from March 2004.
1.Priority Sector Lending

According to the targets prescribed, the UCBs are required to extend 60 per cent of total loans and advances for lending to the priority sector and of the total priority sector advances, at least 25 per cent (or 15 per cent of the total loans and advances) should be extended to weaker sections. In order to ensure that credit is available to all segments of the Small-Scale Industry (SSI) sector, (classified on the basis of investment in plant and machinery), certain sub-targets have also been specified (Table IV.5). As at end-March 2003, UCBs had extended Rs 42,633 crore to the priority sector constituting 62.1 per cent of total loans and advances (Table IV.6). Segment-wise break up shows that the highest percentage of priority sector advances was extended to cottage and mall-scale industries followed by housing, and small business enterprises.
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Refinance Facilities 3During 2003-04 (April-March), four UCBs were sanctioned refinance to the tune of Rs.466.89 lakh under Section 17(2)(bb) read with Section 17(4)(C) of the Reserve Bank of India Act, 1934.
2.Entering into Insurance Business

Scheduled UCBs having a minimum net worth of Rs.100 crore and complying with exposure norms and connected lending have been allowed to act as corporate agents to undertake insurance business without risk participation after obtaining the approval of the Reserve Bank.
3.Standing Advisory Committee on Urban Co-operative Banks

The Standing Advisory Committee on UCBs constituted by the Reserve Bank is a high powered body chaired by a Deputy Governor and comprising members from Central and State Governments, IBA, DICGC, NABARD and federations of UCBs to give expert advice on policy matters pertaining to UCBs. The Committee had recommended in December 2002, that there should be representation of non-member depositors on the Board of UCBs so as to protect the interests of such depositors, as the proportion of non-member deposits to total deposits is very high in the UCBs. Accordingly, State Governments have been requested to consider amending their respective State Co-operative Societies Act so as to give representation to the nonmember depositors on the Board of UCBs. With a view to reinforcing the consultative process in a more constructive manner, to address the structural/ regulatory and supervisory issues relating to UCBs and facilitating the process of formulating future approaches for this sector, it has been decided that the Committee would meet on a quarterly basis in future.
4.Ban on Loans to Directors and Interested Companies

The overall ceiling on loans to directors, their relatives, and concerns in which they are interested was brought down to five per cent of banks demand and time liabilities in December 2002. A few instances, however, of an undue concentration of advances in the hands of a few borrowers, including directors and their relatives, were brought to the notice of the Reserve Bank. The Joint Parliamentary Committee (JPC),
69
which probed the stock market scam and matters relating thereto recommended that a complete ban be imposed on granting of loans and advances to the directors and their relatives or the concerns in which they are interested. Accordingly, a complete ban on sanction of loans and advances by UCBs to their directors and their relatives and the firms/ concerns in which they are interested has been imposed effective October 1, 2003.
5.Investments in Government Securities

UCBs have been advised to step up their SLR investments in Government securities and other approved securities. In order to mitigate the risk arising out of dealing in such securities, it has been prescribed that UCBs should build up Investment Fluctuation Reserve (IFR), out of realised gains on sale of investments and subject to available net profit, of a minimum of five per cent of the investment portfolio in available for sale and held to maturity categories within a period of five years.
6.Non-SLR Investments by UCBs

Draft guidelines on UCBs investments in non-SLR debt securities was placed on the website for comments/suggestions from UCBs. Based on the feedback received, final guidelines were issued in April 2004. The guidelines cover investments in bonds issued by public sector undertakings, unsecured redeemable bonds floated by nationalised banks, bonds/shares issued by AIFIs and units of Unit Trust of India (UTI) and apply to both primary market and secondary market. As per the guidelines, UCBs are not permitted to invest in non-SLR debt securities of original maturity of less than one year. The Board of Directors should fix prudential limits in each category of investments and the aggregate investments in non-SLR debt securities including units of UTI should not exceed 10 per cent of the deposits as on March 31 of the previous year. UCBs investments in units of UTI should not exceed five per cent of the incremental deposits of the previous year.
7.Bill Discounting
UCBs have been issued detailed guidelines/safeguards on purchasing/ negotiating/discounting/rediscounting of genuine commercial bills. Banks have been advised to clearly lay down a bills discounting policy approved by their Board of Directors, which should be consistent with their policy of sanctioning of working capital limits.
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8.Concurrent Audit
All the scheduled UCBs and other UCBs that have deposits above Rs.50 crore were advised in December 1996 to introduce systems of concurrent audit. As recommended by the JPC on Stock Market Scam and Matters Relating Thereto, concurrent audit has been made mandatory for all the UCBs. UCBs have been advised to report serious irregularities, if any, pointed out by the Concurrent Auditors to the Reserve Bank together with details of the action taken to rectify the same.
9. 90 day NPA Norm

In line with the international best practices and to ensure greater transparency, the period for recognition of loan impairment has been reduced from 180 days to 90 days with effect from March 31, 2004 except for gold loans and small loans up to Rs.1 lakh, which continue to be governed by 180 day loan impairment norm.
Reduction of NPAs
In view of representations received from UCBs/Federations, the time period for receiving and processing of applications for settlement of NPAs up to Rs.10 crore under one-time settlement has been extended up to July 2004 and October 2004, respectively. Registrar of Co-operative Societies of all the States have been advised to issue suitable instructions enabling UCBs to take recourse to Securitisation Act for recovery of NPAs. In respect of NPAs included in doubtful for more than three years category on or after April 1, 2004, a higher provisioning requirement of 100 per cent in place of 50 per cent earlier has been prescribed with effect from March 1, 2005. On receipt of requests from Federation/ Association of UCBs for granting more time to restructure their accounts and meet stricter prudential norms, it has been decided to grant more time to UCBs for: (i) adopting a graded higher provisioning according to the age of NPAs for the NPAs outstanding as on March 31, 2006, and (ii) a provisioning requirement of 100 per cent for NPAs classified as doubtful for more than three years category.
Identification of NPAs and Provision there against

It was observed that UCBs wait till the end of financial year to make provisions against NPAs which distorts the quantum of net NPAs as on any date other than the date of annual closure of accounts. UCBs have, therefore, been advised that apart from
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identifying NPAs on an ongoing basis, they should make provisions for the same at the end of each quarter.
10.Off-site Surveillance (OSS) System for UCBs

A revised set of off-site surveillance returns were prescribed for scheduled UCBs effective from the quarter-ended March 2004 to obtain relevant information on areas of supervisory concern, strengthen MIS systems within the scheduled UCBs and to sensitise their managements about the prudential concerns of the supervisory authority and thereby help in self regulation. The content and structure of OSS returns have been modified to reduce the volume of data submission, while enlarging the breadth and depth of information being obtained from UCBs. The UCBs now have to submit eight returns including one annual return from the quarter ended April 2004. The scope of OSS has been extended to cover non-scheduled UCBs with a deposit base of Rs.100 crore and above from the quarter-ended June 2004. The remaining non-scheduled UCBs would be brought under OSS in a phased manner. A revised application software developed by the Reserve Bank has been installed in all the UCBs covered under OSS enabling them to submit all the regulatory and supervisory returns in electronic format. The accuracy of data submission by UCBs is ensured through validation checks built in the application package. The application package also enables Regional Offices to capture the data received from UCBs electronically and the data gets replicated in the server installed in Central Office over the INFINET.
11.Prompt Corrective Action

As a framework for initiating prompt corrective action, a system of gradation of UCBs based on critical financial parameters viz., capital adequacy, net non-performing advances and profitability has been introduced. Gradation is communicated to problem banks to enable them to formulate action plans for corrective action (Box IV.2). Only UCBs having strong financials are allowed to declare dividend.
12.Banks under Directions

Reserve Bank issues directions under Section 35A in respect of banks, which are in serious financial difficulty. The directions may be issued either as a consequence of findings of the inspection report or due to sudden developments like a run on the bank, etc. The directions may include restriction on deposit taking, withdrawal of deposits with
72
or without a ceiling, further expansion of loans, restriction on incurring expenditure other than minimum establishment expenses required for day to day running of the bank, etc. The banks placed under directions are monitored and the restrictions may be gradually removed depending upon the ability of banks to rectify the inadequacies (Appendix Table IV.2).
13.Reconstruction Schemes
The reconstruction schemes approved by the Reserve Bank in the recent past, in respect of a few UCBs, which landed into financial difficulty, have not been progressing as intended. Accordingly, it has been announced in the annual policy Statement for the year 2004-05 that only such reconstruction schemes would be considered, which envisage recapitalisation by the stakeholders viz., the shareholders/co-operative institutions/ Government to the extent of achieving the prescribed capital adequacy norms, without infusion of liquidity through settlement of insurance claims by DICGC, and schemes that lay a clear road map for reducing the NPA level to a tolerable limit within a stipulated time-frame.
Administration of UCBs under liquidation

Keeping a constant vigil on the UCBs, the Reserve Bank took measures as cancellation of licences and rejection of licence applications to eliminate financially unviable entities from the urban banking sector. Also, the Registrars of Co-operative Societies (RCS) were asked to initiate liquidation proceedings in a few banks (Appendix Table IV.3). Further, the liquidators appointed by the RCS in a few banks were found to be directly linked with other UCBs in the area. It was also noticed by DICGC that the claim list submitted in respect of UCBs under liquidation contained several inadequacies. In order to overcome such shortcomings, RCS of all the States were requested to frame criteria for appointment of liquidators with suitable qualifications. Further, certification by a Chartered Accountant of the deposit claim list forwarded by UCBs under liquidation/amalgamation/merger/restructure has been introduced.
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DEVELOPMENTS IN CO-OPERATIVE BANKING

1. The co-operative banking system, with two broad segments of urban and rural cooperatives, forms an integral part of the Indian financial system. With a wide network and extensive coverage, these institutions have played an important developmental role in enlarging the ambit of institutional credit by way of inculcating banking habits among the poor and those in remote areas. In recent times, co-operative banks have tried to improve credit delivery through some financial innovations. 2. The structure of co-operative banking that has evolved over more than fifty years highlights the dual role of members as lenders and borrowers. The co-operative credit structure in the country can be divided into two broad segments: the urban co-operative banks and the rural co-operative credit institutions (Chart IV.1). While the urban cooperative banking system has a single tier comprising the Primary Co-operative Banks (commonly known as urban co-operative banks UCBs), the rural co-operative credit system is Under the Banking Regulation Act, 1949 only Urban Co-operative Banks (UCBs), State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs) are qualified to be called as banks in the co-operative sector. The discussion in this Chapter also covers issues relating to other credit co-operatives viz., Primary Agricultural Credit Societies (PACS) and the long-term structure of rural credit co-operatives. Data on scheduled urban co-operative banks relate to 2003-04, while those for others pertain to 2002-03.divided into long-term and short-term co-operative credit institutions which have a multi-tier structure. The short-term co-operative credit institutions have a threetier structure comprising State Co-operative Banks (StCBs), Central Co-operative Banks (CCBs), and Primary Agricultural Credit Societies (PACSs) which are not banks but only societies. The long-term co-operative credit institutions have generally a two tier structure comprising the State Co-operative Agriculture and Rural Development Banks (SCARDBs) and the Primary Co-operative Agriculture and Rural Development Banks (PCARDBs). Long-term co-operative credit institutions have a unitary structure in some States, while in other States they have a mixed structure (unitary and two-tier). The States not having long-term co-operative credit entities are served by the State Cooperative Banks apart from being serviced by the branches of Regional Rural Banks (RRBs) and the rural/semi-urban branches of commercial banks. However, in the State of Andhra Pradesh, the co-operative structure is integrated combining both short-term and long-term structures.
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3 .The regulation and supervision of co-operative banks poses several challenges in view of the large number of such banks, as also the multiple controls by supervisors, including the Reserve Bank, the State Governments and NABARD. The co-operatives are at present under the control of State Governments in all matters relating to registration, membership, election, financial assistance, loaning powers, business operations, loan recovery and audit. Some aspects relating to banking activities are regulated and supervised by the Reserve Bank of India/NABARD. While urban cooperative banks come under the supervisory jurisdiction of the Reserve Bank, rural cooperatives are regulated by the NABARD. There is thus no clear demarcation of regulatory powers, which at times has resulted in cross directives from the controlling agencies, thereby undermining the working of co-operatives. 4.Despite several years of operational experience, financial performance of a number of co-operative banks is still below their potential (Appendix Table IV.1). The infusion of elements of good corporate governance, sound investment policy, appropriate internal control systems, better credit risk management, commitment to better customer service, and focus on newly-emerging business areas like micro finance, is expected to strengthen the co-operative banks The Reserve Bank is in favour of a consultative approach to developing a regulatory framework and a revival plan in order to ensure a vibrant future for the co-operative sector, and thus encouraging systemic stability of the overall financial sector.
2.Urban Co-operative Banks

1.urban Co-operative Banks (UCBs) play an important role as financial intermediaries in urban and semi-urban areas catering to the needs of the non-agricultural sector, particularly small borrowers. In the context of the current economic scenario and problems faced by the co-operative banking sector, several initiatives were taken in consultation with the federations and associations of co-operative banks. These include: deferring the application of 90 day NPA norm for small loans and gold loans up to Rs.1 lakh by two years, giving additional time for meeting the prescribed provisioning requirements for assets classified in doubtful category and permission to transfer Government and other approved securities up to 25 per cent to held to maturity (HTM)
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category. The Reserve Bank has taken several initiatives to address the procedural and regulatory issues. The consultative process has already been put in place with respect to the UCBs in the form of a Standing Advisory Committee. As stated in the mid-term Review of annual policy 2004-05, a vision document for the future role of UCBs is being evolved to ensure depositors interests and avoid contagion, while providing useful service to local communities. In regard to structural issues, the Reserve Bank would be encouraging growth of strong and viable entities within the sector through consolidation. Further, the Reserve Bank would continue to pursue with the State and Central Governments regarding the issues that arise in their jurisdiction. 2.The number of UCBs increased to 2,105 including 179 banks under liquidation at endJune 2004 compared with 1,106 in 1966 the year in which the UCBs were brought under the purview of Banking Regulation Act 1949 (As Applicable to Co-operative Societies (AACS)). These include 80 salary earners banks, 112 Mahila banks and 25 SC/ST banks. State-wise
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FUTURE OF COOPERATIVE BANKING

In the emerging competitive business environment, only those co-operative banks that adhere to strict financial discipline, will survive. The future of this sector primarily depends on the strong belief on its core competence, its local operations with global vision, the integration of weak players with strong ones and proper risk management policies. This sector should not be unduly concerned about its growing size, instead, try to capitalize on its inherent strengths
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Conclusion
Today banks are one of the most important parts of our lives. We cannot imagine our lives without the services of banks. They have also contributed immensely to the development of trade and economy. Impossible dreams are realized because of the services provided by banks. It is banks, which plays an important role in a industry and their devolopment. Banks in the country are like hearts; which countinously pump money in various sectors, which lead to the growth of the sectors. The development of infrastructure is impossible without the services of banks. Imagine a day without the services of banks. No cash, No cheques, No transaction etc. Dont you feel paralyzed? In India there are various kinds of banks like scheduled banks, co-operative banks, Nationalized banks, etc. All these banks have one thing in common, i.e.banking services. But the formation of these banks is different. These banks are formed by various people by keeping in mind their objectives. For e.g.a commercial bank is formed to render banking services with the aim of earning profit; where as a co-operative bank is setup for rendering services, whose ultimate goal is not just profit. So what is the motive? The motive behind this is providing services by coming together. Co-operative sector means a union of persons established according to the principles of equality, the purpose of which is to improve the financial position of its members, by means of either self help or self help with government support provided that all profits made by the joint action shall be distributed proportionately to its members. Since it is formed by a group of people the State governments role as a regulating body is important. The governments lays certain rules and regulations on these co-operatives, so that they can keep a vigilant check and ensure that they provide services for which were incorporated. The government is actively involved in cooperatives because it is one of the important medium through which they can enforce and implement. By having control over co-operatives the governments gets a ready network for providing banking facilities.
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Co Operative Bank Movement

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