Project Report on Umbrella Organisation--Dhara Shah

8/3/2019 Project Report on Umbrella Organisation--Dhara Shah

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Contents

Sr. No. Particulars Page NO.

1

Role of RBI-Efforts to Ensure Sustainable Growth and

Functioning of UCBs 3

2 Introduction to industry 7

1 Banking Sector 7

2 History of Bank and Banking 9

3 Financial Structure of Bank in India 13

3 Research Methodology 15

1 Significance of Study 15

2 Objectives of Study 16

3 Research Methodology 17

4 Limitations of Study 21

4 Introduction to UCB sector 22

1 What is Co-operative? 22

2 Introduction of Co-operative Bank 22

3 History of Urban Co-operative Bank 23

4 Features of Urban Co-operative Bank 24

5 Importance of Urban Co-operative Bank 25

6 Difficulties faced by Co-operative Bank 26

7 Banking Sector Reforms and UCB 28

8 Profile of UCB 33

9 Mushrooming Growth 34

10 Market share of UCBs in the Banking System 3511 Heterogeneity in UCB Sector 36

12 Size of Deposits, Advances, Assets 36

13 Unit Banks 38

14 Financial Health of Banks 39

15 CRAR Distribution 40

16 Diversity in Spread 41

5 Umbrella Organization 43

1 Concept Development 44

2 Objectives of UO 45

3 Organizational Structure of UO 464 Features of UO 46

5 Need for UO 47

6 Management 49

7 UO at National Level 50

8 Working Methodology 51

9 Form of Organization 52

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10 Function of UO 55

11 Authorized Capital, Subscription? Paid up Capital 56

12 Sources of Working Capital 58

13 CRR & SLR 59

14 Regulation and Supervision 60

15 Emergency Liquidity & Solvancy Support 60

16 Emergency Liquidity Support 61

17 Revival of Fund 62

18 Emergency Fund Facility Trust 62

19 Effects 64

6 Analysis of Umbrella Organization 65

7 What steps should UO has to take? 74

8 Feasibility Case Study 78

1 Charminar Co-operative Bank 78

2 Surat Peoples Co-operative Bank 829 Recommendation 84

10 Conclusion 85

11 Bibliography 86

Annexure

Role of RBI-Efforts to Ensure Sustainable Growth

and Functioning of UCBs

The Urban Banks Department of the Reserve Bank of India is vested with the

responsibility of regulating and supervising primary (urban) cooperative banks, which are

popularly known as Urban Cooperative Banks (UCBs). While overseeing the activities of 1926

primary (urban) cooperative banks, the Urban Banks Department performs three main functions :

regulatory, supervisory and developmental. The Department performs these functions through its

17 regional offices.

I. Regulatory Function:

(i) Licensing of New Primary (Urban) Cooperative Banks:For commencing banking business, a primary (urban) cooperative bank, as in the case of

commercial bank, is required to obtain a license from the Reserve Bank of India, under the

provisions of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative

Societies).

(ii) Licensing of Existing Primary (Urban) Co-operative Banks:

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In terms of sub-section (2) of Section 22 of the Banking Regulation Act, 1949 (As

Applicable to Cooperative Societies), the primary (urban) cooperative banks existing in the

country as on March 1, 1966, (when some banking laws were applied to UCBs), were required to

apply to the Reserve Bank of India. They were given three months to obtain a license to carry on

banking business. Similarly, a primary credit society which becomes a primary (urban)

cooperative bank by virtue of its share capital and reserves reaching Rs. one lakh (Rs.1,00,000)

and above was to apply to the Reserve Bank of India for a license within three months from the

date on which its share capital and reserves reach Rs. one lakh. The existing unlicensed primary

(urban) cooperative banks can carry on banking business till they are refused a license by the

Reserve Bank of India.

(iii) Branch Licensing:

Under the provisions of Section 23 of the Banking Regulation Act, 1949 (As Applicable

to Cooperative Societies), primary (urban) cooperative banks are required to obtain permission

from the Reserve Bank of India for opening branches.

(iv) Statutory Provisions:

The regulatory functions of Urban Banks Department relate to monitoring compliance

with the provisions of the Banking Regulation Act, 1949 (As Applicable to Cooperative

Societies) by urban cooperative banks. These provisions include :

a. Minimum Share Capital:

Under the provisions of Section 11 of the Banking Regulation Act, 1949 (As Applicable

to Cooperative Societies), no primary (urban) cooperative bank can commence or carry on

banking business if the real or exchangeable value of its paid-up capital and reserves is less than

Rs one lakh.

b. Maintenance of CRR and SLR:

As in the case of commercial banks, primary (urban) cooperative banks are also required

to maintain certain amount of cash reserve and liquid assets. The scheduled primary (urban)

cooperative banks are required to maintain with the Reserve Bank of India an average daily

balance, the amount of which should not be less than 5 per cent of their net demand and time

liabilities in India in terms of Section 42 of the Reserve Bank of India Act, 1934. In addition to

the cash reserve, every primary (urban) cooperative bank (scheduled/non-scheduled) is required

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to maintain liquid assets in the form of cash, gold or unencumbered approved securities which

should not be less than 25 per cent of the total of its demand and time liabilities in accordance

with the provisions of Section 24 of the Banking Regulation Act, 1949 (As Applicable to

Cooperative Societies). Out of the prescribed SLR, the UCBs have been advised to maintain a

certain amount in the form of SLR Securities as under:

Sr. No. Category of bank

Minimum SLR holding in Government and

other approved securities as percentage ofNet Demand and Time Liabilities (NDTL)

1. Scheduled banks 25%

2.

Non-Scheduled banks

a) with NDTL of Rs.25 Crore &

above

b) with NDTL of less thanRs.25 Crore

15%

10%

Supervisory Functions:

To ensure that the UCBs conduct their affairs in the interests of the depositors and also

comply with the regulatory framework prescribed by the Reserve Bank of India, the department

undertakes on site inspection of these banks with frequency ranging from one to two years

depending upon the financial condition / status of banks. The thrust of supervision is to ensure

that banks' affairs are not conducted in a manner detrimental to the depositors' interest and also

to assess the solvency of the bank vis--vis its liabilities, besides examining the banks'

compliance with the existing regulatory framework. The department also undertakes off-site

surveillance of scheduled banks and non-scheduled banks with a deposit base of Rs 100 Crore

and above based on a set of quarterly and annual returns.

III Developmental Functions:

With a view to extending institutional credit support to tiny and cottage units, the Reserve

Bank of India grants refinance facilities to urban cooperative banks under the provisions of

Section 17 of the Reserve Bank of India Act, 1934. The refinance is given at the Bank Rate.

Training is imparted to the middle and top management of urban cooperative banks through

College of Agricultural Banking, Pune.

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IV Sections / Divisions of Urban Banks Department:

1. Administration:

This Section handles staff matters of the department.

2. New Bank Licensing and Branch Licensing:

This section frames policies for issue of bank license /allots centers for opening of

branches and authorizes regional offices to take action accordingly. It also deals with

conversion of cooperative credit societies into urban banks.

3. Returns:

Returns section at each of the regional offices is responsible for monitoring receipt of

various statutory returns under the provisions of Banking Regulation Act, 1949, (AACS) and

Sec 42 of Reserve Bank of India Act 1934 in case of scheduled UCBs. They also verify

compliance with the provisions of the Acts, ibid, and take suitable action against non-

compliant UCBs.

4. Banks Supervision:

This division arranges inspection of urban cooperative banks through regional offices and

closely monitors the action taken by the UCBs to rectify the irregularities / deficiencies

pointed out in inspection reports. The division also associates itself with the RCS of

respective states in rehabilitation of financially weak UCBs.

5. Banking Policy:

This section frames policies on prudential norms, investment policies, monitoring priority

sector targets, refinancing, issue of directives on interest rates, CRR/SLR, etc. Policies

relating to para banking activities such as merchant banking, hire purchase, leasing,

insurance business, etc. are also formulated by this division. Besides, the section also attends

to compliance with the directions of Local Board / Central Board / BFS, furnishes requisite

material for Bank's publications such as Annual Report, Report on Trend and Progress of

Banking in India, Currency and Finance, etc.

Further, the section interprets the provisions of Banking Regulation Act 1949 (AACS),

initiates amendments, coordinates with the Government, corresponds with various State

Governments on matters pertaining to amendments of State Cooperative Societies Acts,

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coordinates with DICGC on matters pertaining to banks under liquidation, maintains and

updates the list of urban cooperative banks, monitors cooperative credit societies having paid

up capital above Rs one lakh, watches compliance to Sec 9, 29 & 31 of Banking Regulation

Act, attends to cooperative banks going out of the purview of Banking Regulation Act etc.

Reserve Banks Role in Empowering UCBs:

In order to empower the cooperative banks in their commercial / managerial functioning,

the Reserve Bank in its MOUs with the State Governments has committed to facilitate the

development of human resources and skills and to provide assistance in IT initiatives undertaken

by the UCBs. The UCBs here have to take a lead and play a more pro-active role in order to

utilize the services and assistance provided by the Reserve Bank to make themselves more

competitive by bringing efficiency in their functioning. This has to be achieved through

cultivating Capital Adequacy and NPA Provisioning Standards; better Corporate Governance;

introducing Professional Management and following best practices in Banking operations.

Introduction to Industry

Introduction to Banking Sector :

Banking Sector:

In simple word, A Bank can be defined as a financial institution that accepts deposits

and channels the money into lending activities.

The banking system in India is significantly different from that of other Asian nations

because of the countrys unique geographic, social, and economic characteristics. India has a

large population and land size, a diverse culture, and extreme disparities in income, which

are marked among its regions. There are high levels of illiteracy among a large percentage of

its population but, at the same time, the country has a large reservoir of managerial and

technologically advanced talents. Between about 30 and 35 percent of the population resides

in metro and urban cities and the rest is spread in several semi-urban and rural centers. The

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countrys economic policy framework combines socialistic and capitalistic features with a

heavy bias towards public sector investment. India has followed the path of growth-led

exports rather than the exported growth of other Asian economies, with emphasis on self-

reliance through import substitution. These features are reflected in the structure, size, and

diversity of the countrys banking and financial sector. The banking system has had to serve

the goals of economic policies enunciated in successive five year development plans,

particularly concerning equitable income distribution, balanced regional economic growth,

and the reduction and elimination of private sector monopolies in trade and industry. In order

for the banking industry to serve as an instrument of state policy, it was subjected to various

nationalization schemes in different phases (1955, 1969, and 1980). As a result, banking

remained internationally isolated (few Indian banks had presence abroad in international

financial centers) because of preoccupations with domestic priorities, especially massive

branch expansion and attracting more people to the system. Moreover, the sector has been

assigned the role of providing support to other economic sectors such as agriculture, small-

scale industries, exports, and banking activities in the developed commercial centers (i.e.,

metro, urban, and a limited number of semi-urban centers). The banking systems

international isolation was also due to strict branch licensing controls on foreign banks

already operating in the country as well as entry restrictions facing new foreign banks. A

criterion of reciprocity is required for any Indian bank to open an office abroad. These

features have left the Indian banking sector with weaknesses and strengths. A big challenge

facing Indian banks is how, under the current ownership structure, to attain operational

efficiency suitable for modern financial intermediation. On the other hand, it has been

relatively easy for the public sector banks to recapitalize, given the in creases in

nonperforming assets (NPAs), as their Government dominated ownership structure has

reduced the conflicts of interest that private banks would face.

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History of Bank and Banking:

History of Banking:

The first banks were probably the religious temples of the ancient world, and were

probably established sometime during the 3rd millennium B.C. Banks probably predated the

invention of money. Deposits initially consisted of grain and later other goods including cattle,

agricultural implements, and eventually precious metals such as gold, in the form of easy-to-

carry compressed plates. Temples and palaces were the safest places to store gold as they were

constantly attended and well built. As sacred places, temples presented an extra deterrent to

would-be thieves. There are extant records of loans from the 18th century BC in Babylon that

were made by temple priests to merchants.

Modern western economic and financial history is usually traced back to the coffeehouses of London. The London Royal Exchange was established in 1565. At that time

moneychangers were already called bankers, though the term "bank" usually referred to their

offices, and did not carry the meaning it does today. There was also a hierarchical order among

professionals; at the top were the bankers who did business with heads of state, next were the

city exchanges, and at the bottom were the pawn shops or Lombard's.

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Global banking and capital market services proliferated during the 1980s and 1990s as a

result of a great increase in demand from companies, governments, and financial institutions, but

also because financial market conditions were buoyant and, on the whole, bullish.

Growing internationalization and opportunity in financial services entirely changed the

competitive landscape, and now many banks prefer the universal banking model. Today

universal banks are free to engage in all forms of financial services, make investments in client

companies, and function as much as possible as a one-stop supplier of both retail and

wholesale financial services.

The Indian Story:

Banking in India originated in the first decade of 18th century with The General Bank of

India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks

are now defunct. The oldest bank in existence in India is the State Bank of India beingestablished as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign

banks like credit Lyonnais started their Calcutta operations in the 1850s. At that point of time,

Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due

to which banking activity took roots there and prospered. The first fully Indian owned bank was

the Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab

National Bank in 1895 in Lahore and Bank of India in 1906 in Mumbai - both of which were

founded under private ownership. The Reserve Bank of India formally took on the responsibility

of regulating the Indian banking sector from 1935. After India's independence in 1947, the

Reserve Bank was nationalized and given broader powers.

Indian Banking- Present and Future:

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Currently, banking in India is considered to be fairly mature in terms of supply and

product range. Indian economy is one of the fastest growing economies in the world. The

countrys GDP has been growing at an average rate of almost 7 percent during the last decade

with the GDP growth rate touching 9.4 percent in the last year. The Indian banking industry also

has obtained its share in the growth of the Indian economy. In the post nationalization period, the

country witnessed unprecedented expansion in the branch network of commercial banks with

these banks reaching the people in far-flung unbanked areas. There was a gradual shift in the

approach of nationalized banks from class banking to mass banking. The present focus on

retail credit such as housing loans and vehicle loans, regulatory norms for flow of credit to

agricultural sector and changes in the attitude of the people now opting for availing loans to build

their assets, have created a vast market potential for banks in India. On the other hand, the Indian

household sector, which is one of the largest savers in the world, still continues to lock up a

major portion of its savings in the form of investments in gold and real estate. The need for huge

investment in various infrastructure projects being undertaken for providing support to the

economic development of the country opens up a hitherto untapped market in the financial sector

in India. The overall banking scenario is proving to be a fast growing profitable avenue for

commercial banks, which is now attracting the foreign banks for reaping benefits of the

developing economy.

Further, the Indian banking industry has realized the Critical importance of IT based

operational solutions for surviving the fierce competition to enhance the customer base. Many

banks have implemented IT based Core Banking Solutions in the recent time. A considerable

amount has been spent in the form of IT investments by major banks in the country. Wherever

required, the banks have undertaken business process re-engineering to suit the technology.

Indian Banks also seek to expand overseas considering both developing and developed

nations. Expanding into developed economies will provide Indian Banks an expertise, much

needed to face competition from global players in local market i.e., Indian market. High margins

and opportunity to reap profits lure the Indian players to developing economies.

The Reserve Bank of India in its road map for the banking industry has indicated that

the Indian market will be opened for international banks by 2009. It is expected that apart from

the existing foreign players, many such other banks would gain entry in the Indian markets to tap

the vast potential. These banks with the help of advanced technology, adequate capital for

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investment, and their customer centric approach attract the profitable customers from the existing

banks. A fierce competition between the existing banks and the new entrants provides impetus

for business growth.

The new foreign banks entering the Indian market strive for creating a strong customer

base. These banks, with their large resource availability in the form of capital, infuse the latest IT

based technological solutions for quality financial services. The Indian commercial banks have

experienced the shift of preferences of the new generation customers from personalized

banking to technological banking. This techno-savvy customer group prefers to complete

banking transactions from their home or offices rather than visiting the bank branch. They have

very little loyalty to their bankers and given a slightest improved technology based service, they

are ready to shift their banking needs from the existing to another bank. In the face of the threat

of losing profitable customers to the new entrants in the banking sector, the existing commercial

banks evolve suitable market strategies aimed at attracting new customers and retaining the

existing ones.

To effectively meet the competitive challenge from such banks, the Indian banking

industry will have to gear up and adopt the global best practices, which would make them

stronger and comparable with the international banks. In the changed circumstances, the need for

need for customer delight overrides the need for customer service.

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Financial Structure:

The Indian financial system comprises the following institutions:

1. Commercial banks

a. Public sector

b. Private sector

c. Foreign banks

d. Cooperative institutions

(i) Urban cooperative banks

(ii) State cooperative banks

(iii) Central cooperative banks

2. Financial institutions

a. All-India financial institutions (AIFIs)

b. State financial corporations (SFCs)

c. State industrial development corporations (SIDCs)

3. Non-banking financial companies (NBFCs)

4. Capital market intermediaries

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(Chart No. 1)

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STRUCTURE OF INDIAN BANKING SYSTEM

Organized Unorganized

Licensed Creditors

Unlicensed Indigenousmoneylenders.

Co-o erativeBankCommercial BankReserve Bank of India


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Research Methodology

Significance of the study

The main aim of any person is the utilization money in the best manner since the India is

country were more than half of the population has problem of running the family in the most

efficient manner. However Indian people faced large number of problem till the development of

the full-fledged banking sector. The Indian banking sector came into the developing nature

mostly after the 1991 government policy. The banking sector has really helped the Indian people

to utilize the single money in the best manner as they want. People now have started investing

their money in the banks and banks also provide good returns on the deposited amount. The

people now have at the most understood that banks provide them good security to their deposits

and so excess amounts are invested in the banks. Thus, banks have helped the people to achieve

their socio economic objectives. The banks not only accept the deposits of the people but also

provide them credit facility for their development. Indian banking sector has the nation in

developing the business and service sectors.

Many small UCBs are looking forward to a centralized organization for buying, selling

and managing government securities on their behalf in view of their lack of skill and expertise in

the areas.

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Public Sector:

1. State Bank of

India

2. Subsidiaries of

State Bank of

India

3. Nationalized

Indian Scheduled

Commercial Bank

Private Sector:

1. Branch

es of Banks In

corporate outside

India

2. Other Indian

Scheduled

Commercial Bank

3. Non

Scheduled

1. State

Co-operative

Bank at Statelevel

2. Central

Co-operative

Bank at District

level

3. Rural

Primary Co-

operative bank


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To make the umbrella organization sustainable, the RBI could reckon deposits kept by

the UCBs with the organization for the purpose of cash reserve ratio and statutory liquidity ratio,

permit the organization membership of Payment and Settlement systems; and setting up ATM

networks, etc. Being a non-deposit taking NBFC, it would be in a position to access working

capital via borrowings from banks/ financial institutions; term deposits from UCBs; bonds/

debentures; and refinance against loans and advances/ securities.

Objective of the Study:

Primary objective:

The primary objective of the making report is:

To know why should be an umbrella organization for UCBs

Secondary objectives:

The secondary objectives of preparing this report are:

To understand what is Umbrella organization and what are the underlying reasons for the

Umbrella organization.

To understand the impacts of Umbrella Organization on the operations of the

Commercial Sector Banks.

To know what steps are being taken by the Indian banking sector to enhance the UCBs

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Research methodology:

The research methodology means the way in which we would complete our prospected

task. Before undertaking any task it becomes very essential for any one to determine the problem

of study. I have adopted the following procedure in completing my report study.

1. Formulating the problem

2. Research design

3. Determining the data sources

4. Designing Data Collection Form.

5. Determining Design and Sampling Size

6. Organizing and Conducting Field Survey

7. Processing and analyzing the collected data

8. Report Writing

(1) Formulating the problem

I am interested in the banking sector and I want to make my future in the banking sector

so decided to make my research study on the banking sector. I analyzed first the factors that are

important for the banking sector and I came to know that providing facility to the customer/

member by Umbrella organization. On the basis of the analyzed factor, I felt that the important

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issue right now. I started knowing about the basics of the Umbrella organization and decided to

study on the Umbrella organization. So, I chose the topic Umbrella organization for UCBs

(2) Research Design:

The research design tells about the mode with which the entire project is prepared. My

research design for this study is basically analytical. It is based upon primary data. I got help to

make this project from the data published by RBI on 17th Nov 2009 for Umbrella Organization.

A research design specifics the method and procedures for conducting a particular study.

The research design that was selected by me for our project was descriptive research design. The

objective of a descriptive studying is to learn who, when, where and How of a topic

Who- who is to be surveyed. The answer of this question is the customers who prefers

to Umbrella organization.

What- what is the objective of the survey. The answer of this question is to find out

degree of satisfaction level of the customers who prefers to Umbrella organisazation.

When- during 2 months of research project undergone for the partial fulfillment of TY

B.B.A.

So was the case with our study. We wanted to know the various degrees of influences of

satisfaction level of the clients of UO.

3) Determining the sources of data:

The data source can be primary or secondary. The primary data are those data which are

used for the first time in the study. However such data take place much time and are also

expensive. Whereas the secondary data are those data which are already available in the market.

These data are easy to search and are not expensive to for my study I have utilized totally the

secondary data issued by RBI on 17 Nov.2009 and from banknetindias data issued on 22ndJuly 2009.

The purpose of our using the secondary data was to help us in collecting the primary

information i.e. to design the questionnaire, Who prefers UO & etc. The following are the

various sources of data used by me.

Primary Sources

Questionnaire Design

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Secondary Sources

Catalogs

Magazine

Internet Web Sites

4) Designing data collection forms:

Once the decision in favor of collecting primary data was taken the more of collecting the

data was decided. The two methods available are observation and survey method.

We had decided to go for survey method. Survey method is commonly used to collect

primary data from the respondent. We had done personal survey with the help of the

questionnaire by going satisfaction level of the member who prefers UO.

5) Determining sampling design and sampling size:

Sample Design

When the research has to carry out a filed survey, He has to decide whether it is to be a

census or sample survey. I had decided to go for a sample survey as the population survey was

out of reach and not feasible.

When a decision in favor of a sample survey has been taken, it is necessary to have clear

definition of the population from which the sample is to be drawn; in sampling I surveyed people

who prefer UO.

In this project report, I used probability sampling, where all the member who prefer UO

have equal chance to be selected in sample.

Sample Size

The sample size taken by me to study the objective was 7 clients to the UO. The co-operative bank in Surat is limited so we can not get more sample survey.

6) Organizing & Conducting field Survey :

Having prepared the questionnaire and selected the sample design and size of the sample,

the next step was to organize and conduct the filed survey.

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Interviewing

The task of interviewing though seems very simple but it is very difficult to conduct. This

is because respondents are generally hesitant in giving information unless approach with tact,

initiative & intelligence. I interviewed 7 clients personally and by going at their Bank.

Supervision

Supervision of fieldwork is equally important to ensure timely & proper completion of

the filed survey. Supervision was also very carefully done. I supervised each & every

questionnaire after the clients filled it. I will duly check to see whether the clients did not miss

any questionnaire in between.

(7) Processing and analyzing the collected data:

The primary data would not be useful until and unless they are well edited and tabulated.

When the person receives the primary data many unuseful data would also be there. So, I

analyzed the data and edited them and turned them in the useful tabulations. So, that can become

useful in my report study. Analysis of the data was very carefully done. Moreover, it took many

days to analysis the data collected. A number of tables are prepared to bring out the main

characteristic of the data.

In order to present the analyzed data in a proper manner following tools were used.

Tables

Graphs

Charts

Interpretation of the data With use of analysed data I managed to prepare my project

report. But the analyzing of data would not help the study to reach towards its objectives. The

interpretation of the data is required so that the others can understand the crux of the study in

more simple way without any problem so I have added the chepter of analysis that would explain

others to understand my study in simpler way.

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(8) Report writing:

This is the last stage of the preparation of project report. Once the data have been

tabulated interpreted & analyzed, it was require to prepare report embodying the findings of the

research study & his recommendation. The sole objective of the report writing will to present the

findings to the concerned authorities.

Limitations of the study:

The limitations that I felt in my study are:

This report is published by RBI recently so it is difficult to get more information about

this topic.

It was critical for me to gather the financial data of the every bank of the Commercial

Sector Banks so the better evaluations of the performance of the banks are not possible.

Since my study is based on the secondary data, the practical operations as related to the

Umbrella Organization are adopted by the banks are not learned.

Since the Indian banking sector is so wide so it was not possible for me to cover all the

banks of the Indian banking sector

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Introduction to UCB Sector

What is Co-Operative?

Co-operatives represent the basic qualities of our people: honesty, democratic consensus,

mutual concern and self-reliance. Throughout our land, there are co-operatives-large and small

which have succeeded. Our day starts with the consumption of milk, the sugar we use in the

preparation of sweets, the ration that we purchase from a fair price shop, the papad and pickles

which add taste to our lunch, the education our children are imparted, the fish and poultry

products that we consume for dinner; the betel nut that we chew after dinner and chocolates

given to kids put them to sleep, all have some contribution of the co-operative movement.

Indeed, co-operatives have touched our lives in more ways than one. India is the land of co-

operatives. The largest numbers of co-operatives are in our nation.

According to ICA, "a cooperative is an autonomous association of persons united

voluntarily to meet their common, economic, social and cultural/needs and aspirations through a

jointly owned and democratically -controlled enterprise"

Introduction of Co-operative Banks:

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In the early 20th century, the availability of credit in India, more particularly in rural

areas was non existent. There was no organized institutional credit for agricultural and related

activities. People in the rural areas largely depended on money lenders who lent money at very

high rates of interest. Thus, there was need to create an institution which would cater to the needs

of ordinary people and was based on the principles of co-operative organization and

management. In 1904, the first legislation on cooperatives was passed. In 1914, the Maclagen

committee suggested a three tire structure for cooperative banking i.e. Primary agricultural credit

societies at the grass root level, Central cooperative banks at the district level and State

cooperative banks at the state level. Cooperative banks were expected to serve as substitutes for

money lenders, and provide both short term and long term institutional credit at reasonable rates

of interest.

History of Urban Co-operative Bank:

Inspired by the success of urban cooperative movement in Germany and Italy, in the

early part of the last century, urban cooperative credit societies were organized on community

basis and their lending operations were confined to meeting the consumption oriented credit

needs of their members. Many urban cooperative banks, which were organized initially, were

essentially credit societies but later converted themselves into urban cooperative banks.

Interestingly, many urban cooperative credit societies, which were not engaged in any banking

functions, also used the word .bank.. There was no well-defined concept of urban cooperative

bank till 1996, when banking laws (provisions of section 5(CCV) of Banking Regulation Act

1949) were made applicable to cooperative banks. Accordingly, an urban cooperative bank was

defined as a Primary Cooperative Bank other than a primary agricultural credit society; (i) the

primary object of which is the transaction of banking business, (ii) the paid up share capital and

reserves of which are not less than Rs.1 lakh (0.1 Mn) and (iii) the by-laws of which do not

permit admission of any other cooperative society as a member. The word .primary. is used to

denote that the urban cooperative banks perform the role of a primary unit in a 3-tier cooperative

credit structure.

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Features of Urban Co-operative Bank:

Following are the features of urban cooperative credit banks in India.

1. Urban cooperative banks are registered under Cooperative Societies Act of the respective state

Governments. The Reserve Bank of India (Central Bank of the country) is the regulatory and

supervisory authority for UCBs for their banking related operations. Managerial/Administrative

aspects of UCBs continue to remain with the state Governments. The Union Government

regulates the UCBs having multi-state presence and such banks are registered under Multi-state

Cooperative Societies Act. Controlling of UCBs by state Government and the Central Bank of

the country is generally known as .duality of control..

2. The discernible characteristic feature of UCB structure is its heterogeneity. Nearly 50 percent

of the banks are unitary in nature (with single branch banking). Heterogeneity in their size is

another facet of the UCB structure. The larger UCBs (scheduled UCBs) numbering just 51

accounts for more than 40 percent of the business from UCB sector as against 800 UCBs

accounting for just 6 percent.

3. UCB structure is exemplified by its pronounced focus on the needs of small men and micro

credit sector. The average size of the loan also works out to be relatively low and an

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overwhelming segment of UCBs have been able to comply with the priority sector lending

targets (directive from central bank to lend to certain sectors like small enterprises, trade &

business, housing etc) set by the central bank of the country.

4. Urban cooperative credit movement in general, and the number of UCBs in particular is

concentrated in few states. Five states account for 80 percent of the total UCBs in the country

and one of them accounts for as high as 32 percent of the total UCBs.

5. A noticeable feature of urban banking sector is its financial independence. Unlike the

agricultural cooperative credit structure, the urban cooperative banks are not surviving on

external assistance such as refinance support. In fact, UCBs have been supporting federal units

(District Central Cooperative Banks and State Cooperative Banks) by keeping their surplus

resources in the form of deposits.

Importance of UCBs:

In India, like many other countries in the world, cooperative movement started as a

means of ensuring that the poorly equipped citizens have similar advantages that better placed

persons were able to command. This was ensured by the pooling in of their individual resources.

The principle of mutual aid, which is the basis of cooperative organization, and the practice of

thrift and self-help which sustain it, generate a feeling of self-reliance and empowerment which

is of utmost importance in a democratic set up like us. We recognize and are aware of their

importance in the entire banking system in expanding the outreach of the system and increasing

access to credit. The types of reach cooperative banks have in our country and the type of

customized services they can offer at the local level, the potential is tremendous. But, the

question is have we achieved the true potential? The answer to the question in my opinion to a

certain extent is negative.

Co-operative banks in India have come a long way since the enactment of the

Agricultural Credit Co-operative Societies Act in 1904. The century old co-operative banking

structure is viewed as an important instrument of banking access to the rural masses and thus a

vehicle for democratization of the Indian financial system. Co-operative banks mobilize deposits

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and purvey agricultural and rural credit with a wider outreach. They have also been an important

instrument for various development schemes, particularly subsidy based programmes for the

poor.

Primary (urban) co-operative banks play an important role in meeting the growing credit

needs of urban and semi-urban areas. UCBs mobilize savings from the middle and lower income

groups and purvey credit to small borrowers, including weaker sections of the society. In view of

its importance, it is imperative that the sector emerges as a sound and healthy network of jointly

owned, democratically controlled and professionally managed institutions.

Difficulties faced by Co-operative Banks:

1) Slow progress:

The progress of co-operative banks is not up to the expectation and is slow when

comparing other type of banks because of many restrictions on their operations.2) Limited scope of investment:

The main objective of co-operative banks is to provide credit facilities to the poor people

i.e., to small and marginal farmers and other weaker sections. They were originally having

limited scope to invest their surplus funds freely.

3) Delay in decision making:

The co-operative banks directly or indirectly by various agencies i.e., NABARD, RBI.

Thus it takes long time to take decision on some important issues. This, in turn affects the

progress of co-operative banks.

4) Lack of training facilities:

Generally the staff of co-operative banks is urban oriented and they may not know the

problems and conditions of rural areas. Lack of training facility concerning these areas also

affects the growth of co-operative banks.

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5) Poor recovery rate:

The recovery performance of the co-operative banks is not up to the mark. the reason for

poor recovery of loans and mounting overdue are; inadequate supervision and follow up action to

assess the end use of credit by co-operative banks due to inadequate staff in banks, poor

identification of beneficiaries, inadequate generation of output and income by the beneficiaries,

poor marketing facilities.

6) Lack of local participation:

Rural co-operative banks have not received sufficient local participation. The cooperative

banks have been thrust upon the rural people from above without involving local people in its

operation and management. In this connection, it is suggested that knowledgeable persons in the

rural areas need be associated with the management of co-operative banks.

7) Lack of co-ordination:

There is lack of proper co-ordination between co-operative banks and other institutional

financing agencies like commercial banks and RRBs. Also, there is inadequate co-ordination

between co-operative banks and other developmental agencies operating in rural areas. This has

hampered the progress of co-operative banks.

8) Poor development of rural areas :

In spite of several efforts made during the course o development plans to promote the

development of rural areas, it has not taken place in a significant way. The areas, at present lack

economic infra- structures like; facilities of marketing storage and distribution of inputs. Besides,

social infrastructure like; schools, medical facilities. As a result, co-operative banks find it

extremely difficult to operate in such areas.

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Banking Sector Reforms and Urban Co-operative Bank:

The reform measures as applicable to UCB sector may be classified into three broad categories.

(I) While recognizing the differences between commercial and urban cooperative banks,

a majority of the prudential norms introduced for commercial banks are being

extended to UCBs, albeit in a phased manner.

(II) Policy initiatives have been introduced (through Monetary & Credit Policies) to

contain the systemic risk emanating from cooperative sector, in particular from UCB

sector.

(III) Lastly, duality/multiplicity of control has been recognized as an irritant to their

effective regulation and supervision. Although, the focal point of the reforms has

been prudential norms, steps are also being initiated to professionalize the

management and manpower of UCBs. The influence of the reforms on the

functioning as well as the cooperative character of UCBs is discussed below.

Prudential Standards:

(I) To begin with, in 1993, RBI introduced Income Recognition and Asset Classification

Norms to UCBs. In 1995, the prudential exposure norms to single/group borrowers were

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also made applicable to them. Subsequently, in a phased time frame, the capital adequacy

norms (capital to risk weighted asset ratio) were also made applicable to UCBs. To put it

differently, while there is no dispute that UCBs should be subjected to prudential

standards (capital adequacy, asset classification, income recognition and provisioning

norms), it is not yet clear, whether the prudential standards prescribed for commercial

banks would work without distorting the cooperative character of UCBs.

(II)Secondly, in order to ensure the adherence to the prudential standards by cooperative

credit societies/banks, the regulator.s frequency (as also scope) of intervention increases

thereby affecting the cooperative character. In this regard, in India regulator.s

intervention has indirectly infringed upon the functional autonomy covering areas like

share-linkage, credit, investment, deposit and so on.

(III) Thirdly, in the name of protecting the interests of the depositors (majority of whom are

not the members of cooperative banks), not only prudential standards are extended but

even the professional content in the management committee of the urban cooperative

credit societies/banks is also stipulated in India by the regulator/Government. While one

can not remain ignorant of the role of the Government in the promotion of and

development of cooperation in India, prescribing the number and qualification of the

nominee directors would no doubt impair the cooperative character.

(IV) Fourthly, the strict entry norms in terms of minimum capital, membership prescription

as it prevails in India, prevents the birth of new credit cooperatives and constrain the

existing societies in so far as the expansion is concerned.

(V)Fifthly, with the introduction of same prudential standards the difference between urban

credit cooperatives/banks and commercial banks get blurred and possibly, the former may

have to progressively imbibe the character of the latter.

In view of the above discussion, four major issues (or broad areas for investigation by

researchers/scholars interested in cooperative banking) are listed below which needs the

consideration of the cooperative thinkers.

a) How relevant are the prudential standards (norms are accepted and implemented by

most countries) to cooperative credit societies/banks?

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b) In countries where prudential standards have been extended to urban credit

societies/banks, whether desired result has been obtained? Could urban credit

societies/banks adhere fully to prudential practices?

c) What are the implications of extending prudential standards to urban credit

societies/banks on their cooperative character?

d) Is it possible to derive a set of prudential norms especially for urban credit cooperative

societies/banks from the Standards?

Professional Management and Governance:

Good corporate governance is critical to efficient functioning of an entity and more so for

a banking entity. Thus the need for professional management and healthy governance practices

in urban credit cooperative societies/banks in the present competitive environment needs no

emphasis. Thus, for managing a financial intermediary, whether a cooperative or a commercial

bank (irrespective of its size), the human resource comprising of paid staff and elected

management has to be highly competent. However, in India it is not uncommon that the

cooperative banks are superseded and Government officials are posted to head or nominated on

the board and unfortunately this trend is increasing in the post reform period. Quite often the

reason quoted is that there is lack of qualified and competent directors and the protection of

depositors. Interests (majority of them are not the members) in the case of urban cooperative

banks. While this is to some extent true, the solution to this problem certainly is not Government

intervention as it would seriously impair the cooperative character.

It is disheartening to note that the elected management of 41 % of State Cooperative

Banks, 37 % of State Cooperative Agricultural and Rural Development Banks, 21 % of the

District Central Cooperative Banks and 8% of Primary Cooperative Agricultural and Rural

Development Banks stood superseded as on March 2000. It is this management committee which

is entrusted with the responsibilities like risk management - policy/strategy, credit and NPA

management, investment management, marketing plan/strategy, Asset-Liability Management and

so on. It should also be noted that the very concept of banking (financial inter-mediation) is

undergoing change in the present competitive environment and the conventional framework for

management with which cooperative banks are comfortable may not be sufficient. Given this, it

is doubtful whether the elected management (as per the existing provisions of cooperative act

and principles the individuals without sufficient knowledge/experience in financial markets or

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management can be at the helm of affairs of a cooperative bank) would be able to take on the

emerging challenges. Perhaps, the need of the hour is to ensure that in cooperative organizations,

the system of governance including the size and composition of the board of directors is driven

by the purpose and objectives of the business. In this regard, the following issues/areas may be of

some interest to the cooperative researchers.

a) Is it possible to develop a framework of good governance for urban credit

cooperatives/banks within the guiding principles of cooperation?

b) How to ensure that the system of governance including the size and composition of the

board of directors are in consonance with the purpose and objectives of a cooperative

bank? What level of awareness and competencies are required for board of directors for

effective management of a cooperative bank and how to ensure the same within the

framework of cooperative principles?

Future set-up of weak Banks:

The sheer number of weak banks which is well over 200 is a cause of concern. In a large

number of cases licenses have already been cancelled and the banks have closed down. This

process is taken up very cautiously so as not to create panic in the society. Closure is decided

only after all other options are exhausted. Level of capital, history of losses and size of NPAs are

some of the factors which weigh with us in taking a decision on closure. Possibilities of

rehabilitation are invariably explored before such a decision is arrived at. Rehabilitation may

involve the following strategies:

(a) Registrars should direct the co-operative courts for speedy recovery process and

execution of decrees

(b) Unviable branches should either be relocated or closed down

(c) Avenues should be explored for the bank getting additional capital

(d) Merger with a well-managed bank. However, a forcible merger should be strictly

avoided.

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Improving Governance:

It is extremely important that there is a mechanism to ensure that an effective system of

internal governance is in place. Chief Executive should be a person of clean image and display a

professional attitude. Board should consist of knowledgeable persons who are aware of their

responsibilities as board members. There should be a board level committee which should focus

attention on the findings of audit and inspection teams and ensure compliance thereof. The

Committee should also ensure compliance with various regulatory instructions issued by RBI as

also state governments. It is ultimately the boards responsibility that all prudential norms of

governance are observed by the bank.

Supervision and Regulation:

At present in India, urban credit cooperatives/banks are subjected to duality of control,

meaning that the administration related aspects are being supervised and regulated by State

Government and the banking operations are supervised and regulated by the central bank of the

country. This has, understandably resulted in overlapping jurisdiction of the state Government

and the central bank of the country. Given the number of urban credit cooperatives/banks, the

central bank of the country is not in a position to effectively supervising them. Thus, the duality

of control not only affects the quality of supervision and regulations, but also the functioning of

the urban cooperative banking sector. Needless to mention, under this regime of duality of

control the urban cooperative banks may turn out to be neither cooperative nor commercial

banks. There are some areas of concern; some of them may be good for research as well.

a) What type and level of supervision and regulation is required for urban credit

cooperatives? Is it possible to draw an outline of the supervisory framework?

b) Is existing supervisor/regulator (central bank of the country) appropriate for regulating

and supervising the activities of urban credit cooperatives/banks?

c) Can we think of a separate agency (or even regulator) for urban credit cooperatives?

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Profile of UCB Sector:

Primary (Urban) Cooperative Banks (UCBs) are the offshoots of the cooperative

movement in India which gained momentum with the passage of the Cooperative Societies Act,

1904. The first urban cooperative society was registered in Canjeevaram town in the then Madras

province in October 1904. However, the urban cooperative credit movement did not pick up till

the Maclagan Committee (1912) recognized the importance of these institutions. The movement

got a fillip when the banking laws were made applicable to cooperative societies in 1966 in order

to protect the interests of the depositors and to provide insurance cover under the provisions of

the Deposit Insurance and credit Guarantee Corporation Act, 1961.

Profile of UCBs as on March 31, 2009:

(Table No. 1) (Amounts in Rs. Cr..)

Sr.

No. Particulars Scheduled

Non-

Scheduled All

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1 No. of UCBs 53 1668 1721

of which

i) Tier I NIL 1429 1429

of which

Unit Bank NIL 830 830

ii) Tier II 53 239 292

of which

Multi State 25 15 40

2 Assets 85,895 1,10,500 1,96,395

3 Deposits 67,929 90,804 158,733

4 Loans and Advances 42,234 55,684 97,918

5 Investment 29,210 34,961 64,171

6

Total no. of Deposits

Accounts 1,44,87,941 3,91,43,063 5,36,31,004

7

Total no. of Borrowal

Accounts 1,44,87,941 67,61,846 79,00,780

Mushrooming Growth:

In the year 1966, when the Banking Regulation Act,1949 was made applicable to UCBs,

there were about 1,100 UCBs with deposits and advances of Rs.167 Cr. and Rs.153 Cr.,

respectively. The UCBs continued to grow at a fast pace till 2003, when their number inCr..eased

to 1,941 and their deposits and advances in creased to Rs. 1, 01,546 Cr. and Rs. 64,880 Cr

respectively. The liberal licensing policy followed by the Reserve Bank pursuant to the

recommendations of the Marathe Committee (1992) led to the proliferation in the sector.

However, the ban on licensing of new UCBs since 2004 and encouragement to voluntary

amalgamation and consolidation in the sector has resulted in decline in the number of UCBs to1,721 in 2009 with total deposits of Rs. 1,58,733 Cr. and advances of Rs. 97,918 Cr. The growth

profile since the 1990s is given in Table 2 below.

Growth of UCBs:

(Table No.2) (Amounts in Cr. of rupees)

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Year

ended

March 31 No. of UCBs Deposits

Percent

Growth Advances

Percent

Growth

1991 1,307 10,157 8,003

1992 1,311 11,108 9.4 8,713 8.9

1993 1,306 13,531 21.8 10,132 16.31994 1,305 16,769 23.9 12,172 20.1

1995 1,300 20,101 19.9 14,795 21.5

1996 1,327 24,165 20.2 17,908 21.1

1997 1,355 30,714 27.1 21,550 20.3

1998 1,502 40,692 32.5 27,807 29

1999 1,590 52,681 29.5 34,214 23

2000 1,645 71,189 35.1 45,995 34.4

2001 1,618 80,840 13.6 54,389 18.2

2002 1,854 93,069 15.1 62,060 14.1

2003 1,941 1,01,546 9.1 64,880 4.52004 1,926 1,10,256 8.6 67,930 4.7

2005 1,872 1,05,021 -4.7 66,874 -1.6

2006 1,853 1,14,060 8.6 71,641 7.1

2007 1,813 1,21,391 6.4 79,733 11.3

2008 1,770 1,38,496 14.1 88,981 11.6

2009 1,721 1,58,733 14.6 97,918 10

Market share of UCBs in the banking sector:

As discussed above, UCBs are important purveyors of credit to socially underprivileged

and deprived sections of the urban and semi urban populace. The sector has over 79 lakh

borrowers and 5.36 Cr. depositors. The market share of UCBs is given in the Table 3 and 4

below. It may however, be observed from the tables that the market share of UCBs have come

down from peak of 6.6 % in end- March, 2000 to 3.7 % in end-March, 2008.

Market share of deposits of All Bank Groups to Total Deposits:

(Table No.3) (Market Share in Percentage)

Year ended

March 31 UCBs

Rural Co-op Bank

(DCCBs & SCBs)

Regional

Rural Banks

Commercial

Banks1996 4.5 7.2 2.5 85.8

1997 4.9 7.6 2.6 84.9

1998 5.3 7.7 2.8 84.2

1999 5.6 7.8 2.8 83.8

2000 6.6 7.7 2.8 82.9

2001 6.3 7.2 2.9 83.6

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2002 6.4 7.2 3 83.4

2003 6.3 7 3 83.7

2004 5.8 6.6 3.1 84.5

2005 5.3 6.3 3.1 85.3

2006 4.6 5.4 2.9 87.1

2007 4 4.7 2.7 88.6

2008 3.7 4.1 2.7 89.5

Deposits of the UCBs vis--vis other banking entities:

(Table No.4)

Particulars Deposits ( amount in Cr...) Share %

2006 2007 2008 2006 2007 2008

UCBs 1,14,060 1,21,391 1,38,496 4.6 4 3.7

SCBs 21,64,681 26,96,936 33,20,054 87.2 88.6 89.5

RRBs 71,329 83,144 99,095 2.9 2.7 2.7

DCCBs + SCBs 1,32,937 1,43,089 1,52,247 5.4 4.7 4.1

Total 24,83,007 30,44,560 37,09,892 100 100 100

Heterogeneity in UCB Sector:

UCBs are unique among banks in the sense that there is high degree of heterogeneity

among the banks in this sector in terms of size (deposits, assets and branches), geographical

distribution and financial health. Further, some UCBs have also been organized for specific

needs of certain communities, underprivileged class of society, Mahila banks, etc. As on March

31, 2009, while there were 1,721 UCBs in total, there were 1,668 non scheduled banks, 79 Salary

Earners' Banks, 108 Mahila banks and 6 SC/ST Banks.

Size of deposit, advance and asset:

Apart from a few large scheduled UCBs, most of the banks are of small and medium in

size as shown in the deposit, advances and asset-wise frequency distribution are as follows:

Deposit-wise Distribution of UCBs (End-March 2009):

(Table No.5)

Deposit Size No of

Banks

No.of Banks

(% to total)

Deposits

Rs in Cr.

Deposits

(% to

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total)

< Rs 10 Cr. 464 27 2,975 1.9

Rs. 10 Cr. & above but < Rs. 25 Cr. 452 26.3 7,621 4.8

Rs 25 Cr. & above but < Rs. 50 Cr. 317 18.3 11,757 7.4Rs 50 Cr. & above but < Rs.100 Cr. 196 11.4 15,069 9.5

Rs100 Cr. & above but < Rs. 250

Cr. 189 11 28,526 18

Rs 250 Cr. & above but < Rs. 500

Cr. 56 3.3 20,754 13.1

Rs 500 Cr.& above but < Rs1000

Cr. 27 1.6 18,749 11.8

Rs 1,000 Cr. & above 20 1.2 53,281 33.5

Total 1,721 100 1,58,733 100

Advance wise Distribution of UCBs (End-March 2009):

(Table No. 6)

Advance Size.

No of

Banks

No.of Banks

(% to total)

Advances

Rs in Cr.

Advances

(% to total)

< Rs 10 Cr. 710 41.3 3,831 3.9

Rs. 10 Cr. & above but < Rs. 25 Cr. 441 25.6 7,279 7.4

Rs 25 Cr. & above but < Rs. 50 Cr. 236 13.7 8,658 8.8

Rs 50 Cr. & above but < Rs.100 Cr. 154 8.9 11,634 11.9

Rs100 Cr. & above but < Rs. 250 Cr. 116 6.7 17,721 18.1

Rs 250 Cr. & above but < Rs. 500 Cr. 37 2.1 12,668 12.9

Rs 500 Cr. & above but < Rs1000 Cr. 16 0.9 11,093 11.3Rs 1,000 Cr. & above 11 0.6 25,033 25.6

Total 1721 100 97,918 100

Asset wise Distribution of UCBs (End-March 2009):

(Table No.7)

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Asset Size

Number

(Percent to Total)

Assets

(Percent to Total)

< Rs 15 Cr. 28.6 2.3

Rs. 15 Cr. & above but < Rs. 25 Cr 16.6 2.6

Rs 25 Cr. & above but < Rs. 50 Cr. 19.5 5.9

Rs 50 Cr. & above but < Rs.100 Cr. 14.2 8.3

Rs100 Cr. & above but < Rs. 250 Cr. 13.1 17.1

Rs 250 Cr. & above but < Rs. 500 Cr. 4.3 12.4

Rs 500 Cr. & above but < Rs1000 Cr. 2.3 13.5

Rs 1000 Cr.& above but < Rs. 2000 Cr 0.6 6.3

Rs 2,000 Cr. & above 0.9 31.7

Total 100 100

As may be seen from the table 5 above, 27.0 percent of UCBs had deposits less than

Rs.10 Cr. as at end March 2009. However, these banks accounted for only 1.9 percent of total

deposits at the end of March 2009. At the other end of the spectrum, there were 20 UCBs with

deposits of Rs.1000 Cr. and above accounting for 33.6 percent of deposits of the sector. Further,

83 UCBs (i.e. 4.9 percent of the total number) with deposits of Rs. 250 Cr. and above but less

than Rs 1000 Cr accounted for 24.9 percent of the total deposits. 64 UCBs (i.e., 3.6 percent of

the total number) having advance of Rs. 250 Cr. and above accounted for 50.8 percent of the

total advances (table 7). This reflects the skewed distribution of deposits and advances in the

sector. Similarly, the skewed distribution pattern is reflected in the asset wise distribution and38.0 percent of the assets is concentrated in only 1.5 percent of the UCBs having asset of Rs

1000 Cr. and above (Table 7).

Unit Banks:

Another unique but significant characteristics of the sector is the presence of large number of

unit banks, i.e., banks which function as head office-cum-branch. Of the 1721 UCBs at end-

March 2009, 830 were unit banks (55.5 percent Maharashtra (including Goa), Gujarat and

Karnataka had the highest number. (Table 8)

State wise Distribution of UCBs as on end-March 2009:

(Table No.8)

States Total No.of

Reporting

UCBs

Total No.of

Units UCBs

Total No. of

Branches

(Including

Total No.of

extension

Counters

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Head office

cum Branches)

Andhra Pradesh 114 82 234 7

Assam/ Manipur/ Tripura/Meghalaya/ Mizoram 17 13 28 1

Bihar/Jharkhand 5 4 6 1Chattisgarh 13 10 21 2

Gujarat 260 134 886 10

Jammu & Kashmir 4 1 16 4

Karnataka 273 146 828 9

Kerala 60 16 332 2

Maharashtra 583 219 4148 165

Madhya Pradesh 55 41 84 0

New Delhi 15 6 62

Orissa 13 1 50 4

Punjab/Haryana/HimachalPradesh 16 8 40 3

Rajasthan 39 19 149 3

Tamil Nadu/Puducherry 130 58 310 0

Uttarakhand 5 1 49 2

Uttar Pradesh 70 42 189 28

West Bengal/Sikkim 49 29 100 2

Total 1721 830 7532 244

Financial health of banks:

As part of on-site inspection, Reserve Bank has adopted a system of categorizing banks

into four grades (since April 2003) based on objective parameters relating to capital adequacy,

asset quality, earnings, compliance with CRR / SLR requirements and adherence to RBI

guidelines and / directives. While Grade I represents banks with no major supervisory concerns,

the other three grades would indicate supervisory concerns in varying degree. TheGrade-wise

and center -wise position is given below (table 9 and 10):

Grade wise Distribution of UCBs as on end-March 2009:

(Table No.9)

GradeNo .ofBanks

No. of Banks(Percent to Total)

Deposits(Percent to Total)

Advances(Percent to Total)

I 845 49.1 65.2 64.2

II 484 28.1 19.5 19.7

III 219 12.7 5.1 5.6

IV 173 10.1 10.3 10.5

Total 1721 100 100 100

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Centre & Number wise Distribution of UCBs in every Grade as on end March 2009:

(Table No.10)

Sr. No. Centre Gr. I Gr. II Gr. III Gr. IV Total UCBs.

1 Ahmedabad 116 100 16 28 206

2 Bangalore 128 82 47 16 2733 Bhopal 13 25 12 5 55

4 Bhubaneshwar 3 4 3 3 13

5 Chandigarh 10 2 1 3 16

6 Chennai 88 34 3 5 130

7 Dehradun 4 0 1 0 5

8 Guwahati 7 8 1 1 17

9 Hyderabad 75 25 6 8 114

10 Jaipur 25 11 1 2 39

11 Jammu 3 0 1 0 4

12 Kolkata 27 11 1 10 4913 Lucknow 46 10 9 5 70

14 Mumbai 202 100 64 54 420

15 Nagpur 55 40 39 29 163

16 New Delhi 11 2 1 1 15

17 Patna 5 0 0 0 5

18 Raipur 7 3 1 2 13

19 Thiruvananthapuram 20 27 12 1 60

Total 845 484 219 173 1721

It is observed from the above that at the end of March 2009, out of the 1721 UCBs, 845

banks (49.1percent) were classified under Grade-I and 484 banks (28.1 percent) were Grade-II,

while financials of 392 UCBs (22.8 percent) were not considered satisfactory and were

categorized under Grade III / IV.

CRAR Distribution:

Basel I norms have been made applicable to UCBs in so far as it relates to credit risk. As

per the existing norms, UCBs are required to maintain capital charge for credit risk based on

1988 capital accord and surrogate capital charge on market risk through an additional risk weight

of 2.5 percent. The CRAR (Capital to Risk Assets Ratio) position of banks is given in Table 11.

CRAR Wise Distribution of UCBs as at end March 2009:

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(Table No. 11)

Range of

CRAR

0% &

above but

< 3%

3% &

above but

< 6%

6% &

above but

< 9% >=9%

Grand

Total

Scheduled 9 1 1 42 53

Non-Scheduled 136 24 66 1442 1668

Total 145 25 67 1484 1721

( percent share) 8.4 1.5 3.9 86.2 100

It is observed that out of 1721 UCBs as of March 31, 2009, 237 (13.7 percent) UCBs

have CRAR lower than the prescribed CRAR of 9 percent. Out of these banks 145 (8.4 percent)

UCBs have CRAR less than 3 percent.

Diversity in spread:

Geographical spread of UCBs is also uneven. UCBs are concentrated in 5 states viz.,

Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu, which cumulatively account

for 79 percent of the total UCBs and 89 percent of deposits resources. Maharashtra alone

accounts for 33.9 of the total UCBs and 61.4 per cent of deposit of the sector (table 12).

Regional Spread of Urban Co-operative Banks (as of end March 2009):

(Table No.12)

Sr. No. State

No.of UCBs(Share in

total %)

Amount ofDeposits (Share in

Total %)

No. ofBranches(Share

in Total %)

1 Andhra Pradesh 6.6 2.3 3.1

2 Gujarat 15.1 16.1 11.5

3 Karnataka 15.9 6.5 10.8

4 Maharashtra 33.9 61.4 55.5

5 Tamil Nadu 7.5 2.3 4

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6 Others 21 11.4 15.1

Total 100 100 100

(Chart No.2)

Spread of UCBs

AP

Gujarat

Karnataka

Maharashtra

Tamil Nadu

Others

Interpretation:

As shown above the UCB sector is more popular in Maharastra. We need to

enhance and develop the UCB sector in Andhrapradesh.

(Chart No. 3)

Share in Deposits

AP

Gujarat

Karnataka

Maharashtra

Tamil Nadu

Others

Interpretation:

Maharastrian believe in C-UCB sector and Deposits in it and get the benefits of

facilities provided by the Bank. On the contrary Andhra Pradesh and Tamil Nadu are

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lacking because of many factors like facilities provided by the Bank, interference

regulatory bodies, uneducated people and etc.

Umbrella Organization

Umbrella Organization:

Increase in deposit and decrease in demand of loans have been the main problem of the

banking industry during the last few years. As a result, a reduction in the distribution of loans is

observed despite the best efforts of banks. Urban Cooperative Banks (UCBs) have been, mainly,

giving loans against gold jewellery, house construction, consumer goods and social rituals or

occasions. Now, the commercial banks are also distributing these types of loans aggressively.

Urban cooperative banks are less competent and unable to compete with the capability of

commercial banks in terms of their nationwide character, vast deposit base, marketing

competency and commercial vision. Urban cooperative banks are lagging behind in traditional

business even. Various new mechanism and deregulation of polices, especially deregulation of

interest rates, have posed new challenges to them. Urban cooperative banks are helpless in

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offering the fee based financial services. UCBs are not able to offer services like, collection of

outside Cheques, foreign currency exchange, etc. because of the national level mechanism, non

availability of proper resources and technology. Information technology revolution has greatly

facilitated providing services like, online trading, collection, remittances, payments and balance

verification, etc. Most of the UCBs are perceived to be weak in the perceptions of customers.

Many banks will become sick if due and timely attention is not paid. Thus, it is now the right

time in preparing the UCBs to be more innovative, resourceful and competent.

Day-to-day difficulties of UCBs are many and of varied nature. It will be much beneficial

for all concerned if an Umbrella organization is formed to look after the routine problems and

provide solutions. The proposed umbrella organization will be consisting of participatory UCBs

and will provide the necessary base to all member banks.

Concept Development:

The idea of networking of UCBs was initiated during an All India Convention of

SAHKAR BHARTI at Pune in the year 1998. Further in the general meeting of national

Federation of Urban Cooperative Banks (NAFCUB) at Delhi, the idea of networking was

presented in the forms of a model Coop Bank. The handouts of this model were circulated

among the participants who were representatives of various UCBs. The idea and the model

created a lot of enthusiasm and a thought provoking discussion took place. Also, during another

general meeting of NAFCUB in July 2008, questionnaires regarding Umbrella Concept for

UCBs were distributed by NAFCUB and the responses were received. The aforementioned

model Co-op Bank was again presented to NAFCUB. The same model was presented during

the Seminar on Policy Issues at CAB in January 2009.

Recently a Working Group, for the establishment process of Umbrella Organization for

Urban Cooperative Banks, has been constituted by the Reserve Bank of India (RBI) under the

chairmanship of the Executive Director, RBI. More than 70 key persons of various UCBs

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gathered during the one day seminar in March 2009 and embraced the idea of Umbrella

Organization. The model, described in this document has been sent to the chairperson of

Working Group of Umbrella Organization (constituted by RBI), NAFCUB, and TAFCUB of

Madhya Pradesh.

Objectives of UO:

To establish modern information technology like Core Banking Solution, itsrenewal/modernization and maintenance

To link UCBs with electronic clearing system;

To make banks competent to provide fee based services in order to increase their

incomes; to facilitate provision of facilities like, ATM, credit and debit cards, travelers

Cheques, demand drafts, Demat account, etc. and offering services like life and general

insurance, mutual funds, etc.

To advise the banks for making decisions in investment of surplus funds

To help banks in funding high cost projects and infrastructure

To provide guidance and training to banks to make more effective utilization of human

resources

To identify the weak and sick banks timely and to help them making strong and to

manage them.

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To propagate and project the UCBs at national level through various means;

To promote the establishment of new UCBs

Organization Structure:

The structure of the proposed Umbrella Organization of UCBs will be as under:

(Chart No.4)

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Features of UO:

Umbrella Organization will be the service provider.

UCBs may be shareholder/business partners by maintaining their respective autonomy.

Settlement of accounts (net Dr & Cr) of transaction between UCBs will be taken up by

the UO.

All UCBs shall keep sufficient funds with the UO for settlement.

UO will be responsible for information technology and software development, their

maintenance and necessary changes. The cost incurred may be shared with partner banks.

Relation between UO and UCBs will be that of service provider and service consumer or

business partnership or shareholder

Need for Umbrella Organization:

Urban Cooperative Banks in India cater to the financial needs of the middle and lower

middle class people in metropolitan, urban and semi-urban centers. They operate on a standalone

UCBMUMBAI

UCBBANGLORE

UCBCHENNAI

UCB

AGRA

UCB

DELHI

UCB

GWALIOR

UBRELLA

ORGANIZATION

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basis, unlike rural cooperatives in India, which have a three tier structure. These banks are large

in number, though of varied asset size, ranging from small to medium. Although they compete

with commercial banks, their share in total deposits is barely 4 percent. There is a significant part

of the UCB sector that lacks professionalism and is unable to keep pace with rapid advancements

in IT, modern banking systems and financial products. The sector also has significant number of

banks which are weak and need financial support. There have been occasions when, due to

contagion effect, banks have encountered liquidity problems. Being in the nature of cooperative

societies, the UCBs' ability to augment their capital is also restricted, thereby hindering their

growth.

The organizational structure of UCBs, their small size and limited area of operation add

to their vulnerability. Further, in the wake of advances in information and communication

technology, payment and settlement systems and services, they need to widen their range of

services to run on professional lines and match the services provided by commercial banks.

Internationally, cooperative banks, popularly called Credit Unions, operate in networks

and have an entity which provides a wide range of services to them, such as, fund management

services, lines of credit, asset management, payment and settlement system gateway, ATM

networks, credit card, investment, securitization, capital raising and other financial services.

These entities act as Umbrella Organizations and the networks provide cooperative solidarity.

International experience has shown that the presence of such an Umbrella Organization hascontributed towards the member Credit Unions being stable, sound and efficient entities.

The Working Group had a close look at the Umbrella Organizations of credit unions in

certain countries, such as, Australia, Belgium, Canada, Finland, France, Germany, Netherlands,

Poland and USA. These have been discussed in the preceding chapter of this report. In particular,

it was noteworthy that the presence of such organizations has induced a climate of self-regulation

and good corporate governance in the sector. This has resulted in greater comfort for regulatory

authorities in these countries. The Working Group is convinced that an Umbrella Organization

that provides a variety of professional services to UCBs helps them in augmenting their capital

and provides emergency liquidity support would be immensely helpful for the sector. This,

indeed, was also the unanimous view of all the representative bodies of UCBs across various

states as also cross-section of UCBs which were consulted by the Working Group.

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As on March-end 2009, there were 1,721 UCBs with an asset size of Rs 1,96,395 Crore.

If these banks initially contribute Rs 0.10 per every Rs 100 of assets, then Rs 196 Crore could be

raised by way of capital. However, since shareholding in the organization would be voluntary for

UCBs, their participation, according to the group, is expected to be 50-60 per cent in terms of

assets, though it could be much more in terms of actual number.

The paid-up capital could be called up/ subscribed in two or more installments. To begin

with, a one-time fee of Rs 1 lakh a member could also be collected and kept in the reserve fund.

The group felt that some kind of fiscal incentives by the Government to UCBs for their

contribution would help the organization mobilize the share capital.

Management:

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It goes without saying that an Umbrella Organization, such as the one under design

should be run on thoroughly professional lines and observe the best practices insofar as corporate

governance is concerned. The Working Group recommends that the Memorandum and Articles

of Association of the company (Umbrella Organization) should specifically provide for

appointment of independent directors. In order to achieve this objective, the fit and proper

criteria for the Board of Directors and Executive Board/CEO may be prescribed either in the

Memorandum and Articles of Association, or by the regulators.

The Working Group is the opinion that the CEO should be a professional of repute, with

deep knowledge and understanding of the UCB sector, combined with business acumen of a

finance company to inspire confidence in the Umbrella Organization. The Working Group leaves

it to the Reserve Bank for putting in place a suitable system, standards and stringent fit and

proper criteria to ensure that the position of CEO is held by a competent person. The Working

Group is also of the considered view that the Reserve Bank should nominate on the Board a

suitable officer, at least during the initial formative years of the Umbrella Organization,

Subsequently, the Reserve Bank may have an Observer on the Board. This would not only lend

the Umbrella Organization greater credibility, but its nominees guidance would also be useful in

adherence to best corporate governance practices, regulations and formulation of appropriate

business strategies and products.

The Working Group shall comprise:

a) Shri V.S Das, Executive Director, RBI , Chairman

b) Joint Secretary & CRCS, Ministry Agriculture, Govt. of India Member

c) CGM-in-charge , RBI, DBOD, CO Member

d) CGM-in-charge, RBI, UBD, CO Member

e) Legal Adviser-in-Charge, RBI, Legal Dept, CO Member

f) Representative , Govt. of Maharashtra Member

g) Representative , Govt. of Gujarat Member

h) Representative, NAFCUB, New Delhi Member

i) Representative, Maharashtra Urban Co-op Banks Federation. Member

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j) Representative, Gujarat Urban Co-op Banks Federation Member

k) General Manager, UBD, BPD, RBI , CO Member Secretary

Umbrella Organization at the National Level:

The Working Group carefully went into the important issue of whether in India we

should have an Umbrella Organization at the national level or whether each state should have its

own Umbrella Organization. While countries such as Canada and USA have provincial Umbrella

Organizations, Australia and European countries have preferred to consolidate and have national

level organizations.

UCBs in India are not evenly spread across the country. They have predominant presence

in five states, viz. Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu accounting

for about 89 percent of the total business of the sector. Further, UCBs in Maharashtra alone had

about 64 percent of the total business. In contrast, their presence was minimal in many states.

Considering the regional spread and market share of UCBs, the Working Group is of the opinion

that having multiple umbrella organizations for UCBs in India or state-wise umbrellas may be

neither feasible nor desirable. Therefore, the Working Group is of the view that there should be

one Umbrella Organization at the national level for the entire UCB sector.

Working Methodology:

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The working arrangement would be similar to that of Bombay Stock Exchange (BSE) of

National Stock Exchange (NSE).All the business partner UCBs will have link with the UO

through satellite and they will conduct mutual business. Customer of a bank will deal with the

customer of another bank through their respective bank. Each member bank will be allocated a

bank participant number and customers will be provided with the customers identification

number.

(Chart No.4)

Form of Organization of Umbrella Organization:

UMBRELLA

ORGANIZATION

UCB

RAJKOT

UCB

PUNE

UCB

DELHI

UCB

BHOPAL

CUSTOMERSCUSTOME

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Project Report on Umbrella Organisation--Dhara Shah

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