urban Cooperative Banks by Dr. Suresh vadde

7/29/2019 urban Cooperative Banks by Dr. Suresh vadde

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RIJBFA Volume 1, Issue 10(October 2012) ISSN:2277- 100X

Journal of Radix International Educational and Research Consortium

1 |P a g e www.rierc.org

GROWTH AND PERFORMANCE OF URBAN CO-OPERATIVE BANKS

IN INDIA: AN OVERVIEW

Dr. SURESH VADDE, Associate ProfessorDepartment of Accounting & Finance

College of Business & Economics

Mekelle University

Melelle, Ethiopia.

Abstract

Co-operative bank, in a nutshell, provides financial assistance to the people with small

means to protect them from the debt trap of the moneylenders. It is a part of vast and

powerful structure of co-operative institutions which are engaged in tasks of production,

processing, marketing, distribution, servicing and banking in India. A co-operative bank is a

financial entity which belongs to its members, who are at the same time the owners and the

customers of their bank. Co-operative banks are often created by persons belonging to the

same local or professional community or sharing a common interest. Urban co-operative

banks usually meet the needs of specific types or groups of members pertaining to a certain

trade, profession, community or even locality. Urban banks almost function like commercial

banks in providing essential banking and non-banking agency and utility services. The

mobilization of savings by urban co-operative banks and the consequent drawing of urban

resources into the apex and central co-operative banks which are in need of funds to finance

the rural, industrial and other functional co-operatives can contribute to general economic

development. Hence, the purpose of this study is to identify and understand the growth and

performance of the Urban Co-operative Banks and its capital adequacy.

A Journal of Radix International Educational and

Research Consortium

RIJBFA

RADIX INTERNATIONAL JOURNAL OF

BANKING, FINANCE AND ACCOUNTING


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Key words: financial assistance, moneylender, mobilization of savings and capital adequacy etc.

INTRODUCTION

The Co operative banks in India started functioning almost 100 years ago. The Cooperative

bank is an important constituent of the Indian Financial System, judging by the role

assigned to co operative, the expectations the co operative is supposed to fulfill, their

number, and the number of offices the cooperative bank operate. Though the co operative

movement originated in the West, but the importance of such banks have assumed in India

is rarely paralleled anywhere else in the world. The cooperative banks in India play an

important role even today in rural financing. The businesses of cooperative bank in the

urban areas also have increased phenomenally in recent years due to the sharp increase in

the number of primary co-operative banks. A Co-operative bank, as its name indicates is an

institution consisting of a number of individuals who join together to pool their surplus

savings for the purpose of eliminating the profits of the bankers or moneylenders with a

view to distributing the same amongst the depositors and borrowers.Co operative Banks in

India are registered under the Co-operative Societies Act. The cooperative bank is also

regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking

Laws (Co-operative Societies) Act, 1965.

The Co-operative Banks Act, of 2007 (the Act) defines a co-operative bank as a co-operative

registered as a co-operative bank in terms of the Act whose members

1. are of similar occupation or profession or who are employed by a common employer or

who are employed within the same business district; or

2. have common membership in an association or organization, including a business,

religious, social, co-operative, labor or educational group; or


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3. have common membership in an association or organization, including a business,

religious, social, co-operative, labor or educational group; or

4. Reside within the same defined community or geographical areas.

OBJECTIVE AND METHODOLOGY

An attempt is made in this article to provide an evolution, growth and issues of urban

cooperative banks in India. The study is based on the data collected from secondary

source which is gathered from the Annual Reports of different UCBs, published and

unpublished materials in the form of books, articles from journals, websites and reports are

relevant to the study. The study of urban cooperative banks in India covers a period of 10-

years, commencing from 2001 to 2011.

ROLE OF CO-OPERATIVE BANKING IN INDIA

Co-operative Banks are much more important in India than anywhere else in the world. The

distinctive character of this bank is service at a lower cost and service without exploitation.

It has gained its importance by the role assigned to them, the expectations they are

supposed to fulfill, their number, and the number of offices they operate. Co-operative

banks role in rural financing continues to be important day by day, and their business in the

urban areas also has increased phenomenally in recent years mainly due tithe sharp

increase in the number of primary co-operative banks. In rural areas, as far as the

agricultural and related activities are concerned, the supply of credit was inadequate, and

money lenders would exploit the poor people in rural areas providing them loans at higher

rates. So, Co-operative banks mobilize deposits and purvey agricultural and rural credit with

a wider outreach and provide institutional credit to the farmers. Co-operative bank have


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also been an important instrument for various development schemes, particularly subsidy-

based programmers for poor.

The Co-operative banks in rural areas mainly finance agricultural based activities like:

Farming Cattle Milk Hatchery Personal finance

The Co-operative banks in urban areas finance in activities like:

Self-employment Industries Small scale units Home finance Consumer finance Personal finance

Some of the forward looking Co-operative banks have developed sufficient core

competencies to such an extent that they are able to challenge state and private sector

banks. The exponential growth of Co-operative banks is attributed mainly to their much

better contacts with the local people, personal interaction with customers, and their ability

to catch the nerve of the local clientele. The total deposits and lendings of Co -operative

banks are much more than the Old Private Sector Banks and the New Private Sector Banks.

URBAN CO-OPERATIVE BANKS (UCBS)

Urban Co-operative Banks is also referred as Primary Co-operative banks by the Reserve

Bank of India. Among the non-agricultural credit societies urban co-operative banks occupy


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an important place. This bank is started in India with the object of catering to the banking

and credit

requirements of the urban middle classes. The RBI defines Urban Co-operative banks as

small sized co- operatively organized banking units which operate in metropolitan, urban

and semi-urban centers to cater mainly to the needs of small borrowers, viz. owners of

small scale industrial units, retail traders, professional and salaries classes.

Urban Co-operative banks mobilize savings from the middle and lower income groups and

purvey credit to small borrowers, including weaker sections of the society. These banks

organize on a limited liability basis, generally extend their area of operation over a town.

The main functions of these banks are to promote thrift by attracting deposits from

members and non-members and to advance loans to the members. It is registered under

Co-operatives Societies Act of the respective state Governments. Prior to 1966, Urban Co-

operative banks were exclusively under the purview of State Government. From March 1,

1966 certain provisions of Banking Regulation Act have been made applicable to these

banks. Consequently, the Co-operative Banking RBI became the regulatory an supervisory

authority of Urban Co-operative Banks for their related operations. Managerial aspects of

such banks continue to remain with State Governments under the respective Co- operative

Societies Act. These banks with multi-presence are regulated by the Central Governments

and registered under Multi-State Co-operative Societies Act. The RBI extends refinance to

Urban Co-operative Banks at bank ate against their advances to tiny and cottage industrial

units. These banks grants sizeable loans and advances under priority sector for lending to

small business enterprises, retail trade, road and water transport operators and

professional and self-employed persons. Urban Co-operative banks are mostly located in

towns and cities and cater to the credit requirement of the urban clientele.


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THE OBJECTIVES AND FUNCTIONS OF THE UCBS

Primarily, to rise funds for lending money to its members.

To attract deposits from members as well as non-members. To encourage thrift, self-help ad mutual aid among members. To draw, make, accept, discount, buy, sell, collect and deal in bills of exchange,

drafts, certificates and other securities.

To provide safe-deposit vaults.

AREA OF OPERATION

The area of operation of these banks is usually restricted by its byelaws to a municipal area

or a town. In some occasions it exceeds this limit. The study group on Credit Co-operatives

in Non-Agricultural Sectors has recommended that normally, it would be advisable for an

urban cooperative bank to restrict its area of operation to the municipality or the taluka

town where it operates.

INTERLINKAGES BETWEEN UCBS AND COMMERCIAL BANKS

In recent years, the integration of cooperative banks with the financial sector has

increased following the inclusion of UCBs in Indian Financial Network (INFINET) and Real

Time Gross Settlement System (RTGS) from November 2010. Further the annual policy

statement of the Reserve Bank for 2010-11 envisages inclusion of financially sound UCBs in

the Negotiated Dealing System (NDS) and opening up of internet banking channel for

UCBs satisfying certain criteria. This growing interconnectedness of cooperative sector

with the commercial banking sector, however, raises the risk of contagion that may affect the


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financial system as a whole due to the weak financial position of these institutions. The

cooperative structure in India can broadly be divided into two segments. While the urban

areas are served by Urban Cooperative Banks (UCBs), rural cooperatives operate in the rural

parts of the country. As at end-March2011, there were 1,645 UCBs operating in the

country, of which majority were non-scheduled UCBs. Moreover, while majority of the UCBs

were operating within a single State, there were 42 UCBs having operations in more than

one State. The rural cooperatives are divided into short term and long term

structures. The structure of short term cooperatives sector comprises of State

Cooperative Banks (StCBs) operating as apex level institutions in each state, District Central

Cooperative Banks (DCCBs) operating at district level and the Primary Agricultural Credit

Societies (PACS) operating at grass root level. Similarly, the long term cooperatives are

the State Cooperative Agriculture and Rural Development Banks (SCARDBs) at State

level and Primary Cooperative Agriculture and Rural Development Banks (PCARDBs)

operating at district/block level.

The banking related activities of UCBs are governed by the Reserve Bank, whereas the

registration and management related activities are governed by the Registrar of

Cooperative Societies (RCS) in case of UCBs operating in single State and Central RCS (CRCS)

in case of multi-State UCBs. In case of rural cooperatives, the structure is even more complex

with the Reserve Bank and the NABARD sharing the responsibility of regulating banking

related activities and RCS regulating registration/ management related activities.

However, efforts have been taken in recent years by the Reserve Bank to solve problems

related to duality in control. This involved signing of Memorandum of Understanding (MoUs)

with the Central/State Government apart from putting in place a forum called State Level Task

Force on Co-operative Urban Banks (TAFCUB), for resolving issues related to duality in

control.


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GROWTH AND PERFORMANCE OF UCBS

Performance of UCBs during 1967-11 has, by and large, been satisfactory (Table 1).

There are 271 districts, out of a total 603 districts, uncovered by UCBs. Though there has

been reduction in the number of UCBs from 2004 onwards, total banking business (deposits

and advances) of UCBs has shown steady increase (in absolute terms) signifying that

banks have been able to garner more business. However, there has been a continuous fall

in their share, which declined from 6.3% in 2001 to 3.5% in 2010. On the other hand, share

of commercial banks increased from 83.6% to 90.1% during the same period. The year

1993 was a watershed in the annals of UCBs. The one district- one bank norm was

dispensed on the recommendations Marathe committee. As a result, 537 licenses were

issued during 1993-99 and branch network almost doubled.

Table 1: Growth in deposits and advances of UCBs, 1967-11

S.No. Years UCBs Deposits Advances

1 1967 1106 153 167

2 1991 1307 8660 7802

3 1996 1327 24165 17908

1 2001 1618 80840 543892 2002 1854 93069 620603 2003 1941 101546 648804 2004 1926 110256 679305 2005 1872 105021 668746 2006 1853 114060 716417 2007 1813 121391 797338 2008 1770 138496 889819 2009 1721 158733 97918

10 2010 1674 182862 11030311 2011 1645 209949 135104

Source: Reserve Bank of India (2011)


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STATE-WISE AND GRADE-WISE DISTRIBUTION OF UCBS

As regards regional distribution, Maharashtra, Karnataka, Gujarat, Tamil Nadu and

Andhra Pradesh account for about 77% and Maharashtra alone accounts for 33% of the

total UCBs (Table 2). Gradationsystem was made applicable to UCBs from 2003

onwards. Prior to 2003, they were classified as weak and sick (grade III and IV). In

absolute terms, Maharashtra has 133 UCBs belonging to grade III and IV constituting 45%

of total (298) weak and sick banks. Karnataka, Gujarat, and Uttar Pradesh occupied

second, third and fourth places in terms of having grade III and IV banks. Sincere efforts

from managements and governments are required to upgrade them to either grade I or II

category.

UCBs are classified into four categories, viz., grade I, II, III and IV based on their financial

performance in terms of certain parameters like CRAR, net NPAs and history of profit/loss.

UCBs categorised as grade I and II are considered as financially stronger than that of

grade III and IV. As an outcome of the ongoing consolidation process of the UCB sector in the

form of merger/ acquisition among financially viable banks and exit of the non-viable

ones, there was a concentration of number of UCBs in grade I and II categories in recent

years. The percentage of banks in grade I and II together constituted 82 per cent of total

UCBs as at end-March 2011 compared to 80 per cent at end-March 2010. There was,

however a marginal decline in the percentage of UCBs of grade I category in 2010- 11 as

compared to the previous year.

The share of banking business also witnessed concentration in favour of financially sound

UCBs in the recent past. This is evident from the fact that the UCBs of grade I and II

witnessed an increase in their share in total deposits as well as advances in recent years.


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The shares of deposits and advances of UCBs in grade I and II together were 89.5 and 89.9

per cent of total deposits and advances of UCBs (Table 3), respectively, at end-March 2011.

The share of banking business also witnessed concentration in favour of financially sound

UCBs in the recent past. This is evident from the fact that the UCBs of grade I and II

witnessed an increase in their share in total deposits as well as advances in recent years.

The shares of deposits and advances of UCBs in grade I and II together were 89.5 and 89.9

per cent of total deposits and advances of UCBs, respectively, at end-March 2011.

Table-2: State-wise and grade-wise distribution of UCBs, 2011

S.N. StateGrade

I

Grade

II

Grade

III

Grade

IV

Total

UCBs1 Andhra Pradesh 52 45 5 4 106

2 Gujarat 60 155 11 17 243

3 Karnataka 112 108 35 13 268

4 Kerala 41 12 5 2 60

5 Madhya Pradesh 16 17 13 6 52

6 Maharashtra 301 105 78 55 5397 Rajasthan 32 4 1 2 39

8 Tamil Nadu 107 18 1 3 129

9 Uttar Pradesh 46 9 7 8 70

10 West Bengal 30 2 5 9 46

11 Rest of India 48 27 11 7 93

Total 845 502 172 126 1645


Table-3: Grade-wise Distribution of Deposits and Advances of Urban Cooperative

Banks (As at end-March 2011)

GradesNumber

of UCBs

Percentage

Share to

Total

Amount

of

Deposits

Percentage

Share to

Total

Amount

of

Advances

Percentage

share to

Total


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I 845 51.3 1,34,691 63.5 86,916 63.7

II 497 30.2 55,130 26.0 35,701 26.2

III 172 10.5 10,206 4.8 6,487 4.8

IV 131 8.0 12,004 5.7 7,237 5.3

Total 1,645 100.0 2,12,031 100.0 1,36,341 100.0


CAPITAL ADEQUACY

It is a measure of banks capital and expressed as a percentage of a bank's risk

weighted credit exposures. It is also known as Capital to Risk Weighted Assets Ratio

(CRAR).

CRAR =Tier one capital + Tier two capital/ Risk weighted assets

This ratio is used to protect depositors and promote the stability and efficiency of

financial systems around the world. It can be seen from Table 3 that majority of the (9

1%) UCBs comply with regulatory prescription of minimum CRAR of 9%. Some of the UCBs

which had negative net worth also reported positive CRARs by raising tier two capital

through innovative instrument like long term deposits.

NET WORTH

Net worth (sometimes called net assets) is the total assets minus total outside

liabilities of a company. This is called shareholders' preference and may be referred to as

book value. Net worth is stated as at a particular year in time. An excess of liabilities over


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assets is called negative net worth or deficit net worth. It can be noticed from Table 4 that

there has been a continuous reduction in banks having negative net worth. UCBs having

negative net worth have declined from 8.7% in 2006-07 to 5.3% in 2010- 11. This

improvement can be attributed to up-gradation, amalgamation and liquidation.

Table 4: Growth in CRAR of UCBs, 2007-11

S.N. YearUCBs

Below 9% Above 9% Total

1 2006-07 317 1496 1813

2 2007-08 313 1457 1770

3 2008-09 236 1485 1721

4 2009-10 230 1444 1674

5 2010-11 141 1504 1645

Source: Records of NAFCUB

Table 5: Growth in negative net worth, 2007-11

S.N. Year UCBs %

1 2006-07 157 8.7

2 2007-08 169 9.5

3 2008-09 115 6.7

4 2009-10 111 6.6

5 2010-11 88 5.3

Source: Records of NAFCUB

CONCLUSION

Co-operative banks take active part in local communities and local development with a

stronger commitment and social responsibilities. These banks are best vehicles for taking

banking to doorsteps of common men, unbanked people in urban and rural areas. Their


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presence in the social, economic and democratic structure of the country is essential to

bring about harmonious development and that perhaps is the best justification for

nurturing them and strengthening their base. During the year 2010-11, the financial

performances of UCBs improved while some segments of the rural cooperative sector

witnessed deterioration in their financial health. Though the overall profits of UCBs

improved during 2010-11 there were some concerns regarding some of the UCBs

reporting negative CRAR. Also there was an increase in gross NPAs of UCBs albeit the

NPA ratio declined.

REFERENCES

Kamesam, V. (2002), Cooperative banks in India: strengthening through corporategovernance, inaugural address at the National convention of urban cooperative

banks, Academy of Cooperative Governance, Mumbai on July 5, 2002.

Mitra, A. (2011), Corporate governance of urban co-operative banks in India: Anoverview, paper presented at the international conference on Scientific paradigm shift

in information technology and management held at Kolkata during January 5-6,

2011.

Pandey, J. K. (undated), Regulation and supervision of urban cooperative banks,College of Agricultural Banking, Pune.

Pitre, V. (2003), Urban cooperative banks: Issues and prospects, Economic and PoliticalWeekly, 38 (15):1505-1513.

Reserve Bank of India (undated), Brief history of urban cooperative banks in India,http://www.rbi.org.in/scripts/fun urban.aspx

Reserve Bank of India (2011), Report of the expert committee on licensing of newurban cooperative banks, RBI, Mumbai.
http://www.rbi.org.in/scripts/funhttp://www.rbi.org.in/scripts/fun


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Thorat, U. (2006), Urban cooperative banks: Evolution of the banks, current issues incorporate governance and challenges in their regulation and supervision,

R.N.Godbole memorial lecture at Shivaji University on December 6, 2006.

Thorat, U. (2007), Issues and challenges in regulating, supervising, and providingdeposit insurance to rural banks and cooperatives in India, paper presented at the

6th Annual conference and annual general meeting of International Association of

Deposit insurers, held at Kula Lumpur on November 1, 2007.

http://www.investopedia.com/terms/c/capitaladequacyratio.asp#ixzz1bORkclnc
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urban Cooperative Banks by Dr. Suresh vadde