Banking and Micro Finance

8/4/2019 Banking and Micro Finance

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Role Played by cooperative credit system in India in providing

Banking support to small Entrepreneurs across sectors



What is Co-operative? History

Structure Role of Co-operatives Mandates Performance over last few years Problems and Challenges Recommendations Conclusion



Let’s understand the basics



A co-operative is an autonomous association

of persons united voluntarily to meet theircommon economic, social, and cultural needsand aspirations through a jointly-owned anddemocratically-controlled enterprise.

- International Co-operative Alliance (ICA)



The values universally recognized ascornerstones of cooperative behavior are

Self-help Democracy

Equality

Equity Solidarity



Let’s go back



Completed 103 years of existence in 2007.

Was established with Primary aim of addressing the twin issues of farmers’ indebtedness and poverty.

History can be divided into four phasesdescribed further.



First phase (1900-1930)

Second phase (1930-1950)

Third phase (1950-1990) Fourth phase (1990’s onwards)



Cooperative Societies Act was passed in1904.

Some provinces like Bombay, Madras, Bihar,Orissa and Bengal devised their owncooperative laws in line with the 1912 act.



RBI, which was formed in 1934, played a crucial role insupporting the cooperatives.

The 1945 Cooperative Planning Committee found out that alarge number of cooperatives were facing the problem of frozen assets.

Post independence cooperatives were seen as playing aninstrumental role in the planned economic development of India.

Pandit Nehru had visualized an India in which each village

would have a panchayat, a cooperative and a school.



The All India Rural Credit Survey Committee(1951-1954) recommended state should takepart in the functioning of the cooperatives

(providing equity and helping in governance andmanagement).

In the early 1960’s cooperative legislationunderwent a major change on the basis of theabove listed findings.

NABARD was set up (12 July 1982).



Increased politicization of financial cooperativeswhich has led to poor governance and reductionof their financial health.

Various Committees such as Choudhary BrahmPrakash Committee, Mirdha Committee etc.were setup to introduce reforms.

These committees have indicated replacing thegovernment dominated cooperative laws with amore people centric laws.



The cooperative system in India is more thana century old.

The cooperatives were the only sourceproviding institutional credit to theagriculture sector and other small borrowersuntil the emergence of commercial bankingin the country.



It’s types and numbers



Operate both in urban and non-urban areas.

Traditionally centered around communities,localities and work place groups and theyessentially lend to small borrowers andbusinesses.



Co-operativeCredit

Institutions

RuralCo-operative CreditInstitutions

Urban Co-operative

Banks(Also known asPrimary Co-

operative Banks)



RuralCo-operative

Credit Institutions(96,751)

Short-termStructure(96,034)

StateCo-operative

Banks(31)

District CentralCo-operative

Banks(370)

PrimaryAgricultural

Credit Societies(95,633)

Long TermStructure

(717)

State Co-operativeAgriculture And

Rural DevelopmentBanks

(20)

PrimaryCo-operative

Agriculture AndRural Dev Banks

(697)



Urban Co-operative Banks

(1,674)

Scheduled UCBs(53)

Multi-State(25) Single State(28)

Non-ScheduledUCBs

(1,621)

Multi-State(17)

Single State(1,604)

Tier I(1,353)

Tier II(251)



In the Indian context



Much more important in India than anywhereelse in world.

Service at a lower cost and service withoutexploitation.

Plays an important role in both rural financingand urban business development

Mobilized deposits and purvey agricultural andrural credit



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 areasfinance in activities like:

Self-employment

Industries

Small scale units

Home finance Consumer finance

Personal finance



They are the main source for the institutional credit tofarmers.

They are chiefly responsible for breaking the monopoly of moneylenders in providing credit to agriculturists.

They have extensive branch network and reach out to peoplein remote areas.

They have traditionally played an important role in creatingbanking habits among the lower and middle income groupsand in strengthening the rural credit delivery system.



Targets to be achieved



Targets and sub-targets set under priority sector lending

Total PrioritySector advances

40 per cent of Adjusted Bank Credit (ABC) or creditequivalent amount of Off-Balance Sheet Exposure,

whichever is higher

Agriculture Advances No target

Small Enterprise

advances

Advances to small enterprises sector will be

reckoned in computing performance under theoverall priority sector target of 40 per cent of ABC orcredit equivalent amount of Off-Balance Sheet

Exposure, whichever is higher




Micro enterpriseswithin SmallEnterprises

sector

(i) 40 per cent of total advances to smallenterprises sector should go to micro(manufacturing) enterprises having investment inplant and machinery up to Rs 5 lakh and micro(service) enterprises having investment inequipment up to Rs.2lakh;(ii) 20 per cent of total advances to smallenterprises sector should go to micro

(manufacturing) enterprises with investment in plantand machinery above Rs 5 lakh and up to Rs. 25 lakh,and micro (service) enterprises with investment inequipment above Rs. 2 lakh and up to Rs. 10lakh. (Thus, 60 per cent of small enterprises

advances should go to the micro enterprises).




Advances toweaker sections

Of the stipulated target for priority sector advances,at least 25% (or 10% of the ABC or credit equivalent

amount of Off-Balance Sheet Exposure, whichever ishigher) should be given to weaker sections.

Advances to

Minorities

Within the overall target for priority sector lending and the

sub- target of 25 per cent for the weaker sections, sufficientcare may be taken to ensure that the minority communities

also receive an equitable portion of the credit.



Some good news



18.315.5

13.0 11.8

0

2

46

8

10

12

14

16

18

20

2007 2008 2009 2010

P e r c e n t

Gross NPA Ratio

Gross NPA Ratio



8.87.7

5.94.7

0

1

23

4

5

6

7

8

9

10

2007 2008 2009 2010

P e r c e n t

Net NPA Ratio

Net NPA Ratio



Agriculture &

Allied Activities

9%

Small

Enterprises41%

Retail Trade

14%Micro Credit

7%

State Sponsored

Organisations

for SC/ST

1%

Education Loans

3%Housing Loans

25%

Composition of Priority Sector Advances



Agriculture &

Allied Activities

12%

Small

Enterprises

25%

Retail Trade

17%

Micro Credit

12%

State Sponsored

Organisations

for SC/ST

2%

Education Loans

3%

Housing Loans

29%

Composition of Advances to Weaker Sections



As faced by Co-operative Institutions



High levels of loan delinquency Erosion of capital base. Paucity of funds for fresh deployment. High level of dependence on other agencies for

funds. Lack of professionalism in conduct and

management. Inadequate internal controls, governance

structure and non-adherence to norms andregulations.



Audit system is visibly fragile in the cooperativeinstitutions as the same in most states continueto be operated by junior functionaries in the Co-

operation Department of the respective StateGovernments, and that too in a manner, which isfar from rigorous.

Cooperative credit institutions are subject tomultiple control by the central bank as well asthe State or the Central Government dependingupon whether the institution operates in one ormore than one State.



Studies indicate that absence of the mandatoryrequirement of disclosure of key informationpertaining to the functioning of any financial

institution makes it possible for it to indulge inirregular and unhealthy practices with impunity.

Politicization of functioning: members of the

boards, who are often active politicians bring tobear their political proclivities on the day-todayworking of the respective institutions.



As indicated in Vaidyanathan Committee report & others



Legal reform to ensure that co-operatives workas self-reliant, mutually aided, autonomousinstitutions.

Clear demarcation of the role and jurisdiction of the Government (State or Central as the casemay be) and the Reserve Bank of India/NABARD, vis-à-vis régulation and control of

cooperative credit institutions.

Implementation of the financial part of thepackage with some benchmarks and milestones.



Redesign of the audit formats to capture allaspects of current-day functioning of thecooperative institutions.

Induction of professionals for conduct of audit.

Introduction of a system of mandatoryconcurrent audit for relatively larger institutions.

Evolution of a system of regular follow-up andmonitoring so as to ensure effective compliancewith audit comments.



Cooperatives the oldest of MFIs operating in thecountry have continued to be one of the mostsignificant agencies of delivery of financial services tothe poor.

Exhibited several frailties in their day-today working,which have evidently impinged on the effectiveness of their overall role as micro finance institutions.

Weaknesses witnessed in the functioning of theseinstitutions have emanated largely on account of anabsence of a credible governance structure in them.



They would be able to do much better oncethe inadequacies identified in their

organizational framework and functionalorientation are addressed effectively.

The issue needs to be addressed sooner than

later not only to ensure sustainability of theseinstitutions individually, but also to maintainstability of the entire financial system.

Banking and Micro Finance

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