Rajesh Soni-Project Copy

8/3/2019 Rajesh Soni-Project Copy

http://slidepdf.com/reader/full/rajesh-soni-project-copy 1/64

PROJECT REPORT

ON

“An Analytical study of Capital augmentation of

cooperative bank with special reference to “The

Akola Urban Co-operative Bank Ltd, Akola”

COMPLETED FOR

“The Akola Urban Co-operative Bank Ltd, Akola”

SUBMITTED BY

Mr. Rajesh J. Soni

SUBMITTED TO

PUNE UNIVERSITY

IN PARTIAL FULFILLMENT OF MASTER DEGREE IN BUSINESS

ADMINISTRATION

2010-12

Jayawant Institute of Computer Applications

(JSPM’s), Pune

1



ACKNOWLEDGEMENT

At the outset, I would like to thank The Akola Urban Co-

operative Bank, Akola for giving me the approval to do this project in

the organization. I am grateful to

Board Secretary Akola for the moral support, encouragement and

generous assistance.

I thank my faculty guide MR.VIKAS BARBATE

. For coordinating project work and giving me the guidance. This

project would not have been possible without his help.

I also wish to recognize and thank DR. AJAY KUMAR

(Director) for inspiring me to make the best of the opportunity

provided. A heartfelt thanks to the many respondents surveyed whose

ideas, critical insights and suggestions have been invaluable in the

preparation of this report. Last but by no means the least I would like

to convey my special thanks to all the faculty members of ASM’s

Institute of Professional studies MBA for giving me the opportunity to

work on this project and for providing us the computer lab and library

facilities.

Mr. Rajesh . J. Soni

2



DECLARATION

I Mr. Rahesh .J . Soni , a student of Jayawant Institute of Computer Applications

(JSPM’s ) PUNE

hereby declare that the project report submitted by me is an original work

conducted by me for the partial fulfillment of the degree of Master of

Business Administration and the same has not been submitted by me for any

other examination of this university or any other university.

Mr. Rajesh . J. Soni

3



Chapter Index

Sr. No. Contents Pg. No.

1 Introduction 08-32

2 Company Profile 33-36

3 Scope and objectives 37-38

4 Research Methodology 39-40

5 Data Analysis 41-54

6 Observations and Findings 55

7 Recommendation and suggestion 56 - 58

8 Limitations 59- 60

9 Conclusion 61 - 62

10 Bibliography 63

4



EXECUTIVE SUMMARY

Urban co-operative bank are an important par of financial system in India.

It is therefore, necessary, that the UCB emerge as a sound an healthy network of jointly

owned, democratically controlled an ethically manage banking institution providing need

based banking system in India essentially in the middle and lower middle class an

marginalize section of society. If we observe we will see that urban co operative

witnessed a phenomenal growth an emerge as an important means of infrastructure

development. In such situation, nee for capital will arise which can be meet by

augmentation of capital. Capital augmentation can be defined as a system by which

various method or process has been adopted to raise the capital structure of the UCB by

various capital adequacy norms. The main purpose of capital augmentation is to increase

the financial viability of UCB by using various instrument of capital augmentation as

given in RBI circulars.

Capital augmentation:-

Capital augmentation is totally a new concept which guides UCB in

strengthening capital of Cubby following some norms of RBI. The concept is yet to be

implemented and the project covered an analysis of capital augmentation and tries to

explain it benefits obstacles in its implementation.

Location of project:-

The project has been complete entirely in the corporate office of Akola

Urban Co-operative Bank Ltd an it covered the study of its branches locate within the

city...

5



Duration of project:-

The project has been completed in 60 days and it is as per the rules of

Pune University.

1. In the first chapter name introduction we have explain about the cooperative

movement in India, structure of cooperative movement in India, establishment of

cooperative society act, importance of cooperative bank, its scope, need and

development of cooperative bank in India.

2. In the II chapter we have explain about the topic capital augmentation, its

concept, importance, objective, need etc. This chapter also covered various capital

adequacy norm of RBI, basal committee recommendation an instrument of capital

augmentation as the RBI norms.

3. Chapter III is Research Methodology it cover objective of research, need of

research, sources of data collection and type of research design. It is also

mentioned that why the topic of capital augmentation has been selected a structure

of project is being mention.

Objective of research methodology :-

• To analyze and understand the concept of capital augmentation.

• To find out the need a scope of capital augmentation.

• To search the various means of capital augmentation.

• Importance of UCB in financial reform.

• To look after the role played by cooperative bank can play in capital

augmentation.

6



Limitations:-

• Concept of augmentation is new so collection of data is complicate task.

• The concept is yet to be implemented so conclusion may vary.

• Time is not sufficient because topic need detail study.

• There is no general specification given on capital augmentation in any site or

book.

• Result will be approximate only.

In the IV chapter Profile of Akola Urban Co-operative Bank.

Establishment of Akola urban cooperative bank, their progress report an journey of Akola

urban is mention. A case has also been taken to give information about the Akola urban

bank.

In the V chapter data Analyses an interpretation data of different has been

compare which includes last 3 yrs comparisons an result thereof.

Conclusion:-

In the last chapter i.e. conclusion we have given conclusion of the whole

project along with the case study of Akola urban bank. It includes following points

1. Bank need to improve it NPA, s.

2. It needs to invest in equities or bonds.

3. Capital of bank needs good management.

4. Reserve surplus need to be use for building of capital

5. Management needs to be improved for expansion of AUB in metros.

7



Chapter-1.

INTRODUCTION

CAPITAL AUGMENTATION

MEANING:-

Capital augmentation is a division of two terms namely "capital" and

"augmentation". Capital means owned money invest for some purpose and "augment"

means to raise, to increase, to boost. So in general terms "Capital Augmentation is the

process to raise capital to the higher level so that needs for capital can be fulfilled.

Capital augmentation can be defined in other words as, "it is a instrument

by which various sources of capital increment can be used to improve the capital

structure. It is necessary in today as the requirement of funds from various sectors has

been increased and to cope up with such a situation, it is necessary to maintain adequate

capital to fulfill needs of various people. Especially in urban and primary co-operative

banks the demand for agricultural loans and various other loans for rural development has

been increased, so in such case the need for augmentation of capital arises. Capital

augmentation can be done by few ways such as issue of bonds, equities and other

commercial paper. But there are some guidelines given by "RBP regarding capital

augmentation to co-operative banks. That can be explaining in details in upcoming

chapters, but before that we should understand the aims and objectives of capital

augmentation in details.

IMPORTANCE:-

• Strengthen of financial position of urban co-operative banks in India.

• Improvement in the banking structure of urban and rural sectors.

•Development of infrastructure, small scale industrial development in rural sectors.

• Effective utilization of various instruments in raising the lending capacity of

urban co-operative banks, especially in rural development.

• Augmentation in the capital ratio of banks in rural region.

• To raise the funding ability of the banks for rural development.

8



• Create a reform in banking sector of rural region.

Instruments for Augmenting Capital Funds-UCBs:-

Following the announcement in the Annual Policy Statement for the year

2006-07, the Reserve Bank constituted a Working Group (Chairman: Shri N. S.

Vishwanathan) to examine the issues concerning raising of capital by UCBs and

identifying alternate instruments / avenues for augmenting their capital funds. The

Working Group had members drawn from the urban co-operative banking sector and

state governments. The Group submitted its report in November 2006.

2. The recommendations of the Working Group have been examined and it has been

decided that in order to facilitate raising of capital funds (Tier I and Tier II) by UCBs for

the purpose of compliance with the prescribed Capital Adequacy norms, they be

permitted to issue the following financial instruments:

A) Preference shares:-

Preference shares may be of the following types:

i) Perpetual Non-Cumulative preference shares (PNCPS)

ii) Perpetual Cumulative preference shares (PCPS)

iii) Redeemable Non-Cumulative preference shares (RNCPS)

iv) Redeemable Cumulative preference shares (RCPS)

The detailed guidelines are given in Annex L While Perpetual Non-CumulativePreference Shares (PNCPS) would be eligible to be treated as Tier I capital, Perpetual

Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares

(RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be eligible to be

treated as Tier II capital. UCBs, however, are not permitted to subscribe to the preference

shares of other UCBs.

B) Long Term Deposits:-

UCBs may be permitted to raise term deposits for a minimum period of

not less than 5 years, which will be eligible to be treated as Tier II capital. The detailed

guidelines are given.

9



3. Share Linkage Norms:-

As per the current regulatory prescriptions, borrowings from UCBs are

linked to shareholdings of the borrowing members. At present, the shareholding

requirement is 2.5% for secured borrowings and 5% for unsecured borrowings. Taking

into account the recommendation of the Working Group and the feedback received in this

regard, it has been decided that the extant share linking norm may be applicable for

member's shareholdings up to the limit of 5% of the total paid up share capital of the

bank Where a member is already holding 5% of the total paid up share capital of an UCB,

it would not be necessary for him to subscribe to any additional share capital on account

of the application of the extant share linking norms. In other words, a borrowing member

may be required to hold shares for an amount that may be computed as per the extant

share linking norms or for an amount that is 5% of the total paid up share capital of the

bank , whichever is lower.

4. Classification of Capital Funds:-

4.1 As per the extant instructions, capital funds are divided into Tier I

capital and Tier II capital. Elements of Tier II capital are reckoned as capital funds up to a

maximum of 100 per cent of Tier I capital (please refer to our circular

UBD.No.DS.PCB.DIR.2/13.05.00/2004-05 dated April 15, 2005). It has now been

decided that Tier II capital may further be divided into upper and lower tiers. Perpetual

Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares

(RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be treated as

upper Tier II capital. Long Term Deposits would be treated as lower Tier II capital.

PNCPS should not exceed 20 % of Tier I capital (excluding PNCPS). Long term deposit

should not exceed 50 % of Tier I capital and that total Tier II should not exceed Tier I

capital.

4.2 As stated above, elements of Tier II capital are reckoned as capital

funds up to a maximum of 100 per cent of Tier I capital. It has now been decided that the

above restriction may be kept in abeyance for five years, i.e., up to March 31, 2013 for

banks that are having CRAR less than the 9 % in order to give time to the banks to raise

Tier I capital. In other words, Tier II capital would be reckoned as capital funds for

10



capital adequacy purpose even if a bank does not have Tier I capital. However, during

this period, for the purpose of capital adequacy requirement, lower Tier II capital alone

would be restricted to 50 % of the prescribed CRAR and the progressive discount in

respect of Tier II capital would, be applicable.

UCBs may issue preference shares and Long Term Deposits subject to

compliance with their bye-laws/provisions of the Co-operative Societies Act under which

they are registered and with the approval of the concerned Registrar of Co-operative

Societies /Central Registrar of Co-operative Societies, wherever applicable and the

Reserve Bank of India. The Central/ State Governments are being requested separately to

make necessary amendments to Multi-State Cooperative Societies Act / Co-operative

Societies Acts /Rules, wherever necessary.

Guidelines to Primary (Urban) Cooperative Banks (UCBs) on issue of Preference

Shares :-

A, Perpetual Non-Cumulative Preference Shares (PNCPS) :-

UCBs may issue Perpetual Non-Cumulative Preference Shares (PNCPS)

with the prior permission of the respective Registrar/Central Register of Cooperative

Societies (RCS/CRCS) granted in consultation with the Reserve Bank. PNCPS should be

issued at par. The amounts raised through PNCPS which comply with the following

terms and conditions will be eligible to be treated as Tier I capital.

2. Terms of Issue

2.1 Limits:-

The outstanding amount of PNCPS would be eligible for inclusion in Tier

I capital and should not exceed 20 % of total Tier I capital excluding PNCPS at any point

of time. The above limit will be based on the amount of Tier I capital after deduction of

goodwill and other intangible assets but before the deduction of investments.

2.2 Amount: - The amount of PNCPS to be raised may be decided by the Board of

Directors of banks.

2.3 Maturity: - The PNCPS shall be perpetual.

2.4 Options:-

(i) PNCPS shall not be issued with a 'put option' or' step up option',

11



(ii) However, banks may issue PNCPS with a call option at a particular date subject

to following conditions:

(a) The call option on the instrument is permissible after the instrument has run for at

least ten years; and

(b) Call option shall be exercised only with the prior approval of Reserve Bank of

India (Urban Banks Department). While considering the proposals received from

banks for exercising the call option, the Reserve Bank would, among other things,

take into consideration the bank's CRAR position both at the time of exercise of

the call option and after exercise of the call option.

2.5 Classification in the Balance Sheet: - These instruments will be classified as

'capital' and shown separately in the Balance Sheet.

2.6 Dividend: - The rate of dividend payable to the investors will be a fixed rate or a

floating rate referenced to a market determined rupee interest benchmark rate.

2.7 Payment of Dividend:-

(a) The issuing bank shall pay dividend subject to availability of distributable surplus

out of current year's earnings, and if

(i) The bank's CRAR is above the minimum regulatory requirement prescribed by

the Reserve Bank;

(ii) The impact of such payment does not result in bank's capital to risk weighted

assets ratio (CRAR) falling below or remaining below the minimum regulatory

requirement prescribed by the Reserve Bank; and

(iii) While paying dividends, it may be ensured that the current year balance sheet

does not show any accumulated losses

(b) The dividend shall not be cumulative, i.e., dividend missed in a year will not be

paid in future years, even if adequate profit is available and the level of CRAR

conforms to the regulatory minimum.

(c) All instances of non-payment of dividend in consequence of conditions as at (a)

above should be reported by the issuing banks to the Chief General Managers-in-

Charge of Urban Banks Department, Central Office of the Reserve Bank of India,

Mumbai.

12



2.8 Seniority of claim: - The claims of the investors in PNCPS shall be senior to the

claims of investors in equity shares and subordinated to the claims of all other creditors

and the depositors.

2.9 Voting rights: - The investors in PNCPS will not be eligible for any voting rights.

2.10 Other conditions:-

(a) PNCPS should be fully paid-up, unsecured, and free of any restrictive clauses.

(b) The PNCPS may be rated at the discretion of the issuer.

(c) Banks should comply with the terms and conditions, if any, stipulated by other

regulatory authorities in regard to issue of the PNCPS, provided they do not result

in violation of any of the terms and conditions specified in these guidelines. Any

instance of conflict, shall be brought to the notice of the RBI for seeking

confirmation of the eligibility of the instrument for inclusion in Tier I capital.

3. Compliance with Reserve Requirements:-

(a) The funds collected for the issue and held by the bank pending finalization

of allotment of the Tier I preference shares will have to be taken into account for

the purpose of calculating reserve requirements.

(b) However, the total amount raised by the bank by issue of PNCPS shall not be

reckoned as liability for calculation of net demand and time liabilities for the

purpose of reserve requirements and, as such, will not attract CRR / SLR

requirements.

4. Reporting Requirements:-

Banks issuing PNCPS shall submit a report to the Chief General Manager-

in-charge, Urban Banks Department , Reserve Bank of India, Mumbai giving details of

the capital raised, including the terms and conditions of issue as specified above together

with a copy of the offer document soon after the issue is completed.

5. Investment by Commercial Banks in perpetual non-cumulative preference shares

issued by UCBs

(a) Commercial banks can invest in PNCPS issued by the UCBs within the 10 %

ceiling for unlisted securities or as prescribed by Department of Banking

Operations and Development (DBOD), Central Office, Reserve Bank of India,

provided they are rated.

13



(b) The investments in PNCPS issued by UCBs will attract such risk weight for

capital adequacy purposes, as may be prescribed by DBOD.

6. Investment in/grant of advances against Tier I preference shares UCBs

should not invest in PNCPS of other banks; nor they should grant advances

against the security of the PNCPS issued by them or other banks.

B. Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative

Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares

(RCPS)

1. Terms of Issue :-

UCBs may issue Perpetual Cumulative Preference Shares (PCPS) /

Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative

Preference Shares (RCPS) with the prior permission of the respective Registrar/Central

Register of Cooperative Societies (RCS/CRCS) granted in consultation with the Reserve

Bank. These three instruments will be collectively referred to as Tier II preference shares.

These Tier II preference shares should be issued at par. The amounts raised through the

Tier II preference shares, which comply with the following terms and conditions, will be

eligible to be treated as upper Tier II capital.

2.1 Characteristics of the instruments

The Tier II preference shares could be either perpetual (PCPS) or dated

(RNCPS and RCPS) instruments with a fixed maturity of minimum 15 years.

2.2 Limits

The outstanding amount of these instruments along with other components

of Tier II capital shall not exceed 100% of Tier I capital at any point of time. The above

limit will be based on the amount of Tier I capital after deduction of goodwill and other

intangible assets but before the deduction of investments.

2.3 Amount

The amount to be raised may be decided by the Board of Directors of

banks.

14



2.4 Options:-

(i) These instruments shall not be issued with a 'put option',

(ii) However, banks may issue the instruments with a call option at a particular date

subject to strict compliance with each of the following conditions:

(a) The call option on the instrument is permissible after the instrument has run for at

least ten years; and

(b) Call option shall be exercised only with the prior approval of Reserve Bank of

India (Urban Banks Department). While considering the proposals received from

banks for exercising the call option, the Reserve Bank would, among other things,



2.5. Step-up option:-

The issuing bank may have a step-up option, which may be exercised only

once during the whole life of the instrument, in conjunction with the call option, after the

lapse often years from the date of issue. The step-up shall not be more than 100 bps. The

limits on step-up apply to the all-in cost of the debt to the issuing banks.

2.6. Classification in the balance sheet: - These instruments will be classified as

'borrowings' and shown separately in the Balance sheet.

2.7 Coupon: - The coupon payable to the investors may be either at a fixed rate or at a

floating rate referenced to a market determined rupee interest benchmark rate.

2.8. Payment of coupon:-

2.8.1 The coupon will be payable only if

(a) The bank's CRAR is above the minimum regulatory requirement prescribed by

the Reserve Bank.

(b) The impact of such payment does not result in bank's CRAR falling below or

remaining below the minimum regulatory requirement prescribed by the Reserve

Bank.

(c) The bank does not have a net loss. For this purpose, the Net Loss is defined as

either

15



(i) The accumulated loss at the end of the previous financial year or

(ii) The loss incurred during the current financial year.

(d) In the case of PCPS and RCPS the unpaid coupon will be treated as a liability.

The interest amount due and remaining unpaid may be allowed to be paid in later

years subject to the bank complying with the above requirements.

(e) In the case of RNCPS, deferred coupon will not be paid in future years, even if

adequate profit is available and the level of CRAR conforms to the regulatory

minimum.

2.8.2. All instances of non-payment of interest should be notified by the

issuing banks to the Chief General Managers-in-Charge of Urban Banks Department,

Central Office of the Reserve Bank of India, Mumbai.

2.9. Redemption / repayment of redeemable preference shares included in Upper

Tier II

Redemption of these instruments at maturity shall be made only with the

prior approval of the Reserve Bank of India (Urban Banks Department) subject inter alia

to the following conditions:

(a) The bank's CRAR is above the minimum regulatory requirement prescribed by

the Reserve Bank.

(b) The impact of such payment does not result in bank's CRAR falling below or


Bank.

2.10. Seniority of claim:-

The claims of the investors in these instruments shall be senior to the

claims of investors in instruments eligible for inclusion in Tier I capital and subordinate

to the claims of all other creditors including those in lower Tier II and the depositors.

Amongst the investors of various instruments included in upper Tier II, the claims shall

info pari-passu with each other.

2 11 Voting rights: - The investors in Tier II preference shares shall not be eligible for

any voting rights.

2.12 Amortization for the purpose of computing CRAR:-

16



The Redeemable Preference Shares (both cumulative and non-cumulative)

shall be subjected to a progressive discount for capital adequacy purposes over the last

five years of their tenor, as they approach maturity as indicated in the table below for

being eligible for inclusion in Tier II capital.

2.13 Other conditions:-

(a) The Tier II preference shares should be fully paid-up, unsecured, and free of any

restrictive clauses.

(b) The Tier II preference shares may be rated at the discretion of the issuer.

(c) Banks should comply with the terms and conditions, if any, stipulated by other

regulatory authorities in regard to issue of the Tier II Preference Shares, provided

they do not result in violation of any of the terms and conditions specified in these

guidelines. Any instance of conflict shall be brought to the notice of the RBI for

seeking confirmation of the eligibility of the instrument for inclusion in Tier II

capital.

3. Compliance with Reserve Requirements

(a) The funds collected by the bank and held pending finalization of allotment of

these installments will have to be taken into account for the purpose of calculating

reserve requirements.

(b) The total amount raised by a bank through the issue of these instruments shall be

reckoned as liability for the calculation of net demand and time liabilities for the

purpose of reserve requirements and, as such, will attract CRR / SLR

requirements.


UCBs issuing these instruments shall submit a report to the Chief General

Manager-in-charge, Urban Banks Department, Reserve Bank of India, Mumbai giving

details of the debt raised, including the terms and conditions of issue specified above

together with a copy of the offer document soon after the issue is completed.

5. Commercial Bank's investment in Tier II preference shares issued by UCBs

17



(a) Commercial Banks may invest in Tier II preference shares issued by the UCBs

within the 10 % ceiling for unlisted securities or as prescribed by Department of

Banking Operations and Development (DBOD), Central Office, Reserve Bank of

India, provided they are rated

(b) Investments in Tier II preference shares will attract such risk weight for capital

adequacy purposes, as may be prescribed by DBOD.

Guidelines to Primary (Urban) Co-operative Banks (UCBs) on issuance of

Long Term Deposits

1. Term of Issue:-

UCBs may issue Long Term Deposits (LTD) with the prior permission of

the respective Registrar/Central Register of Cooperative Societies (RCS/CRCS) granted

in consultation with the Reserve Bank. LTDs may be issued to members and non-

members, including those outside the area of operations of the UCB concerned. The

amounts rose through LTD, which comply with the following terms and conditions will

be eligible to be treated as lower Tier II capital.

2.1 Maturity: - LTD should have a minimum maturity of not less than 5 years.

2.2 Limits: - The outstanding amount of LTD, which is eligible to be reckoned as Tier

II capital, will be limited to 50 percent of Tier I capital. The above limit will be based on

the amount of Tier I capital after deduction of goodwill and other intangible assets but

before the deduction of equity investments in subsidiaries, if any.

2.3 Amount: - The amount to be raised may be decided by the Board of Directors of

banks.

2.4 Seniority of Claims:-

LTD will be subordinated to the claims of depositors and other creditors

but would rank senior to the claims of shareholders, including holders of preference

shares (both Tier I & Tier II). Among investors of instruments included in lower Tier II,

the claims shall rank pan passu with each other.

18



Options:-

(a) LTD shall not be issued with a cput option’ or a 'step up’ option.

(b) The 'call option' will be permissible and may be exercised after 5 years with prior

permission of the Reserve Bank. While considering the proposals received from

banks for exercising the call option the Reserve Bank would, among other things,



2.6 Redemption/prepayment:-

Repayment of LTD at maturity shall be made only with the prior approval

of the Reserve Bank of India (Urban Banks Department, Central Office) subject inter alia

to the following conditions:

(i) The bank's CRAR is above the minimum regulatory requirement prescribed

by the Reserve Bank.

(ii) The impact of such repayment does not result in bank's CRAR falling below or


Bank.

2.7 Interest Rate: - LTD may bear a fixed rate of interest or a floating rate of interest

referenced to a market determined rupee interest benchmark rate.

2.8 DICGC Cover: - LTD will not be eligible for DICGC cover

2.9 Progressive Discount: - These deposits will be subjected to a progressive discount

for capital adequacy purposes as under:

Remaining period of Maturity Rate of Discount

Less than one year 100%

More than one year and Less than two years 80%

More than two years and less than three years 60%

More than three years and less than four years 40%

More than four years and less than five years. 20%

19



2.10 Classification in the Balance Sheet: - These instruments will be classified as

'borrowings' and shown separately in the Balance Sheet.

3. Reserve Requirement:-

Total amount raised by a bank through the issue of LTD will be reckoned

as a liability for the computation of net demand and time liabilities for the purpose of

reserve requirements (CRR and SLR).


Banks issuing such long term deposits shall submit a report to the Chief

General Manager-in-charge, Urban Banks Department, Reserve Bank of India, Mumbai

giving details of the deposit raised, including the terms of issue specified as above.

5 Investment in/grant of advances against LTD:-

UCBs should not invest in LTD of other UCBs; nor should they grant

advances against the security of LTD issued by them or by other banks.

Capital Adequacy Standards:-

1. General

The fundamental objective behind introducing Capital to Risk Weighted

Asset Ratio (CRAR) framework is to strengthen the soundness and stability of the rural

co-operative banks.

2. Definition of Capital Funds etc :-

The Capital Funds can be segregated into two broad groups/tiers - Tier I

and Tier II. While Tier I Capital, otherwise known as core capital, provides the most

permanent and readily available support to a bank against unexpected losses, the Tier 11

capital consists elements that are less readily available.

2.1. Tier I Capital/Core Capital :-

Tier I Capital would include the following items:

(a) Paid up share capital collected from regular members of a bank having voting

powers.

(b) Free Reserves

(c) Capital Reserve representing surplus arising out of sale proceeds of assets.

20



(d) Any surplus (net) in profit and loss account i.e. balance after appropriation

towards dividend payable, education fund, other funds whose utilisation is defined

and asset loss, if any, etc.

Note:-

Amount of intangible assets, losses in current year and those brought

forward from previous periods, deficit in NPA provisions, income wrongly recognized on

non performing assets, provision required for liability devolved on bank etc., will be

deducted from Tier I Capital.

2.2. Tier II Capital

2.2.1 Undisclosed Reserves:-

These often have characteristics similar to equity and disclosed reserves.

They have the capacity to absorb unexpected losses and can be included in capital, if they

represent accumulation of profits and not encumbered by any known liability and should

not be routinely used for absorbing normal loss or operating losses.

2.2.2. Revaluation Reserves:-

These reserves often serve as a cushion against unexpected losses, but they

are less permanent in nature and cannot be considered as 'Core Capital1. Revaluation

reserves arise from revaluation of assets that are undervalued on the bank's books. The

typical examples in this regard are bank premises and marketable securities. The extent to

which the revaluation reserves can be relied upon as a cushion for unexpected losses

depends mainly upon the level of certainty that can be placed on estimates of the market

values of the relevant assets, the subsequent deterioration in values under difficult market

conditions or in a forced sale, potential for actual liquidation of those values, tax

consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation

reserves at a discount of 55 percent when determining their value for inclusion in Tier II

capital i.e. only 45% of revaluation reserve is available for inclusion in Tier II capital.

Such reserves will have to be reflected on the face of the Balance Sheet as revaluation

reserves.

21



2.2.3. General Provisions and Loss Reserves:-

These will include such provisions of general nature appearing in the

books of the bank which are not attributed to any identified potential loss or a diminution

in value of an asset or a known liability. Adequate care must be taken to ensure that

sufficient provisions have been made to meet all known losses and foreseeable potential

losses before considering any amount of general provision as part of Tier II capital as

indicated above. To illustrate, excess provision in respect of Bad and Doubtful Debt,

general provision for Standard Assets etc. could be considered for inclusion under this

category. Such provisions which are considered for inclusion in Tier II capital will be

admitted up to 1.25% of total weighted risk assets.

2.2.4 Investment Fluctuation Reserve:-

Balance, if any, in Investment Fluctuation Reserve of bank.

Note: It may be noted that the total of Tier II elements will be limited to a maximum of

100 percent of total Tier I elements for the purpose of compliance with the norms.

3. Risk Adjusted Assets and Off-Balance Sheet Items:-

Risk adjusted assets would mean weighted aggregate of funded and non-

funded items. Degrees of credit risk expressed as percentage weightings have been

assigned to Balance Sheet assets and conversion factors to off-Balance Sheet items. The

value of each asset/item shall be multiplied by the relevant weights to produce risk-

adjusted values of assets and of off-Balance Sheet items.

CAPITAL ADEQUACY

l. Introduction:-

Capital acts as a buffer in times of crisis or poor performance by a bank.

Sufficiency of capital also instills depositors' confidence. As such, adequacy of capital is

22



one of the pre-conditions for licensing of a new bank as well as its continuance in

business.

2 Statutory Requirements:-

In terms of the provisions contained in Section 11 of Banking Regulation

Act (AACS), no co-operative bank shall commence or carry on banking business unless

the aggregate value of its paid up capital and reserves is not less than one lakh of rupees.

In addition, under Section 22 (3) (d) of the above Act, the Reserve Bank prescribes the

minimum entry point capital (entry point norms) from time to time, for setting-up of a

new Primary (Urban) Cooperative Bank.

3 Share linking to Borrowings:-

Traditionally, Primary (Urban) Cooperative Banks have been augmenting

their share capital by linking the same to the borrowings of the members. The Reserve

Bank has prescribed the following share linking norms:

(i) 5% of the borrowings, if the borrowings are on unsecured basis.

(ii) 2.5% of the borrowings, in case of secured borrowings.

(iii) In case of secured borrowings by SSIs, 2.5% of the borrowings, of which

1% is to be collected initially and the balance of 1.5% is to be collected in the

course of next 2 years.

The above share linking norm may be applicable for member's

shareholdings up to the limit of 5% of the total paid up share capital of the bank. Where a

member is already holding 5% of the total paid up share capital of an UCB, it would not

be necessary for him/her to subscribe to any additional share capital on account of the

application of extant share linking norms. In other words, a borrowing member may be

required to hold shares for an amount that may be computed as per the extant share

linking norms or for an amount that 5% of the total paid up share capital of the bank,

whichever is lower.

23



Capital Adequacy Norms:-

The traditional approach to sufficiency of capital does not capture the risk

elements in various types of assets in the balance sheet as well as in the off-balance sheet

business and compare the capital to the level of the assets. The Basel Committee on

Banking Supervision^ had published the first Basel Capital Accord (popularly called as

Basel I framework) in July, 1988 prescribing minimum capital adequacy requirements in

banks for maintaining the soundness and stability of the International Banking System

and to diminish existing source of competitive inequality among international banks. The

basic features of the Capital Accord of 1988 are as under:

(i) Minimum Capital Requirement of 8 % by end of 1992.

(ii) Tier approach to capital:

Core Capital: Equity, Disclosed Reserves

Supplementary Capital : General Loan Loss Reserves, Other Hidden

Reserves, Revaluation Reserves, Hybrid Capital Instruments and SubordinateDebts

50% of the capital to be reckoned as core capital.

(iii) Risk Weights for different categories of exposure of banks ranging from 0 % to

100 % depending upon the riskiness of the assets. While commercial loan assets had a

risk weight of 100%, inter-bank assets were assigned 20% risk weight; sovereign paper

carried 0 % risk weight

Further, vide 1996 amendment to the original Basel Accord, capital charge

was prescribed for market related exposures.

5 Capitals to Risk Asset Ratio (CRAR) for UCBs:

5.1 CRAR framework, as advocated by Basel Accord, has been adopted

by most of the regulatory authorities as the basis of measurement of capital adequacy,

which takes into account the element of risk associated with various types of assets

24



reflected in the balance sheet as well as in respect of off-balance sheet items and the level

of capital held by the banks. RBI introduced a minimum CRAR of 8% in 1992, for the

commercial banks based on the recommendations of the Committee on Financial Sector

Reforms (Narsimham Committee I), in a phased manner.

5.2) The Reserve Bank had constituted a High Power Committee on Urban

Cooperative Banks (Chairman: Shri K. Madhava Rao) in May 1999 to review their

performance and to suggest necessary measures to strengthen them. The committee felt

that the continued financial stability of UCBs could not be ensured unless they were

subjected to the CRAR discipline. The committee recommended that CRAR norms

should be implemented in respect of UCBs on account of the following reasons:

i) CRAR serves as a buffer, which can absorb the unforeseen losses a UCB may

incur in future;

ii) Primary Urban Cooperative Banking sector is an important segment of the

Financial system and exclusion of this segment from CRAR discipline would

undermine the stability of the whole system; and

iii) Primary Urban Cooperative Banks perform the same banking functions as

Commercial banks and are subject to similar risks. To exempt UCBs from the

CRAR discipline would, therefore, be untenable.

5.3 Pursuant to the recommendations of the High Power Committee

( Madhavrao Committee), UCBs were brought under the CRAR discipline with effect

from March 31, 2002, in a phased manner. Accordingly, UCBs were advised to adhere to

capital adequacy standards over a period of three years as indicated below:

25



Table: 1

Date Scheduled UCBs Non-Scheduled

UCBs.

31.03.02 8% 6%

31.03.03 9% 7%

31.03.04 As applicable to commercial banks i.e. 9% 9%

31.03.05 As applicable to commercial banks i.e., 9% As applicable to

commercial banks.

5.4 Essentially, under the capital adequacy framework, the balance sheet

assets, and off-balance sheet items have been assigned weights according to the

prescribed risk weights as indicated in Annex I. The value of each asset/item shall be

multiplied by the relevant weights to arrive at the risk-adjusted values of assets and of

off-balance sheet items. The aggregate will be taken into account for reckoning the

minimum capital ratio.

Primary Urban Cooperative Banks are required to maintain minimum

'Capital Funds' equivalent to the prescribed ratio on the aggregate of risk weighted assets

and other off-balance sheet exposures on an ongoing basis.

6 Capital Funds:-

6.1 It may be noted that 'Capital Funds' for the purpose of capital

adequacy standard consist of both Tier I and Tier II Capital as defined in the following

paragraphs.

6.2 Tier I capital:-

Tier I would include the following items:

26



(i) Paid-up share capital collected from regular members having voting rights

(ii) Contributions received from associate / nominal members where the bye-laws

permit allotment of shares to them and provided there are restrictions on

withdrawal of such shares, as applicable to regular members

(iii) Contribution / non-refundable admission fees collected from the nominal and

associate members which is held separately as 'reserves' under an appropriate

head since these are not refundable.

(iv) Perpetual Non-Cumulative Preference Shares (PNCPS).

(v) Free Reserves as per the audited accounts. Reserves, if any, created out of

revaluation of fixed assets or those created to meet outside liabilities should not

be included in the Tier I Capital. Free reserves shall exclude all reserves

provisions which are created to meet anticipated loan losses, losses on account of

fraud etc., depreciation in investments and other assets and other outside

Liabilities. For example, while the amounts held under the head "Building Fund"

will be eligible to be treated as part of free reserves; "Bad and Doubtful Reserves"

shall be excluded.

(vi) Capital Reserve representing surplus arising out of sale proceeds of assets.

(vii) Innovative Perpetual Debt Instruments*

(viii) Any surplus (net) in Profit and Loss Account i.e. Balance after

Appropriation towards dividend payable, education fund, other funds whose

Utilization is defined, asset loss, if any, etc.

Guidelines on issue of Innovative Perpetual Debt Instruments are furnished in

Annex of circular UCB. PCB. Cir.No. 39 / 09.16.900 / 2008-09 dated January 23,

2009.

NOTE:-

27



(I) Amount of intangible assets, losses in current year and those brought forward

from previous periods, deficit in NPA provisions, income wrongly recognized on

non performing assets , provision required for liability devolved on bank, etc. will

be deducted from Tier I Capital.

(ii) For a Fund to be included in the Tier I Capital, the Fund should satisfy two

criteria viz., the Fund should be created as an appropriation of net profit and

should be a free reserve and not a specific reserve. However, if the same has been

created not by appropriation of profit but by a charge on the profit then this Fund

is in effect a provision and hence will be eligible for being reckoned only as Tier

II capital as defined below and subject to a limit of 1.25% of risk weight assets

provided it is not attributed to any identified potential loss or diminution in value

of an asset or a known liability.

6.3 Tier II Capital: - Tier II capital would include the following items:

6.3.1 Undisclosed Reserves:-

These often have characteristics similar to equity and disclosed reserves.

They have the capacity to absorb unexpected losses and can be included in capital, if they

represent accumulation of profits and not encumbered by any known liability and should

not be routinely used for absorbing normal loss or operating losses.

6.3.2 Revaluation Reserves:-

28



These reserves often serve as a cushion against unexpected losses, but they

are less permanent in nature and cannot be considered as 'Core Capital1. Revaluation

reserves arise from revaluation of assets that are undervalued in the bank's books. The

typical example in this regard is bank premises and marketable securities. The extent to

which the revaluation reserves can be relied upon as a cushion for unexpected losses

depends mainly upon the level of certainty that can be placed on estimates of the market

value of the relevant assets, the subsequent deterioration in values under difficult market

conditions or in a forced sale, potential for actual liquidation of those values, tax

consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation

reserves at a discount of 55 % when determining their value for inclusion in Tier II

Capital i.e. only 45% of revaluation reserve should be taken for inclusion in Tier II

Capital. Such reserves will have to be reflected on the face of the balance sheet as

revaluation reserves.

6.3.3 General Provisions and Loss Reserves:-

These would include such provisions of general nature appearing in the

books of the bank which are not attributed to any identified potential loss or a diminution

in value of an asset or a known liability. Adequate care must be taken to ensure that

sufficient provisions have been made to meet all known losses and foreseeable potential

losses before considering any amount of general provision as part of Tier II capital as

indicated above. To illustrate : General provision for Standard Assets, excess provision

on sale of NPAs etc. could be considered for inclusion under this category. Such

provisions which are considered for inclusion in Tier II capital will be admitted upto

1.25% of total weighted risk assets.

6.3.4 Investment Fluctuation Reserve: - Balance, if any, in the Investment Fluctuation

Reserve Fund of the bank.

6.3.5 Hybrid Debt Capital Instruments:-

29



Under this category, there are a number of capital instruments, which

combine certain characteristics of equity and certain characteristics of debt. Each has a

particular feature which can be considered to affect its qualification as capital where

these instruments have close similarities to equity, in particular, when they are able to

support losses on an ongoing basis without triggering liquidation, they may be included

in Tier II capital. The instruments are as follows:

(i) Tier II Preference Shares

Primary (Urban) Cooperative Banks are permitted to issue

Perpetual Cumulative Preference Shares (PCPS), Redeemable Non Cumulative

Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS)

subject to extant instructions as per Annex III

(ii) Long Term Deposits (LTDs) would be treated as lower Tier II capital

6.3.6 Subordinated Debt:-

To be eligible for inclusion in Tier II capital, the instrument should be

fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive

clauses and should not be redeemable at the initiative of the holder or without the consent

of the bank's supervisory authorities. They often carry a fixed maturity and as they

approach maturity, they should be subjected to progressive discount for inclusion in Tier

II capital. Instruments with an initial maturity of less than 5 years or with a remaining

maturity of one year should not be included as part of Tier II capital. Subordinated debt

instruments will be limited to 50 percent of Tier I capital.

Other Conditions:-

(i) PNCPS should not exceed 20% of Tier I capital (excluding PNCPS).

(ii) Long Term Deposit being lower Tier II capital should not exceed 50% of Tier I

capital and that total Tier II should not exceed Tier I capital.

(iii) All the components of Tier II capital mentioned above except Long Term

Deposits are to be considered as upper Tier II capital.

(iv) It may be noted that the total of Tier II elements will be limited to a maximum of

100 percent of total Tier I elements for the purpose of compliance with the norms.

This restriction is kept in abeyance for five years i.e., up to

30



March 31, 2013 for banks that are having CRAR less than the prescribed

9% in order to give time to the banks to raise Tier I capital. In other words, Tier II capital

would be reckoned as capital funds for capital adequacy purpose even if a bank does not

have Tier I capital. However, during this period, for the purpose of capital adequacy

requirement, lower Tier II capital alone would be restricted to 50% of the prescribed

CRAR and the progressive discount in respect of Tier II capital would be applicable.

7. Capital for Market Risk:-

7.1 The Basel Committee on Banking Supervision (BCBS) had issued an

amendment to the Capital Accord inI996 to incorporate market risks. It contains

comprehensive guidelines to provide explicit capital charge for market risks. Market risk

is defined as the risk of losses in on-balance sheet and off-balance sheet positions arising

from movements in market prices. The market risk positions, which are subject to capital

charge are as under:

The risks pertaining to interest rate related instruments and equities in the trading

book; and

Foreign exchange risk (including open position in precious metals) throughout the

bank (both banking and trading books).

7.2 As an initial step towards prescribing capital requirement for market

risks, UCBs were advised to assign an additional risk weight of 2.5 per cent oninvestments. It may, however, be noted that the additional risk weights are clubbed with

the risk weight prescribed in the Annex and banks are not required to provide for the

same separately.

8. Measures to augment capital funds :-

8.1 All UCBs are required to Endeavour to strengthen their capital funds and achieve the

prescribed level of CRAR. They should review the existing level of capital funds vis-a-

vis the prescribed level and chalk out strategy to achieve the requisite ratio, where it is

not already attained.

8.2 Instruments for augmenting capital funds. Based on the recommendations of the

Working Group constituted to examine the issues concerning raising of capital by

Primary (Urban) Cooperative Banks, they have been permitted to issue the following

financial instruments:

31



(A) Preference Shares:-

Preference shares may be of the following types (i) Perpetual Non-

Cumulative preference shares (PNCPS) (ii) Perpetual Cumulative preference shares

(PCPS) (iii) Redeemable Non-Cumulative preference shares (RNCPS) (iv) Redeemable

Cumulative preference shares (RCPS)

The detailed guidelines are given in Annex-Ill. While Perpetual Non-

Cumulative Preference Shares (PNCPS) would be eligible to be treated as Tier I capital,

Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative

Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS)

would be eligible to be treated as Tier II capital. UCBs, however, are not permitted to

subscribe to the preference shares of other UCBs.

(B) Long Term Deposits:-

UCBs may be permitted to raise term deposits for a minimum period of

not less than 5 years, which will be eligible to be treated as Tier II capital. The detailed

guidelines are given in the Annex - IV.

Primary Urban Cooperative Banks may issue preference shares and Long

Term Deposits subject to compliance with their bye-laws / provisions of the Cooperative

Societies Act under which they are registered and with the approval of the concerned

Registrar of Co-operative Societies / Central Registrar of Cooperative Societies,

wherever applicable and the Reserve Bank of India. The Central / State Governments are

being requested separately to make necessary amendments to Multi-State Cooperative

Societies Act / Co-operative Societies Acts / Rules, wherever necessary.

9 Returns:-

Banks should furnish to the respective Regional Offices annual return

indicating (i) capital funds, (ii) conversion of off-balance sheet/non-funded exposures,

(iii) calculation of risk weighted assets, and (iv) calculation of capital funds and risk

assets ratio. The format of the return is given in the Annex II. The returns should be

signed two officials who are authorized to sign the statutory returns submitted to Reserve

Bank.

32



Chapter – 2

PROFILE OF AKOLA URBAN CO-OPERATIVE BANK LTD. AKOLA

A cooperative movement in the state of Maharashtra started with overall development

and progress of the people through cooperative. Maharashtra is a leading state in

cooperative sector in our country. There are various types of cooperative society and

cooperative bank in the state of which are making progress in respective area. Urban

cooperative bank are one of them which are contributing an important role in cooperative

movement of India.

Akola is one of the important districts in western Vidarbha region of Maharashtra.

It is the major center of banking transactions. There are many commercial, co-operative

& nationalized banks in Akola. Apart from these, there is 10 urban co operative as well as

credit society in Akola which meet the financial need of small borrowers. The

commercials banks mainly provides finance to the large & medium industries while co-

operative societies including co operatives banks provides finance to agriculture as well

as small businessman, professionals, traders & enterprises. The Akola Urban Co-

Operative Bank ltd. Akola is one of them.

The Akola Urban co-operative bank lid.(Multistate Scheduled Bank) is

pioneer Urban co-operative bank in Akola which operates through its 29 branches.

5.1) Development of Bank:-

The Akola urban co-operative bank ltd. Akola (Multistate Scheduled

Bank) was established on 28 sept. 1963 on the auspicious day of "Vijayadashmi". The

business of the bank was started in Ramnath Bhavan hired buliding in Kirana Bazaar

Akola. It is registered under Maharashtra state co-operative Act. 1961 on 19.04.1963.

The bank has attained important status in its field within short period of four decade. Till

the year 1990 the jurisdiction of this bank was only Akola district and eight branch were

working since 1986 -87. The bank has made progress with the help of new generation

during this year. In the globalization and liberalization and privatization and competitive

environment in the decade 1991 – 2000 and on words the bank open 21 new branches and

one extension counter in the state of Maharashtra . It got a status of Scheduled Bank on

22 may 1999. This shows the landmark achievement in the lifetime of the bank. THE

Akola urban cooperative bank limited is a multistate scheduled bank from 31.08.2000.

33



The jurisdiction of this bank has been extended through out Maharashtra state and all so

the Indore khandwa khargaon district of Madhya Pradesh.

A “shahakarenam jankalayanam “is a slogan of the bank. At

present our bank is working as an pioneer bank in vidharbha region, marathwada ,

khandesh and some western part of Maharashtra state .

The Akola Urban Co-Operative Bank Ltd is a multistate scheduled bank.

There are 29 branches of Akola Urban Co-Operative Bank are established id vidarbha &

Maharashtra regions. Mostly Vidharbha region covered by the branches of Akola Urban

Co-Operative Bank Ltd.

The head office of Akola Urban Co-Operative Bank is situated in Akola.

The branches of Akola Urban Co-Operative Bank are established in rural areas of

vidarbha region

5.2) Management & Administration of the Bank:

In the last 45 years bank had made progress under the leaderships of past

and present board of directors of the bank There are 20 members in the panel of the

'Board of Directors' according to bank's regulation. The board of directors plans various

schemes. Carryout various programmers for the overall development of the bank. All the

decisions are taken untidy in the board of directors meeting. They enjoy a 5 year duration

& twice the members from the board of directors panel were elected unopposed. They

enjoy very cordial relationship among them & always work unified way. They contribute

lot towards the all round progress of the bank. at the present Hon . Shri Atulbhai Ganatra

is Chairman. For administrative purpose & to control all the branches of the bank

the responsibility is given to Shri Omprakash Rathi. Is a Chief Executive Officer of the

bank

At present bank are having 29 branch networks, 1 extension counter.

65885 shareholders, 645 staff, and 3.66 lack accountholders as on 31.03.2009. The total

business of their bank has gone up to 2500 cores. The financial position of the bank is

very sound on achieving all the norms and parameters, the reserve bank of India has

awarded GRADE 1 status to bank

34



Bank has taken active part in social part by providing many use full social service ., as a

part of social awareness and responsibility and to educate bank has under taking various

programs , campaign etc. at the time of natural calamities such as flood , riot earth

quake , storms etc bank has help the affected and needed person financially and

manually bank solve acute drinking water problem by providing bore wells supplied

water through tanks etc. by providing financial as well as other human help to affected

and needy person of the area

In a span of 45 years bank provided dedicated services to the

customers. Accountholders. Well- wishers of the bank through its branch network.

35



THE AKOLA URBAN CO-OPERATIVE BANK LTD. AKOLA

(MULTISTATE SHEDULED BANK)

Balance Sheet (Consolidated)

As on 31 March 2007-10

Liability 2007-08 2008-09 2009-10

1) Authorized capital 40 lack 40 lack 70 lack

2) Paid-up capital 27.08 33.15 41.77

3) Reserves & funds 78.66 100.46 110.43

4) Deposits 1222.60 1412.36 1552.32

5) Borrowings 5.49 3.71 2.50

6) Other liability &

provisions

82.91 96.06 108.10

7) Profit & loss A/c 3.03 3.74 1.54

Total 1419.76 1649.48 1816.66

Assets 2007-08 2008-09 2009-10

1) Cash & Bank Balance 167.86 118.19 178.02

2) Investment 296.20 453.70 507.58

3) Advances 865.72 968.19 1002.60

4) Interest receivable 59.84 77.03 93.73

5) Fixed assets 14.74 22.16 22.70

6) Other assets 15.41 10.21 11.74

Total 1419.76 1649.48 1816.66

36



CHAPTER 3.

OBJECTIVES & SCOPE.

Objectives of capital augmentation:-1. Understand the need and concept of capital augmentation.

2. To know why augmentation is necessary in today's situation.

3. Increase the lending capacity of urban co-operative banks.

4. Improve the financial position of urban co-operative banks.

5. Strengthening the financial background of banks.

6. Maintain the position of urban co-operative banks in terms of lending, reserve etc.

7. Conceptualized the augmentation in terms of other benefits.

8. Increase the potential pool for working capital and its outsourcing as per the need

of the customer of Akola.

37



Scope of capital augmentation:-

The working area of the project is limited due to this the scope of The

project is short, some of them is as follows:-1. The growth of banking as an capital accumulation and augmentation institution is

needed to increase and extract the best possibility of profitability to our Bank.

2. The growth trend analysis of creating portfolios for diverting it for profitable

ventures is to enhance the credential of our banking institution.

3. Our work of study was confined to our Head Office of the Bank so field failure

feasibility report was not accessible to our team

4. The work is done on the data from 2006-07 to 2009-10, Time frame allocation

was limited , so all relevant data’s was not bought to our analysis preview..

5. The project is done on the basis of the balance sheet and profit and loss account of

the Bank.

6. Better the rate of capital augmentation better will be the profitability of our

banking institution as a group.

7. Reach and allocation of loans and schemes better than our competitors is the

motive of our study.

8. Local seasonality analysis is to be done to embark our priorities as per the local

festivity and harvesting pattern of Akola.

9. The bank will also be benefited from this project as it will make their fund

management system more effective.

38



CHAPTER-4.

RESEARCH METHODOLOGY

RESEARCH DESIGN:-

Data is collected from both sources i.e. primary and secondary sources.

Primary sources include bank publication, annual report, RBI circulars etc. Secondary

data includes websites of reserve bank of India, capital augmentation; management help

etc, which have, help us in collecting data and completion of project.

RESEARCH METHODOLOGY:-

Descriptive method of data collection and research has been used.

Primary as well as secondary data is being collected for project from the bank and

its description at its ledger

Primary data includes bank annual report, RBI circulars their publication updated

till recent dates etc.

Secondary data include RBI websites, capital augmentation websites, different

books and research reports were also consulted prior to our study and observation.

Tables and graphs are used to show comparison of total banking data augmented

and accumulated at Akola since last 3 years.

Assumptions has been made as concept is new and we are explaining its impact

after implementation

Data is in approximation only.

39



Research Method Used in the Report: Descriptive and analytical Method.

Reason for selecting this method: Descriptive design is used to get an accurate

description of a situation, it helps to minimize the bias and maximize the

reliability. Descriptive Research provides facts or details of a particular event or

situation. It gives a description of the state of affairs as it exists of a particular

situation. It includes surveys and fact-finding enquiries to study a particular

situation or event. The researcher has no control over the situation or event. He

can only report what has happened or what is happening. As opposed to

exploratory research, descriptive research should define questions, people

surveyed, and the method of analysis prior to beginning data collection. In other

words the who, what, where, when, why, and how aspects of the research should

be defined.

40



Chapter-5.

DATA ANALYSIS & INTERPRETATION

1) Sources of funds

1) Authorized Share Capital (Rs In Crores)

Year Authorized Capital Increase/Decrease % increase/Decrease2006-07 40 15 60

2007-08 40 0 0

2008-09 40 0 0

2009-10 70 30 75

Interpretation:-

The Share Capital of bank increased by 60% in the year 2006-07 as

compared to previous year i.e. It shows the high expansion of bank, but if we see at the

year 2007-08 there is no change in Authorized capital, it may because the paid up capital

41



not reached to the authorized capital. So there is no expansion in that year, it remains

same. Year 2008-09 shows some changes as compared to previous year. In 2009-10

authorized capital is increase by 75% compare to previous year 2008-2009

2) Paid –up Capital

(Rs. In cores)

Year Paid - Up Capital Increase/Decrease % increase/Decrease

2006-07 23.70 3.20 15.6

2007-08 27.08 3.38 14.26

2008-09 33.15 6.07 22.41

2009-10 41.77 8.62 26

s

Interpretation:-

In 2006-07the paid up capital is 15.6% and there is slight increase in paid

up capital but the percentage is decrease. This change may occur because of changes in

Authorized Capital. So it is assume that the bank is trying to keep more reserves for

42



future by paying less paid up capital. There is huge increment in 2008-09 in paid up

capital. In the year 2009-10 the paid up capital is increase as compare with previous year.

3) Reserves & Surplus :- (Rs. In cores)

Interpretation:-

As above, we can see that there is a constant increase in Reserves &

Surplus of bank each year. The bank is keeping more reserves for meeting the future

uncertainties. If we see in year 2007-08 there is a slight change in percentage as compare

43

Year Reserves

&

Surplus

Increase/Decr

ease

% increase/Decrease

2006-07 70.44 7.76 12.38

2007-08 78.01 8.22 11.66

2008-09 100.46 22.45 28.77

2009-10 110.43 9.97 9.92



to the previous year. On this ground the bank is performing effectively in managing the

surplus. Reserves and surplus are boosted up in year 2008-09 and the market demand is

increase reserve and surplus in 2009-10.

4) Deposits ( Rs. In cores)

44

Year Deposits Increase/Decrease %

increase/Decrease

2006-07 1046.69 110.27 11.77

2007-08 1222.6 175.91 16.8

2008-09 1412.36 189.76 15.52

2009-10 1552.32 139.96 9.9



Interpretation:-

The Deposit of bank is increased by 11.77% in the year 2006-07 as

compared to previous year & the expansion is continue for next year i.e. 2007-08 by

16.8%. so it shows that the bank increasing its deposits as well as customers by giving

good rate of return. It also shows the faith of customer on the bank. Deposits are

increased in 2008-09.In the year 2009-10 deposit of the bank is expansion compare to

previous year.

5) Borrowings:

(Rs. In cores)

Year Borrowings Increase/Decrease %

increase/Decrease

2006

-07

7.17 -0.07 -0.96

2007-08

5.49 -1.68 -0.96

2008 3.71 -1.78 -32.42

45



-09

2009

-10

2.5 -1.21 -32.61

Interpretation:-

In the above figure we can see that the Borrowings of the bank is

decreasing ever 7 year. It may because the bank has sufficient Reserves to meet itsdemand. But although the bank has less borrowings its rate of interest is increasing day

by day as per the market conditions. At this stage the bank is taking effective decisions.

Borrowings are taking the negative paths in the yaer 2008-09 and 2009-10.

6) Other Liability & Provisions: ( Rs . In cores)

Other

Liabilit

y &

Provisi

on

Increase/Decrea

se

%

increase/Decrea

se

2006-07 74.23 25.22 51.45

2007-08 82.9 8.67 11.67

2008-09 96.06 13.16 15.87

2009-10 108.1 12.04 12.53

46



Interpretation:-

The other liability of bank is increase by 51.45% in the year 2006-07 as

compared to previous year. This is caused because the bank has more outstanding

cheques, but if we see the year 2007-08 the percentage is increase only by 11.67%

compare to last

Year, it shows that the bank is able to clear the dues in time & carry fewer burdens. It

helps in gaining goodwill. In the year 2008-09 and 2009-10 is slidely increase

7) Net Profit: ( Rs . In cores)

Year Net Profit Increase/Decrease %

increase/Decrease

2006-07 2.46 -2.58 -51.19

2007-08 3.03 0.57 23.17

2008-09 3.74 0.71 23.43

2009-10 1.54 -2.2 -58.82

47



Interpretation:-

In the year 2006-07 the bank earned profit of Rs.2.46 core, but in the next

year the profit is increase by3.03crore.2007-08 and next year also increase the net profit

3.74crore.in2008-09.

2) Uses of Fund

1) Cash

& Bank Balances

Year Cash &

Balances

Increase/Decrease %

increase/Decrease

2006-07 117.2 33.3 39.69

48



2007-08 167.86 50.66 43.22

2008-09 118.19 -49.67 -29.59

2009-10 178.02 59.83 50.62

s (Assets) :-

Interpretation:-

In the above chart we can easily see that there is continuously increase in

cash in hand & bank balances of the bank between the year 2007 to 2008. This is happen

due to increase in deposit & paid up capital. The bank also has retained a significant

amount of profit. Year 2008-09 shows some Negative changes in cash balances.In year

2009-10 the cash and bank balance is increase by 50.62%

2) Investment:-

Year

Investment Increase/Decrease Increase/Decrease

%

49



2006-07 257.05 7.52 3.01

2007-08 269.2 39.15 15.23

2008-09 453.7 157.5 58.50

2009-10 507.58 53.88 11.87

Interpretation:-

In the initial years investment has shown a narrow growth but

in the yr 2007-08, it has shown a growth of 15% which shows that bank is

searching new areas which give more return on investment and thus

managing its investment in a better way.

There is massive augmentation in investment in year 2008-09 and 2009-

2010

50



3) Loans & Advances:-

Year Loans

Advances

Increase/Decrease %

increase/Decrease

2006

-07

769.03 97.71 14.55

2007

-08

865.72 96.69 12.57

2008

-09

968.19 102.47 11.83

2009-10

1002.6 34.41 3.55

Interpretation:-

Loans and advances showing a upward trend which means loans and advances are

growing continuously. It proves that customer reliance on banks is increasing and bank is

earning a fair amount of interest on their loans and advances and thus adding more to its

revenue. Year 2009-10

51



4) Interest Receivable

Interpretation:-

Interest receivables are increased by more than 30% in yr 2006-07 but in

very next year it has grown by 17% only. It shows that in the yr 2006-07 interest

receivables has fall by 40% which means the collection of bank fall in terms of interest as

well as lending also. Due to increment in interest receivable in 2009-10 bank is in good

position

52

Year Interest Receivable Increase/Decrease Increase/Decrease %

2006-07 51.09 13.54 36.05

2007-08 59.84 8.75 17.12

2008-09 77.03 17.19 28.72

2009-10 93.73 16.7 21.67



5) Fixed Assets:-

Year Authorized Capital Increase/Decrease % increase/Decrease

2006-07 19.96 1.17 6.22

2007-08 14.74 -5.22 -26.15

2008-09 10.21 -4.53 -30.73

2009-10 11.21 1.00 9.79

Interpretation

Fixed assets have shown a mixed growth from the graph. In the yr 2006-07 fixed asset

has increased by 6.22% but in the next yr it has fall by 26.15%. It means that in the yr

2006-07 bank has sell its fixed asset either in market or publicly. Year 2009-10 shows

changes in fixed asset of bank

53



6) Other Assets:-

Year Other

Assets

Increase/Decrease %

increase/Decrease

2006-07 10.57 -8.98 -45.93

2007-08 15.41 4.84 45.78

2008-09 10.21 -5.2 -33.74

2009-10 11.74 1.53 14.98

Interpretation:-

Other assets show negative trends in their operations. First it fall and then

grow at a slight rate. These is a area where bank need to analyze its situation and donecessary corrections. Other assets are in positive ways in 2007-08 and the next year

other asset is negative way 2008-2009. In year 2009-10 is increase in other asset as

compare with 2008-09.

54



7) Total Asset

Year Total

Assets

Increase/Decrease %

increase/Decrease

2006-07

1224.9 144.26 13.34

2007

-08

1419.7

6

194.86 15.9

2008

-09

1649.4

8

229.72 16.18

2009

-10

1816.6

6

167.18 10.13

Interpretation:-

The total assets of AUB has shown a growth of 16.18% in the last three

years which is a good sign for the growth of AUB and total assets will always a added

advantage to any bank. Assets increase will allow bank to expand its horizon of its

operations and will give benefit in future to AUB. There is huge increment in total asset

in the year 2009-10

55



CHAPTER 6.

OBSERVATION AND FINDINGS

1. THE Bank Follows very hard and rigid documentation process because of there is

problem for borrower to raise the fund..

2. Bank obtains full details of security through various reports like valuation report,

search report and documents like original title deeds in order to see if there is any legal

encumbrance and whether it is marketable or not to protect its own interest.

3. Bank has kept on an average of 15% margin while granting loans .Bank makes use of

Financial tools like ratio analysis and trend analysis to analyze the financial position and

arrive at the credit limit.

4. Bank takes monthly and yearly review of loan accounts to check irregularities.

56



Chapter 7.

RECOMMENDATION AND SUGGESTIONS

During past few years some important and beneficial changes have been

taken place in urban co-operative banking sector which has given quite new and

important outlook to urban banking sector. A beneficial climate has been created for the

urban cooperative banks as opportunities for diversification is provided to them. The co-

operative has been demanding central govt. to introduce democratic reforms in their

regulations and functioning. With the continuous efforts of the National Co-operative

Union the central govt. recently passed the Multistate Co-operative Society Act and also

formulated a National Co-operative Policy that provides greater autonomy to urban co-

operative banks.

The laws relating to urban co-operative bank are being modified to make it

stronger. RBI now contributes a lot for the healthy promotion of urban cooperative

movement through its several activities such as supervision, research, training facilities

etc. As a result now there are more co-operations among different continent of co-

operative structure. However there are some recommendations which can be explain as: -

All UCBs are required to endeavor to strengthen their capital funds and achievethe prescribed level of CRAR. They should review the existing level of capital

funds via-a-vis the prescribed level and chalk out strategy to achieve the requisite

ratio, where it is not already attained.

UCBs may be permitted to raise term deposits for a minimum period of not less

than 5 years, which will be eligible to be treated as Tier II capital. The detailed

guidelines are given in the Annex – IV

Primary Urban Cooperative Banks may issue preference shares and Long Term

Deposits subject to compliance with their bye-laws / provisions of the Co-

operative Societies Act under which they are registered and with the approval of

the concerned Registrar of Co-operative Societies / Central Registrar of Co-

57



operative Societies, wherever applicable and the Reserve Bank of India. The

Central / State Governments are being requested separately to make necessary

amendments to Multi-State Cooperative Societies Act / Co-operative Societies.

UCBs are permitted to determine their lending rates taking into account their cost

of funds, transaction costs etc with the approval of their Board. However, banks

are advised to ensure that the interest rates charged by them are transparent and

known to all customers. Banks are also required to publish the minimum and

maximum interest rates charged on advances and display the information in every

branch. Acts / Rules, wherever necessary.

Boards of banks are, therefore, advised to lay out appropriate internal principles

and procedures so that usurious interest, including processing and other charges,

are not levied by them on loans and advances. In laying down such principles and

procedures in respect of small value loans, particularly, personal loans and such

other loans of similar nature, banks may take into account

Keeping in view the importance of credit discipline for reduction in NPA levels at

the time of opening of current accounts banks should: insist on a declaration fromthe account holder to the effect that he is not enjoying any credit facility with any

other commercial bank or obtain a declaration giving particulars of credit

facilities enjoyed by him with any other commercial bank/s.

As certain whether he/she is a member of any other co-operative society /bank; if

so, the full details thereof such as name of the society / bank, number of shares

held, details of credit facilities, such as nature, quantum, outstanding, due datesetc should be obtained.

Restrictions on holding shares in other cooperative banks by RBI should be

removed.

58



SLR requirement for urban cooperative banks should bring down below 25%

which will facilitate UCB to use more funds for banking operations and creating

more capital.

A primary (urban) co-operative bank is need to be permitted to open and maintain

CSGL A/cs of other PCBs / other entities like charitable institutions, trusts etc

.

Primary (urban) co-operative banks should allow undertaking any purchase / sale

transactions with broking firms or other intermediaries on principal to principal

basis.

If primary (urban) co-operative banks have regularly received dividends from co-

operative institutions, then their shares should be valued at face value.

In a number of cases, the co-operative institutions in whose shares the

primary (urban) co-operative banks have made investments have either gone into

liquidation or have not declared dividend at all. In such cases, the banks should make full

provision in respect of their investments in shares of such cooperative institutions.

.

59



CHAPTER 8.

LIMITATIONS

LIMITATIONS

Topic is new so accurate results or an impact is not possible.

Data collection is complicated as no guidelines or rules are mentioned

regarding augmentation.

Time is not sufficient as topic is new and need detail study.

Applications are not possible because no proper format is given.

Instrument for augmentation and it's applied for calculation are not

mentioned

60



HYPOTHESIS:-

Capital augmentation is a new subject, which is unknown to many people. It is

applicable only to urban cooperative banks. Therefore, we have make a general analysisthat what will happen if the concept is implemented and its impact on banking operation.

General assumptions have been made on the basis of last three-year data

.Therefore, we concluded that capital augmentation is very essential and

needful in current situation. As demand for money in rural sector as well as in urban

sector is rising continuously, it is must for cooperative banks to raise their capital, fulfill

the demand of rural and other sector, and play a crucial role in development of ruraldevelopment. It is also well known that urban co-operative banks allot loans on low rate

of interest and give assistance in rural finance especially in agricultural loans. Therefore,

by increasing their capital they can make their position strong as compare to other

commercial banks and will play a crucial role in rural development of country as well asexpansion of cooperative banks beyond rural level and its growth in terms of profitability.

61



Chapter 9.

CONCLUSION

In a current scenario where the need for money in market has been rising

continuously, it is utmost important for urban co-operative banks to increase their capital

in order to compete with other commercial banks in terms of lending, deposits and other

banking services in order to fulfill customer needs and demands, thus enabling them to

get the required services as and when required by them.

The performance of Akola Urban Co-operative Bank Ltd; showed a

visible improvement in the period 2006-08. Deposit, Investment & Advances growth

were higher during these three years. As far as operations are concerned profit has been

declined in yr.2006-07 by 52% as compared to 2005-06 and the profit of 2007-08 has

shown a growth of mere 23% which is not considered as satisfactory at all looking at the

performance of other commercial banks. There are some major points which need to be

discussed which can be summarized as below: -

Capital adequacy norms and Basel committee recommendation will definitely

going to help urban bank in implementing capital augmentation norms.

Levy of income tax on cooperative banks including UCB by amending sec 80p of

income tax act can be bring down, which affect the growth of profit of urban

cooperative banks.

s

Management and Administration are trying hard to comply with RBI norms and

procedure.

62



The bank has shown growth in paid up capital and advances; augmentation of

capital will further help AUB to expand its horizon beyond rural level.

It will allow bank to increase the liquidity & thus enable them to do more lending

other than co-operative purpose.

The banking operation will be more complicated as they have to use various

means such as public issue, issue of equities and preferential shares etc.

Augmentation will be as per the norms of RBI which have its own drawbacks and

limitations.

NPA of AUB will need to bring down and maintain consistency. It can be said

that augmentation of capital will help UCB to expand its operations beyond rural

level, but it has its own complications which they need to cope up.

Capital augmentation whether raises the profit or not is different thing but it will

allow cooperative banks to operate at par with other commercial banks in the

country.

The paid up capital of AUB has been increased by 35% during these three year

period which shows that there is sufficient rise in capital but it is not utilized

properly for further generation of capital.

There is need to manage he capital which not only benefit the shareholders and

bank but also to creditors and customers.

Deposit has been reduced by more than 3% which is a big hurdle in augmentation

of capital. Management of bank need to take note of that and suggests proper

reforms, so that adequate liquidity will be available in bank.

Reserve surplus have shown a good growth that need to be utilized for further

increment in capital.

Borrowing has been reduced which is a good sign but it could be below than these

one.

Cash & Bank balance have risen by more than 70% which shows that bank has

enough liquidity which can be used for lending purpose leading in more growth in

revenue.

63



BIBLIOGRAPHY

Books:-

RBI policies and its fundamentals.

(Manoj Jain, Mr.Reddy)

Financial Management(Khan&Jain)

Fundamentals of capital augmentation.

(Himalaya publications)

Websites:-

www.rbi.org.in

www.capitalaugmentation.com

www.timesl 00.com

www. financemanaeement. Com.

Date post:	06-Apr-2018
Category:	Documents
Upload:	thorat82
View:	217 times
Download:	0 times

Rajesh Soni-Project Copy

Documents