R K Srivastava Financial Institutions for Rural Development
Indian Banking sector Indian banking sector consists of : • Scheduled Commercial banks • Regional Rural Banks • Local Area Banks • Urban Cooperative banks • State Cooperative Banks- DCCBs, PACS • State Cooperative Agriculture and Rural Development banks
What is banking ? Section 5 (b) of BR Act says, “Banking means the accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”
Major Activities of Banks • Acceptance of deposits • Loaning and investment • Issuing Letter of credit, traveller’s cheques • Buying and selling of bullion • Provision of safe deposit vaults/ Remittance of money • Acting as agent for government / local authorities/ persons
Scheduled Commercial Banks • Scheduled Commercial banks are those banks which are included in second schedule of RBI Act 1934 • These banks have to comply with the provisions of Section 42 (6) of RBI Act. • The value of its paid up capital and reserves is not less than Rs. 5.00 lakhs
Scheduled Commercial Banks • Value means real or exchangeable value and not the nominal value which may be shown in the books of accounts • RBI is satisfied that its affairs are not conducted in a manner deterimental to the interest of depositors
Categories of Scheduled Commercial banks • 27 Public sector banks- • SBI and 6 associate banks, • 19 Nationalized banks • IDBI bank • 7 New Private Sector banks– • ICICI, HDFC, Kotak Mahindra, Yes Bank, Indusind bank, Axis bank and Development Credit bank
Categories of Scheduled Commercial banks (contd..) • 15 Old private sector banks – prominent are Nainital Bank, Jammu and Kashmir Bank, ING Vyasa, Dhanlakshmi, Federal bank • 31 Foreign banks – largest banks in terms of their branches in India are • Standard Chartered Bank – 90 • HSBC Ltd. – 47 • Citi Bank – 41 • Foreign banks are mostly operating in urban and metropolitan centers
Activities covered under services • Transport Operators • Computer Software • Tourism, hotels and restaurants • Shipping • Professional services • Trade – Wholesale ( Other than food procurement ) • Retail Trade • Real Estate Loans • Non Banking Financial Companies • All other services
Personal Loans- activities • Consumer Durable • Housing • Advances against FDRs • Advances to individuals against share, bonds, etc. • Credit card outstanding • Education • Other personal loans
Highlights of performance of SCBs • The banks’ CRAR was 13.2 % as on 31.03.09 • Deposits touched Rs. 4063203 cr. from Rs. 3320061 cr. (growth rate 22.4%) • Loans outstanding touched Rs. 2648501 cr. from Rs. 2247289 cr. (growth rate 17.85%) • The banks’ profits increased from Rs. 31203 cr. to Rs. 42726 cr.
Regional Rural Banks - Objective • RRBs were established in 1975 with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small farmers.
RRB-History • The history of regional rural banks in India dates back to the year 1975. • It was the Narshimhan committee that conceptualized the foundation of Regional Rural Banks in India. • Committee felt the need of 'regionally oriented rural banks' that would address the problems & requirements of the rural people with local feel, yet with the same level of professionalism of commercial banks.
RRBs History (contd..) • RRBs were established by Commercial banks which were called Sponsor Banks. • The share capital was contributed by Government of India, Sponsor Bank and State Government. • Its’ authorised share capital is Rs. 5.00 crore and paid up capital is Rs. 1.00 crore. • Five regional rural banks were set up on October 2 with a total authorized capital of Rs. 1 crore, which was later augmented to Rs. 5 crore. There were five commercial banks, viz. Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India and United Commercial Bank, which sponsored the regional rural banks.
RRBs- History (contd..) • The number of RRBs has touched 196. • The restrictions imposed on them in the form of target group lending, restrictions on types of business to be undertaken, investments and poor recovery made these institutions sick. • Government of India launched a restructuring programme for RRBs in 93-94.
RRBs- History (contd..) • The Government of India approved the recapitalisation of RRBs. • Relaxations in business parameters were given. • A Change Management Programme in the form of ODI was launched.
RRBs- History • The restructuring of RRBs gave desired results. • GoI accepted the recommendations of Narshiman Committee regarding adoption of prudential norms. • Income recognition and asset classifications norms were made applicable to RRBs.
RRB- History • The advisory committee on Flow of Credit to Agriculture & Related Activities (Vyas committee) recommended the restructuring of RRBs. • With a view to improve the viability of RRBs and enable them to compete with other banking institutions, GOI has implemented the sponsor bank wise merger of RRBs at state level from the year 2005. • No of RRBs is 86 as on 31.03.09.
RRB- History • Scheme for phased recapitalisation of RRBs with negative net worth was announced in the budget for 2007-08. • The recapitalisation process has been completed in case of 27 RRBs with an amount of Rs. 1796.00 cr.
Performance of RRBs during 2008-09 • The deposits touched Rs. 120189 cr. and recorded an increase of 21%. • Loan outstanding touched Rs. 67802 cr. and recorded an increase of 15 %. • Credit Depost ratio was 56%. • Net NPA of RRBs were Rs.1188.00 cr. ( 1.75% of outstanding) • 80 RRBs were in profit while 6 were in loss.
Local Area Banks • The Local Area Bank scheme was introduced in August 1996. • The idea behind setting up new private local banks with jurisdiction over two or three contiguous districts was to help mobilisation of rural savings by local institutions and make them available for investment in local areas.
Local Area Bank At present only 4 local area banks are functioning : • Capital Local Area Bank Ltd • Coastal Local Area Bank Ltd. • Krishna Bhima Samruddhi Local Area Bank Ltd. • Subhadra Local Area Bank Ltd.
Present Status RBI has decided not to issue new licences in respect of Local Area Banks.
Cooperative Credit Structure Cooperative Credit structure in India generally can be divided in two categories : • Urban Cooperative Banks • Rural Cooperative Credit institutions
Urban Cooperative Banks • The urban areas are served by urban cooperative banks • These banks are divided into: • Scheduled • Non –scheduled
Grade wise distribution of UCBs • UCBs are divided into 4 categories : • Grade I and II are relatively stronger banks • Grade III and IV are weak and sick banks • With a view to improve the health of Urban Cooperative Banks, a Vision Document was prepared by RBI in 2004-05 and based on feed back, a Medium Term Framework was put into place.
Medium Term Framework • The regulatory coordination between the two authorities, RBI and State Government, was to be achieved by signing the MOU in each state with a view to address the problems of dual control. • As on 20 July 2009, MOUs have been signed with 26 State governments and also with Central Government in respect of multi state UCBs.
Progress • The number of UCBs declined from 1770 in 2008 to 1721 in 2009. • Similarly, the number of Grade III and IV banks declined from 496 in 2008 to 392 in 2009. • The number of Scheduled UCB has remained 53 while the number of unscheduled UCBs have declined to 1668 in 2009 from 1717 in 2008.
Rural Cooperative Credit Structure Rural cooperative credit structure can be divided into two parts : • Short term Cooperative credit Structure – comprising of SCB, DCCB and PACS which cater to short term and medium term credit requirement of farmers. • Long term credit structure – consisting of SCARDBs and PCARDBs- catering mainly to long term credit needs of the farmers.
Rural Cooperative Credit structure as on 31.03.09 • Short term cooperative credit structure – 96061 - SCB (31), DCCB (371), PACS (94942) • Long term Cooperative Credit Structure - SCARDB (20), PCARDB ( 697)
What is PACS ? • PACS means Primary Agriculture Credit Society, the principal business of which is to provide financial accommodation to its members for agricultural purposes or purposes connected with agricultural activities (marketing of crops). • Byelaws do not permit the admission of any other cooperative society as a member. • DCCB which is contributing to share capital from state government funds can be a member.
Central Cooperative Bank Central Cooperative bank means the principal cooperative society in a district of a state, the primary object of which is financing of other cooperative societies in that district.
State Cooperative bank State Cooperative bank means the principal cooperative society in a state, the primary object of which is financing of other cooperative societies in the state.
State Land Development Bank State Land Development bank means the cooperative which is the principal land development bank ( by whatever name called ) in a state and which has as its primary object of providing long term finance for agriculture development.
Two tier and Three tier structure • In case of STCCS, both two tier and three tier structure are functioning in different states : • Two tier means SCB - PACS • Three tier means SCB – DCCB - PACS
Revival of STCCS Government of India appointed a Task Force under the Chairmanship of Shri A. Vaidyanathan of Madras Institute of Technology in the year 2004 to recommend an implementable action plan for reviving the RCIs, taking into consideration, interalia, main recommendations by various committees in this regard.
DETAILS OF STCCS AT THE TIME OF STUDY • 112309 PACS- ACC.LOSSES RS.4595 CR • 367 DCCBs- ACC.LOSSES RS.4401 CR • 30 SCBs- ACC.LOSSES RS.281 CR • DECLINE IN MARKET SHARE- FROM 62% IN EARLY 92-93 TO 34% IN 2002-03 • PACS –MEMBERSHIP-12 CRORE- 50% BORROWING MEMBERS
Recommendations • REVIVAL AND REVITALSIATION COMPULSORY BOTH ON IDEOLOGICAL AND FUNCTIONAL GROUNDS • COOPERATIVES HAVE A WIDER AND DEEPER REACH IN RURAL AREAS
Salient features of Revival package • Aims at reviving the short term RCI • Three components - Provide financial assistance to bring the system to an acceptable level of health - Introduce legal, institutional reforms necessary for their democratic, self reliant and efficient functioning - Take measures to improve the quality of management
Present status • 25 state governments have signed MOU. • Special Audit has been taken up in 79,822 PACS and completed in 79,530 PACS. • Special Audit of CCBs has been taken up in twelve states. • Rs.7,987.60 crore has been released by NABARD as GOI share for recapitalisation of 49,764 PACS in fourteen states, while the State Governments have released Rs.752.88 crore as their share.