RIJBFA

Volume 1, Issue 10(October 2012)

A Journal of Radix International Educational and Research Consortium

ISSN: 2277- 100X

RIJBFA
RADIX INTERNATIONAL JOURNAL OF BANKING, FINANCE AND ACCOUNTING

GROWTH AND PERFORMANCE OF URBAN CO-OPERATIVE BANKS IN INDIA: AN OVERVIEW

Dr. SURESH VADDE, Associate Professor Department 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. Journal of Radix International Educational and Research Consortium 1|Page www.rierc.org

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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 10years, 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 subsidybased 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 Cooperative 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 co- operative 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 Deposits Advances S.No. Years UCBs (Rs. crores) (Rs.crores) 1 1967 1106 153 167 2 1991 1307 8660 7802 3 1996 1327 24165 17908 1 2001 1618 80840 54389 2 2002 1854 93069 62060 3 2003 1941 101546 64880 4 2004 1926 110256 67930 5 2005 1872 105021 66874 6 2006 1853 114060 71641 7 2007 1813 121391 79733 8 2008 1770 138496 88981 9 2009 1721 158733 97918 10 2010 1674 182862 110303 11 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). Gradation system 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. 1 2 3 4 5 6 7 8 9 10 11

State Andhra Pradesh Gujarat Karnataka Kerala Madhya Pradesh Maharashtra Rajasthan Tamil Nadu Uttar Pradesh West Bengal Rest of India Total

Grade I 52 60 112 41 16 301 32 107 46 30 48 845

Grade II 45 155 108 12 17 105 4 18 9 2 27 502

Grade III 5 11 35 5 13 78 1 1 7 5 11 172

Grade IV 4 17 13 2 6 55 2 3 8 9 7 126

Total UCBs 106 243 268 60 52 539 39 129 70 46 93 1645

Source: Reserve Bank of India (2011)

Table-3: Grade-wise Distribution of Deposits and Advances of Urban Cooperative Banks (As at end-March 2011) Number of UCBs Percentage Share to Total Amount of Deposits Percentage Amount Percentage Share to of share to Total Advances Total

Grades

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I II III IV Total

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845 497 172 131 1,645 51.3 30.2 10.5 8.0 100.0 1,34,691 55,130 10,206 12,004 2,12,031 63.5 26.0 4.8 5.7 100.0

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86,916 35,701 6,487 7,237 1,36,341 63.7 26.2 4.8 5.3 100.0

Source: Reserve Bank of India (2011) 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. 1 2 3 4 Year 2006-07 2007-08 2008-09 2009-10 UCBs Below 9% 317 313 236 230 Above 9% 1496 1457 1485 1444 1504 Total 1813 1770 1721 1674 1645

5 2010-11 141 Source: Records of NAFCUB

Table 5: Growth in negative net worth, 2007-11 S.N. Year 1 2006-07 2 2007-08 3 2008-09 4 2009-10 5 2010-11 Source: Records of NAFCUB UCBs 157 169 115 111 88 % 8.7 9.5 6.7 6.6 5.3

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 Journal of Radix International Educational and Research Consortium 12 | P a g e www.rierc.org

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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 corporate governance, 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: An overview, 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 Political Weekly, 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 new urban cooperative banks, RBI, Mumbai.

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Thorat, U. (2006), Urban cooperative banks: Evolution of the banks, current issues in corporate 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 providing deposit 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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