The following points highlight the four institutions of co-operative banks in India. The institutions are: 1. Primary Agricultural Credit Societies (PACSs) 2. Central Co-Operative Banks (CCBs) 3. State Co-Operative Banks (SCBs) 4. Land Development Banks (LDBS).
Institution # 1. Primary Agricultural Credit Societies (PACSs):
Primary Agricultural Credit Societies, also known as Agricultural Cooperative Societies, are meant to develop the spirit of mutual help and cooperation among their members, besides meeting their credit and other needs.
The main features of PACSs are as under:
The main objectives of PACSs are:
(i) To provide short-term and medium-term credit;
(ii) To foster the habit of saving;
(iii) To distribute fertilisers and seeds;
(iv) To provide help in milk production, egg production, sugar production or any other product depending upon the resources of the area; and
(v) To distribute consumer goods to their members.
The membership of a PACS is confined to persons belonging to a village or a group of villages where every person is known to other person. Ten or more persons of a locality can form a PACS. Any person can become its member by purchasing a minimum number of shares. The liability of members is unlimited which means that each member is fully responsible for the loss in the event of failure of the society.
The management of PACSs is on democratic lines. Each member has the right to cast only one vote, irrespective of the number of shares held by him. All members form the General Body which, in turn, elects the Managing Committee annually. It consists of the President or Chairman, Secretary and members. Except the Secretary who is paid some remuneration, all others work in a honorary capacity.
The working funds of PACSs consist of share capital, membership fee, reserve fund (which is 25% of profits), deposits of members and non-members, and loan from the Central Cooperative Bank. They also accept grants, gifts and charities.
The PACSs grant short-term loans for meeting productive as well as unproductive needs of their member only. The medium-term loans are granted up to a certain limit and in special cases. Loans are given against personal security and security of land or crop. The rate of interest charged is lower than the rate in the organised money market. Loans are repayable in instalments.
In terms of membership, PACSs have spread widely in the country. There were 98,247 PACSs having about 10crore members as on 31 March, 2002. Their deposits increased from Rs.4 crores in 1950-51 to Rs.6,518 crores in 1998-99. Total loans issued in 1998-99 amounted to Rs16,081 crores as against Rs.24 crores in 1950-51. Total loans outstanding increased from Rs.6 crores in 1950-51 to Rs.34,522 crores in 2000-01.
The performance of PACSs in the issue of loans has no doubt been commendable, but they suffer from some serious weaknesses.
(1) They have failed to mobilise deposits.
(2) The recovery of loans advanced has been disappointing.
(3) Majority of them are non-viable, and the States of Maharashtra, Gujarat and J & K have not taken steps to re-organise them.
(4) PACSs take very long time in granting loans.
(5) The share capital of many PACSs is very small.
(6) There is lack of properly trained staff. Majority of them do not have full-time paid secretaries.
(7) PACSs have failed to meet the credit needs of small farmers and tenants.
(8) PACSs do not possess adequate finance.
Measures to Remove Weaknesses:
The Agricultural Credit Review Committee (ACRC) of the RBI in its Report (1989) made a number of recommendations to remove the weaknesses of PACSs, and to strengthen them so as to enable them to carry out their functions effectively. They are grouped as under:
The minimum criterion of viability of a PACS can be summed up as its ability to:
(i) Point a full-time paid secretary;
(ii) Set up a regular office in a building;
(iii) Contribute to statutory and other reserves on the scales considered necessary; and
(iv) Pay a reasonable dividend.
Non-viable PACSs should be re-organised as per the guidelines laid down by the RBI.
(2) Strengthening of Share Capital:
The share capital of PACSs in many cases needs strengthening. For this:
(a) The N AB ARD should provide the minimum essential requirement of share capital loan to State Governments in the light of the action programme irrespective of over-dues level,
(b) The ratio of share linking at the Central Cooperative Bank level for PACSs should be fixed at 5% so that they are able to retain with them a part of the share capital received from their members,
(c) The ratio of share linking in respect of cash credit to PACSs should be reduced from 2.5% to 1%.
(3) Deposit Mobilisation:
Deposit mobilisation is absolutely vital for the future growth and strength of PACSs. For this:
(i) The PACSs should preferably mobilise low cost deposits such as savings bank deposits,
(ii) They should maintain 15% of deposits with Central Cooperative Banks in a special account,
(iii) To provide insurance cover to the deposits of PACSs the State Cooperative Banks in coordination with their State Governments should formulate suitable schemes.
(4) Improving Lending Policies and Procedures for Crop Loans:
Crop loans are granted for a period not exceeding 12 months. The Committee has recommended that:
(a) The cash credit system should be introduced in areas where perennial irrigation is available and multiple cropping is practiced,
(b) The credit statements for fixing individual crop loans limits by PACSs should be prepared once in three years, instead of every year, except in cases where crop acreages are changed,
(c) In areas where fertiliser/pesticide use is well-established, the PACSs should not insist on disbursing the input part of the loan in kind,
(d) Where due to shortage of resources it becomes necessary to reduce the quantum of crop loans fixed, the larger farmers should be given less and smaller ones their full credit requirements.
To improve the quality of management of PACSs, a full-time trained secretary should be provided to every PACS. The Committee suggested a two-part salary structure for the secretary: one, a reasonable fixed salary in a scale of pay; and two, a variable payment based on increased performance, such as recovery, deposits, additional loan, business generated, and additional non-credit business undertaken. It should be in terms of additional remuneration by way of percentage of salary. Further, the Managing Committee of a PACS should be provided training through orientation and educational programmes.
(6) Office Premises and Godowns:
All PACSs should have proper office premises and godown space to conduct their activities as multipurpose societies.
(7) Loans for Non-productive Purposes:
PACSs should be allowed to give loans out of their resources for non-productive purposes such as consumption loans, up to certain prescribed limits, but against tangible security only. They may also be allowed to grant loans up to 20% of their deposits against the security of gold and silver ornaments at a rate of interest higher than that on crop loans. This will provide added viability to PACSs.
The audit of PACSs should be done free of cost or at a nominal fee only.
Institution # 2. Central Co-Operative Banks (CCBs):
The Central Cooperative Banks are federations of primary agricultural credit societies in a particular district. That is why they are also known as District Central Cooperative Banks (DCCBs). They are of two types: One, whose membership is confined to PACSs. This type is known as Banking Union and such banking unions exist in Kerala, Orissa, Punjab, Haryana and Rajasthan. Two, those having mixed membership, consisting of both PACSs and individuals. Such banks exist in the majority of States in India.
The CCBs perform the following functions:
(1) They give credit to PACSs without any security.
(2) They also give credit to individual customers on the security of gold, etc.
(3) They foster the habit of thrift and saving among their clients by accepting deposits and paying higher rate of interest than commercial banks.
(4) They also provide remittance facilities to their customers.
(5) They help in solving the problems of PACSs.
(6) They also control and supervise the working of PACSs especially where the recovery of loans is slow.
(7) They help in maintaining a balance among the PACSs under their jurisdiction by transferring funds from a surplus society to a deficit society.
(8) They help in the proper utilisation of the reserve fund of PACS lying with them.
The CCBs are managed by a Board of Directors who are elected on the principle of one member one vote. Its members vary between 10 and 20. The Board appoints trained staff like manager, accountant, etc. for proper functioning of the bank.
The working capital of CCBs consists of:
(i) The share capital which they get by selling their shares to individuals and PACSs under their jurisdiction;
(ii) Reserve fund of PACSs and owned funds;
(iii) Deposits of members and non-members;
(iv) Borrowings from the State Cooperative Bank, commercial banks, and the State Government; and
(v) Deposits of local bodies and even of educational institutions.
CCBs give loans to their PACSs to meet their financial needs. Short-term loans are provided far agricultural operations for a period not exceeding 12 months. The medium-term loans are given for the purchase of cattle, for installing pumps, and for the repair of wells or sinking of well for a period ranging from 1 to 5 years. Loans arc given to societies on their promissory notes.
The number of CCBs-decreased from 509 in 1950-51 to 343 in 2003 as a policy of amalgamation of having one CCB for every district. Deposits with them increased from Rs. 38 crores in 1950-51 to Rs. 72,983 crores in 2002-03, and loans advanced from Rs. 106 crores in 1950-51 to Rs. 50,482 crores in 2002-03.
The CCBs suffer from a number of weaknesses:
(i) There is lack of coordination between FACSs and CCBs.
(ii) There are political considerations in granting loans,
(iii) They lack efficient and sufficient staff to examine the credit-worthiness of PACSs.
(iv) They lack funds,
(v) There is undue delay in grant of loans,
(vi) They hesitate to grant medium-term loans because of the lack of proper planning,
(vii) They charge very high interest rates,
(viii) The majority of CCBs have low level of deposits and high level of over-dues which adversely affect their working. During 1998-99, the percentage of their over-dues to demand was 70%. Consequently, they are week
(ix) They are not allowed to lend to individuals and non-cooperative institutions with the result that they are not in a position to earn more by way of interest.
The various committees appointed by the Reserve Bank of India from time to time suggested measures to remove the drawbacks of CCBs and to improve their functioning.
Some of them are:
(1) They should make efforts to mobilise more deposits from individuals and non-cooperative institutions.
(2) They should open more branches in a district.
(3) They should provide more banking facilities to the people.
(4) As recommended by the Agricultural Credit Review Committee (1989), CCBs should be permitted to lend to non-members whether individuals or institutions, to the extent of not more than 20 per cent of their deposits.
(5) The programme of improving the working of weak CCBs was launched by the RBI in 1971. But it has not made any impact and the number of such banks has been on the increase. For this the ACRC recommended a multi-ignored attempt at providing finance adequately to eligible borrowers, intensive deposit mobilisation, recovery of over-dues and current dues, strengthening of PACSs etc.
Institution # 3. State Co-Operative Banks (SCBs):
The State Cooperative Banks are federations of District Central Cooperative Banks. They are Apex Banks in the three tier cooperative structure in India. Each State has one SCB.
The SCBs perform the following functions:
(1) They coordinate the activities of PACSs and CCBs in the State.
(2) They arrange funds for the entire credit structure of the State.
(3) They control the activities of the CCBs.
(4) They act as an important link between the Indian money market and the cooperative sector.
(5) They help in maintaining a balance among the CCBs by transferring funds from surplus CCBs to deficit CCBs within a State.
(6) In case there is no CCB in a district, it provides credit facilities direct to PACSs in that district.
(7) It also functions as a commercial bank.
A SCB is managed by a General Body which holds its meeting once a year. It is formed by. the representatives of PACs, CCBs and individuals. But it is governed by a Board of Directors whose number varies between 10 and 30 which also appoints the staff.
The working capital of a SCB consists of:
(i) The share capital which it gets by selling its share to PACSs, CCBs, and individuals;
(ii) Reserve fund which comprises 25% of its profits;
(iii) Deposits from members and non-members; and
(iv) Borrowings from the Reserve Bank of India, State Government, commercial banks and inter-bank borrowings.
SCBs lend to CCBs for short-term to meet the needs of PACSs. They do not lend direct to PACSs except in those cases where there is no CCB in a district. Loans are given on the basis of promissory note. The number of SCBs increased from 16 in 1950-51 to 29 in 2002-03 with total deposits rising from Rs.21 crores to Rs. 37,439 crores over the period. Total loans advanced by them increased from Rs.55 crores in 1950- 51 to Rs.38,318 crores in 2002-03 and loans outstanding were 34,864 crores.
There are a number of drawbacks in the working of SCBs, which are:
(i) They lack sufficient funds to meet the needs of the farm sector,
(ii) They are more involved in commercial banking operations,
(iii) There is no proper planning in granting loans to farmers through the DCCBs.
(iv) They do not have adequate and trained staff to supervise and help in the efficient working of CCBs.
(v) They are influenced by political considerations in sanctioning loans than by the genuine needs of agriculturists,
(vi) They have failed to recover over-dues.
(vi) The Board of Directors is not properly managed, and its members are not experienced.
The All India Rural Credit Survey Committee and the Agricultural Credit Review Committee made a number of suggestions to improve the working of banks.
Some of them are:
(1) The membership of SCBs should be restricted only to PACSs and DCCBs.
(2) They should try to increase their share capital, mobilise more deposits from the urban sector, and keep the reserve funds of PACSs and DCCBs with them in order to have larger funds as working capital.
(3) They should meet the farm needs of agriculturists rather than function as commercial banks.
(4) Not more than 33 per cent of the members should be nominated by the State Government on the Board of Directors and one of them must be the Registrar of Cooperative Societies,
(5) Each SCB should set up a technical cell with trained staff to formulate schemes for financing and helping DCCBs in credit planning and project formulation. Besides, expertise should be developed at the SCBs’ level to advise DCCBs on better financial management and investment/portfolio management.
(6) For an efficient working of SCBs, the staff should be recruited in the same manner as is being done in the case of Regional Rural Banks and commercial banks through Banking Commission of the respective-region.
(7) The Government of India along with the State Governments should chalk out a concrete long-term policy to recover over-dues and take firm steps in respect of willful defaulters.
(8) The politicization of agricultural credit system should be stopped, loan ‘melas’ should be discouraged, and loans should be given to needy farmers.
Institution # 4. Land Development Banks (LDBS):
The Land Development Banks, which were earlier known as Land Mortgage Banks are meant to meet the long-term credit needs of agriculturists. Their structure is not uniform in the country. It is unitary in some States, while in some others it is federal, and in Himachal Pradesh and West Bengal, it is both unitary and federal.
Under the federal structure, there is the Central Land Development Bank at the State level, and the Primary Land Development Banks (PLDBs) at the district level. The Central Land Development Bank lends to agriculturists through the PLDBs. They are now known as State Cooperative Agriculture and Rural Development Banks (SCARDBs).
The LDBs provide long-term loans to agriculturists for a period ranging from 5 to 25 years, for the following purposes:
(i) To make improvements on the land;
(ii) To repay old debts;
(iii) To free the mortgaged land; and
(iv) To buy new land.
In recent years, they have also started lending for non-agricultural purposes such as, to the rural cottage industries and small enterprises in rural areas.
The LDBs are registered under the Cooperative Societies Act. A Land Development Bank is managed by a Board of Directors consisting of 15 to 20 members duly elected by the members of PLDBs, and nominated members by the State Government, and the Registrar of Cooperative Societies.
The financial resources of LDBs consist of:
(i) The share capital contributed by borrowing and non-borrowing members;
(ii) Deposits from the public; and
(iii) By issuing debentures.
Debentures are of three types:
First, ordinary debentures purchased by institutions and individuals.
Second, rural debentures issued to farmers at the time of harvesting for 7 years and 15 years.
Third, special development debentures issued for land development or improvement which are purchased by NABARD, the concerned State Government and the Central Government.
The LDBs give loans to their members on the security of their lands which are generally limited to 50% of the value of land mortgaged. Loans are given for a maximum period of 25 years. They are meant to meet the long-term needs of the agriculturists such as land development, land reclamation, buying new land, for minor irrigation works like buying pump sets, digging wells and tube-wells or tanks, for related agricultural activities like dairy, poultry farming bee-keeping, sericulture, biogas, etc. LDBs also give credit to non-agriculturists such as village, household and handicraft industries in rural areas.
The number of LDBs increased from 6 in 1950-51 to 20 in 2002-03. Loans advanced increased from Rs 2.5 crores in 1950-51 to Rs.2,631 crores in 2002-03. Their loans outstanding rose from Rs.8 crores to Rs. 13,870 crores.
The LDBs have been facing a number of problems which hinder their proper functioning. Some of their problems are:
The LDBs have not been able to recover past loans with the result that their over-dues have been rising which affect their smooth working. During 2000-01 the percentage of their over-dues was 58 per cent of the demand.
(2) Restricted Lending Eligibility:
Due to the lack of working capital, the lending eligibility of PLDBs and of the branches of LDBs have restricted lending eligibility. There are hardly one-third of them which have unrestricted lending eligibility.
Due to the restricted lending eligibility, 30% of the total PLDBs and the branches of LDBs are not viable.
(4) Falling Profits:
Due to their non-viability, there is deterioration in their profitability.
People are reluctant to buy their debentures and the cost of raising even ordinary debentures is very high.
There is delay in the grant of loans.
(7) High Margin:
The LDBs keep a high margin of 50% of the value of land mortgaged for the grant of loans.
(8) Discharge of Past Debts:
More loans are granted to repay past debts and less for productive purposes.
(9) Benefits to Rich Farmers:
Rich farmers are able to get more benefits as they have more land than the other farmers having less land.
There is much external interference and government intervention in the management of LDBs.
(11) Inefficient Working:
The LDBs are not working properly due to lack of adequate and trained staff. There is no definite policy in regard to recruitment, appointment, promotion and training of staff. The Chief Executives are either IAS or PCS officers or from the cooperative departments.
The various committees appointed by the Reserve Bank of India have made a number of suggestions to remove the defects and improve the working of LDBs in the country.
Some of the suggestions made by the Agricultural Credit Review Committee (1989) are:
(1) Effective steps should be taken by the LDBs to recover over-dues in order to make then viable.
(2) For LDBs to work as viable units, every effort should be made to increase their volume of business with such diversification of activities as may be feasible.
(3) The LDBs should adopt viability criterion in place of eligibility criteria in order to obtain adequate funds from the NABARD.
(4) The NABARD should provide adequate interim finance for issue of loans before debentures are floated at concessional rates.
(5) The State Governments and institutions should support the programme of issuing of ordinary debentures. So far as the flotation of special development debentures is concerned, the NABARD should provide refinance by way of term loans instead of by contribution to special development debentures.
(6) Politicisation of loans should be stopped and loans should be primarily given for productive purposes.
(7) LDBs should have a definite policy for recruitment, appointment, career planning and development of the staff. They should have their own staff and taking of government staff on deputation should be resorted to only in exceptional cases. There should be no government interference in the management of LDBs.
(8) Loans should be granted without unnecessary delay.
(9) The keeping of high margins for the grant of loans should be relaxed for the benefit of farmers.