WHAT ARE BASEL NORMS?

Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations. Every two months BIS hosts a meeting of the governor and senior officials of central banks of member countries. Currently there are 27 member nations in the committee. Basel guidelines refer to broad supervisory standards formulated by this group of central banks - called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord. The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking system. In fact, on a few parameters the RBI has prescribed stringent norms as compared to the norms prescribed by BCBS.

BASEL I

In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks. The minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means assets with different risk profiles. For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999.

BASEL II
In June 04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord. The guidelines were based on three parameters, which the committee calls it as pillars. - Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets - Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks - Market Discipline: This need increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.

BASEL III

In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008. A need was felt to further strengthen the system as banks in the developed economies were undercapitalized, over-leveraged and had a greater reliance on short-term funding. Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. Basel III norms aim at making most banking activities

such as their trading book activities more capital-intensive. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

What is Basel iii or what is Basel 3 Accord or Meaning and Definition of Basel III Accord:Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords. These accords deal with risk management aspects for the banking sector. In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and marketliquidity risk. (Basel I and Basel II are the earlier versions of the same, and were less stringent) What does Basel III is all About? According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector". Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II. This latest Accord now seeks to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency. What are the objectives / aims of the Basel III measures ? Basel 3 measures aim to: improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source improve risk management and governance

Strengthen banks' transparency and disclosures. Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks : The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for GOI. It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital in next nine years or so i.e. by 2020. Expansion of capital to this extent will affect the returns on the equity of these banks specially public sector banks. However, only consolation for Indian banks is the fact that historically they have maintained their core and overall capital well in excess of the regulatory minimum. What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel iii Accord ? Basel III: Three Pillars Still Standing : Anyone who has ever heard about Basel I and II, is most likely must have heard about Three Pillars of Basel. Three Pillar of Basel still stand under Basel 3. Basel III has essentially been designed to address the weaknesses that become too obvious during the 2008 financial crisis world faced. The intent of the Basel Committee seems to prepare the banking industry for any future economic downturns.. The framework enhances bank-specific measures and includes macro-prudentialregulations to help create a more stable banking sector. The basic structure of Basel III remains unchanged with three mutually reinforcing pillars. Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas. Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face. Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks

What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and Basel II? What are the Major Features of Basel III ? (a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of much stricter definition of capital. Better quality capital means the higher loss-absorbing capacity. This in turn will mean that banks will be stronger, allowing them to better withstand periods of stress.

(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks will be required to hold a capital conservation buffer of 2.5%. The aim of asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress. (c) Countercyclical Buffer: This is also one of the key elements of Basel III. The countercyclical buffer has been introducted with the objective to increase capital requirements in good times and decrease the same in bad times. The buffer will slow banking activity when it overheats and will encourage lending when times are tough i.e. in bad times. The buffer will range from 0% to 2.5%, consisting of common equity or other fully loss-absorbing capital. (d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum requirement for common equity, the highest form of loss-absorbing capital, has been raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital requirement, consisting of not only common equity but also other qualifying financial instruments, will also increase from the current minimum of 4% to 6%. Although the minimum total capital requirement will remain at the current 8% level, yet the required total capital will increase to 10.5% when combined with the conservation buffer. (e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value of many assets fell quicker than assumed from historical experience. Thus, now Basel III rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling of leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018. (f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management will be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be introduced in 2015 and 2018, respectively. (g) Systemically Important Financial Institutions (SIFI) : As part of the macroprudential framework, systemically important banks will be expected to have loss-absorbing capability beyond the Basel III requirements. Options for implementation include capital surcharges, contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III

Requirements Minimum Ratio of Total Capital To RWAs Minimum Ratio of Common Equity to RWAs Tier I capital to RWAs Core Tier I capital to RWAs Capital Conservation Buffers to RWAs Leverage Ratio Countercyclical Buffer Minimum Liquidity Coverage Ratio Minimum Net Stable Funding Ratio Systemically important Financial Institutions Charge Under Under Basel III Basel II 8% 10.50% 2% 4.50% to 7.00% 4% 6.00% 2% 5.00% None 2.50% None 3.00% None 0% to 2.50% None TBD (2015) None TBD (2018) None TBD (2011)

RBI & BASEL

The Reserve Bank of India (RBI) on Wednesday laid out tighter norms for Indian banks under Basel III international accounting standards that were conceived after the 2008 credit crisis to strengthen the lenders capital base and improve their ability to withstand shocks. Banks in India may need at least $30 billion (around Rs.1.6 trillion today) as capital over the next six years to comply with the norms, analysts say. The norms come into effect in a phased manner starting 1 January next year and have to be implemented fully by 31 March 2018. There isnt much change in the norms from the draft guidelines that were issued by RBI in December last year. The key capital adequacy parameter has been stipulated at 9% in the guidelines posted on the RBI website, higher than the international norm of 8%, and unchanged from what the regulator requires in India currently. As a matter of prudence, it has been decided that scheduled commercial banks...operating in India shall maintain a minimum total capital (MTC) of 9% of the total risk-weighted assets (RWAs) as against an MTC of 8% of RWAs as prescribed in (international) Basel III rules, RBI said. But banks will need to raise more money than under Basel II as several items are excluded under the new definition. The capital adequacy ratio is a banks capital as a percentage of its RWAs. These guidelines mean that Indian banks would require a huge amount of capital in the next six years, about $30 billion to $40 billion to be precise, said Suresh Ganapathy, head of the financial research team at Macquarie Securities Group. Both public sector banks as well as private sector banks will have to come to the market to raise equity. That would impose a heavy financial burden on the government, which will need to infuse capital in line with its holdings in the state-owned banks. This is likely to compound the problems of a central government already struggling to recapitalize banks owned by it. Bank chiefs declined to comment on the norms. Private sector banks such as ICICI Bank Ltd and Kotak Mahindra Bank Ltd should not have much trouble since they are well capitalized, but it puts public sector banks in a precarious position because the government does not have much money to give and they need fresh capital to adhere to Basel III, Ganapathy said. There has been a relaxation in guidelines because the final date has been extended to 2018 from 2017 and banks will need more capital later than in the initial years, so it gives them more time. Basel III implementation may also have a negative impact on Indias growth, RBI deputy governor Anand Sinha had said on Monday. The Basel III guidelines envisages increase in capital and liquidity requirements worldwide. By the end of the implementation, according to RBIs estimates, we could see a (marginal) dip in GDP growth, Sinha had said.

For the fiscal year ending March 2013, banks will have to disclose capital ratios computed under Basel II and Basel III. The norm forbids banks from using the consolidated capital of any insurance or non-financial subsidiaries for calculating capital adequacy. Post crisis, with a view to improving the quality and quantity of regulatory capital, it has been decided that the predominant form of tier I capital must be common equity, since it is critical that banks risk exposures are backed by high quality capital base, the guidelines said. Tier I capital consists of common stock, retained earnings and some forms of preferred stock, besides instruments with characteristics of both equity and debt. Basel III norms force banks to eliminate most of these calculations and arrive at a pure equity-based calculation of tier I capitalan issue that is hotly debated by global banks. The Indian regulator has been more stringent. For Indian banks, common equity should be at least 5.5% of the asset base, whereas the international norm suggests 4.5%. Under Basel II, Indian banks need to maintain tier I capital of 6%, which rises to 7% under Basel III. Under Basel III, several instruments, including some that have the characteristics of debt, cannot be included for arriving at tier I capital. On a critical assumption under Basel III norms, the countercyclical capital buffer, the Indian regulator said this depends on how it will be formed. The capital buffer that ranges 0-2.5% in the form of common equity or other fully lossabsorbing capital will be implemented according to national circumstances. The purpose of the countercyclical capital buffer is to achieve the broader macro-prudential goal of protecting the banking sector from periods of excess aggregate credit growth. For any given country, this buffer will only be in effect when there is excess credit growth that results in a system-wide build-up of risk. Banks also cant use unamortized pension liabilities for calculating tier I capital, which will mean they will have to raise this money as capital from the markets. As a measure of comparison, the Union government said it will provide Rs.15,888 crore this fiscal to recapitalize banks it owns to maintain capital adequacy at 8% under Basel II norms.

Basel Norms: An Introduction Basel norms are a set of guidelines that are formulated by bank for international settlements (BIS) basel committee on banking supervision (BCBS). Globalisation banking system in India has attained vital importance. Day by day there has been increasing banking complexities in banking transactions, capital requirements, liquidity, credit and risks associated with them. The World trade organisation (WTO), of which India is a member nation, requires the countries like India to get their banking systems at par with the global standards in terms of financial health, safety and transparency hence they decided to implement basel norms in India. BASEL COMMITTEE: The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. NEED FOR SUCH NORMS: The first accord by the name Basel Accord I. was established in 1988 and was implemented by 1992. It was the very first attempt to introduce the concept of minimum standards of capital adequacy. Then the second accord by the name Basel Accord II was established in 1999 with a final directive in 2003 for implementation by 2006 as Basel II Norms. Unfortunately, India could not fully implement this but, is now gearing up under the guidance from the Reserve Bank of India to implement it from 1 April, 2009. Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord. For Indian Banks, its the need of the hour to buckle-up and practice banking business at par with global standards and make the banking system in India more reliable, transparent and safe. These Norms are necessary since India is and will witness increased capital flows from foreign countries and there is increasing cross-border economic & financial transactions. TYPES OF BASEL NORMS Basel I In July 1988, the Basel Committee come out with a set of recommendation aimed at introducing minimum levels of income for internationally active bank. Though these proposals were not rightfully binding on the signatory countries, more than hundred supervisors from different countries agreed to implement the Basel norms next to modifications suited to their domestic economies. This first series of recommendation by Basel Committee are popularly known as Basel I norm.

These norms required the bank to maintain means of at least 8 per cent of their risk-weighted loan exposures. Different risk weights be specified by the committee for different categories of exposure. For instance, parliament bonds carried risk-weight of 0 per cent, while the corporate loans had a risk-weight of 100 per cent. Basel II To set right those aspects, the Basel Committee came up beside a new set of guidelines within June 2004, popularly known as the Basel II norm. These new norm are far more complex and comprehensive compared to the Basel I norms. Also, the Basel II norms are more risk-sensitive and they rely heavily on data analysis for risk length and management. These norms are based on the three pillars of Capital Requirement, Supervisory Review and Market Discipline. Pillar l: Capital Adequacy Requirements: Under the Basel II Norms, banks should maintain a minimum capital adequacy requirement of 8% of risk assets. For India, the Reserve Bank of India has mandated maintaining of 9% minimum capital adequacy requirement. This requirement is popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR). Pillar II: Supervisory Review: Banks majorly encounter with 3 Risks, viz. Credit, Operational & Market Risks. Basel II Norms under this Pillar wants to ensure that not only banks have adequate capital to support all the risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles: a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels. b) Supervisors should review and evaluate bank's internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. d) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored. Pillar III: Market Discipline: Market discipline imposes banks to conduct their banking business in a safe, sound and effective manner. Mandatory disclosure requirements on capital, risk exposure (semiannually or more frequently, if appropriate) are required to be made so that market participants can assess a bank's capital adequacy. Qualitative disclosures such as risk management objectives and policies, definitions etc may be also published. BASEL III

Basel lll is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the basel committee on banking supervision. The third of the basel accords was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel iii strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. It is estimated that the implementation of basel iii will decrease annual GDP growth by 0.05 to 0.15 percentage point. Will Basel norms make the financial system safer? The Basel Committee expects that these norms will enhance the soundness of the financial system by aligning regulatory capital requirement to the underlying risks in the banking business and by encouraging better risk management by banks and enhanced market discipline. It ensures more efficient capital allocation with higher allocation for weaker assets and lower allocation for good assets. Banks with a greater-than-average risk appetite will find their capital requirements increasing, and vice-versa. The norms require more risk sensitivity, and hence more complex measurement techniques. BASEL NORMS IN RESERVE BANK OF INDIA Basel norms aims to encourage the use of modern risk management techniques; and to encourage banks to ensure that their risk management capabilities are commensurate with the risks of their business. Previously, regulators' main focus was on credit risk and market risk. Basel II takes a more sophisticated approach to credit risk, in that it allows banks to make use of internal ratings based Approach - or 'IRB Approach' as they have become known - to calculate their capital requirement for credit risk. It also introduces, in addition to the market risk capital charge, an explicit capital charge for operational risk. Together, these three risks - credit, market, and operational risk - are the so-called 'Pillar 1' risks. The steps taken for implementation of basel norms in RBI

The RBI had announced in its annual policy statement in May 2004 that banks in India should examine in depth the options available under Basel II and draw a road-map by end-December 2004 for migration to Basel II and review the progress made at quarterly intervals. The Reserve Bank organized a two-day seminar in July 2004 mainly to sensitise the Chief Executive Officers of banks to the opportunities and challenges emerging from the Basel II norms. Soon thereafter all banks were advised in August 2004 to undertake a selfassessment of the various risk management systems in place, with specific reference to the three major risks covered under the Basel II and initiate necessary remedial measures to update the systems to match up to the minimum standards prescribed under the New Framework.

Banks were also advised to formulate and operationalise the Capital Adequacy Assessment Process (CAAP) as required under Pillar II of the New Framework. Reserve Bank issued a Guidance Note on operational risk management in November 2005, which serves as a benchmark for banks to establish a scientific operational risk management framework. We have tried to ensure that the banks have suitable risk management framework oriented towards their requirements dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital. Risk Based Supervision (RBS) in 23 banks has been introduced on a pilot basis. As per normal practice, and with a view to ensuring migration to Basel II in a non-disruptive manner, a consultative and participative approach had been adopted for both designing and implementing Basel II. A Steering Committee comprising senior officials from 14 banks (public, private and foreign) had been constituted wherein representation from the Indian Banks Association and the RBI was ensured. The Steering Committee had formed sub-groups to address specific issues. On the basis of recommendations of the Steering Committee, draft guidelines to the banks on implementation of the New Capital Adequacy Framework have been issued. The Reserve Bank has constituted a sub group of the Steering Committee for making recommendations on the guidelines that may be required to be issued to banks with regard to the Pillar 2 aspects. The guidelines with regard to Pillar 2 aspects proposed to be issued would cover the bank level initiatives that may be required under Pillar 2.

With a view to have an objective assessment of the true cost of implementation of Basel II, banks would be well advised to institute an internal study to make a true assessment of the costs involved exclusively for the elementary approaches. The informal feedback that we have from banks reflects that they do not see Basel II implementation as a costly proposition. However, banks need to ensure that expenditure incurred by them to improve their risk management systems, IT infrastructure, core banking solutions, risk models etc. should not be included as Basel II compliance costs, since these are expenses which a bank would incur even in the normal course of business to improve their efficiencies. Operational Risk Operational risk was one area which was expected to increase capital requirement for the banks. The Reserve Bank had announced in July 2004 that banks in India will be adopting the Basic Indicator Approach for operational risk. This was followed up with the draft guidelines for the Basel II framework in February 2005 where the methodology for computing the capital requirement under the Basic

Indicator Approach was explained to banks. Even at the system level, we find that the CRAR of banks is at present well over 12 per cent. This reflects adequate cushion in the system to meet the capital requirement for operational risks, without breaching the minimum CRAR. Rating agencies In terms of Basel II requirements, national supervisors are responsible in determining whether the rating agencies meet the eligibility criteria. The criteria specified are objectivity in assessment methodology, independence from pressures, transparency, adequate disclosures, sufficient resources for high quality credit assessments and credibility. India has four rating agencies of which three are owned partly/wholly by international rating agencies. Compared to developing countries, the extent of rating penetration has been increasing every year and a large number of capital issues of companies has been rated. However, since rating is of issues and not of issuers, it is likely to result, in effect, in application of only Basel I standards for credit risks in respect of non-retail exposures. While Basel II provides some scope to extend the rating of issues to issuers, this would only be an approximation and it would be necessary for the system to move to rating of issuers. Encouraging rating of issuers would be essential in this regard. An internal working group is examining the process for identification of the domestic credit rating agencies which would be meeting the eligibility criteria prescribed under Basel II. It is expected that by this process would be over soon and banks would be informed the details of the rating agencies which qualify. Thereafter, the borrowers are expected to approach the rating agencies for getting themselves rated, failing which banks would be constrained to assign 100% risk weight at the minimum for unrated borrowers. The Reserve Bank had invited all the four rating agencies to make a presentation on the eligibility criteria and a self assessment with regard to these criteria. The rating agencies have since made their presentations and these are under examination vis--vis the eligibility criteria for recognising the rating agencies, whose ratings can be used by banks for risk weighting purposes. RBI provide training to staff on Basel III norms In a bid to put in place a better implementation of Basel III norms, Reserve Bank of India (RBI) has started training its staff through Center for Advanced Financial Research and Learning headed by former RBI Deputy Governor Usha Thorat. The Basel III is global regulatory standard for bank capital adequacy and liquidity. RBI is focusing initially on financial risk management, financial regulation, and financial markets as the areas of priority, she said. It will hold programs for senior management of the banks and courses may be for RBI people to be able to move over to more advanced methods under the Basel II and Basel III, she further said.

RBI will also conduct an impact analysis resulting implementation of the Basel III framework in 10 large banks including State Bank of India, ICICI Bank, Punjab National Bank, and Canara Bank, as per the media reports. It will also release norms mandating banks to open 25% of their new branches in Tier-V and VI centers, shortly, to cover un-banked areas across the country. Brief History of Urban Cooperative Banks in India The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably. The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, - mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation. The Beginnings The first known mutual aid society in India was probably the Anyonya Sahakari Mandali organised in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban cooperative credit societies, in their formative phase came to be organised on a community basis to meet the consumption oriented credit needs of their members. Salary earners societies inculcating habits of thrift and self help played a significant role in popularising the movement, especially amongst the middle class as well as organized labour. From its origins then to today, the thrust of UCBs, historically, has been to mobilise savings from the middle and low income urban groups and purvey credit to their members - many of which belonged to weaker sections. The enactment of Cooperative Credit Societies Act, 1904, however, gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905), the No.1 Military Accounts Mutual Help Cooperative Credit Society in Poona (January 9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and Belgaum Pioneer (February 23, 1906)

in the Belgaum district, the Kanakavli-Math Co-operative Credit Society and the Varavade Weavers Urban Credit Society (March 13, 1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906.. The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes. The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right. In the present day context, it is of interest to recall that during the banking crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of deposits from joint stock banks to cooperative urban banks. Maclagan Committee chronicled this event thus: As a matter of fact, the crisis had a contrary effect, and in most provinces, there was a movement to withdraw deposits from non-cooperatives and place them in cooperative institutions, the distinction between two classes of security being well appreciated and a preference being given to the latter owing partly to the local character and publicity of cooperative institutions but mainly, we think, to the connection of Government with Cooperative movement. Under State Purview The constitutional reforms which led to the passing of the Government of India Act in 1919 transferred the subject of Cooperation from Government of India to the Provincial Governments. The Government of Bombay passed the first State Cooperative Societies Act in 1925 which not only gave the movement its size and shape but was a pace setter of cooperative activities and stressed the basic concept of thrift, self help and mutual aid. Other States followed. This marked the beginning of the second phase in the history of Cooperative Credit Institutions. There was the general realization that urban banks have an important role to play in economic construction. This was asserted by a host of committees. The Indian Central Banking Enquiry Committee (1931) felt that urban banks have a duty to help the small business and middle class people. The Mehta-Bhansali Committee (1939), recommended that those societies which had fulfilled the criteria of banking should be allowed to work as banks and recommended an Association for these banks. The Co-operative Planning Committee (1946) went on record to

say that urban banks have been the best agencies for small people in whom Joint stock banks are not generally interested. The Rural Banking Enquiry Committee (1950), impressed by the low cost of establishment and operations recommended the establishment of such banks even in places smaller than taluka towns. The first study of Urban Co-operative Banks was taken up by RBI in the year 1958-59. The Report published in 1961 acknowledged the widespread and financially sound framework of urban co-operative banks; emphasized the need to establish primary urban cooperative banks in new centers and suggested that State Governments lend active support to their development. In 1963, Varde Committee recommended that such banks should be organised at all Urban Centres with a population of 1 lakh or more and not by any single community or caste. The committee introduced the concept of minimum capital requirement and the criteria of population for defining the urban centre where UCBs were incorporated. Duality of Control However, concerns regarding the professionalism of urban cooperative banks gave rise to the view that they should be better regulated. Large cooperative banks with paid-up share capital and reserves of Rs.1 lakh were brought under the perview of the Banking Regulation Act 1949 with effect from 1st March, 1966 and within the ambit of the Reserve Banks supervision. This marked the beginning of an era of duality of control over these banks. Banking related functions (viz. licensing, area of operations, interest rates etc.) were to be governed by RBI and registration, management, audit and liquidation, etc. governed by State Governments as per the provisions of respective State Acts. In 1968, UCBS were extended the benefits of Deposit Insurance. Towards the late 1960s there was much debate regarding the promotion of the small scale industries. UCBs came to be seen as important players in this context. The Working Group on Industrial Financing through Co-operative Banks, (1968 known as Damry Group) attempted to broaden the scope of activities of urban cooperative banks by recommending that these banks should finance the small and cottage industries. This was reiterated by the Banking Commisssion (1969). The Madhavdas Committee (1979) evaluated the role played by urban cooperative banks in greater details and drew a roadmap for their future role recommending support from RBI and Government in the establishment of such banks in backward areas and prescribing viability standards. The Hate Working Group (1981) desired better utilisation of banks' surplus funds and that the percentage of the Cash Reserve Ratio (CRR) & the Statutory Liquidity Ratio (SLR) of these banks should be brought at par with commercial banks, in a phased manner. While the Marathe Committee (1992) redefined the viability norms and ushered in the era of liberalization, the Madhava Rao

Committee (1999) focused on consolidation, control of sickness, better professional standards in urban co-operative banks and sought to align the urban banking movement with commercial banks. A feature of the urban banking movement has been its heterogeneous character and its uneven geographical spread with most banks concentrated in the states of Gujarat, Karnataka, Maharashtra, and Tamil Nadu. While most banks are unit banks without any branch network, some of the large banks have established their presence in many states when at their behest multi-state banking was allowed in 1985. Some of these banks are also Authorised Dealers in Foreign Exchange Recent Developments Over the years, primary (urban) cooperative banks have registered a significant growth in number, size and volume of business handled. As on 31st March, 2003 there were 2,104 UCBs of which 56 were scheduled banks. About 79 percent of these are located in five states, - Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. Recently the problems faced by a few large UCBs have highlighted some of the difficulties these banks face and policy endeavours are geared to consolidating and strengthening this sector and improving governance.