EXECUTIVE SUMMARY

Since India is agriculture oriented country, the importance of rural

banks in India is more than any other countries. The development of
rural co-operative banks in India is on the process but still it is not
fully developed.

The Co-operative banks in India was started in 1904.Co-operative

movement in India is the result of a deliberate policy of the state and
is vigorously pursued through formation of an elaborate governing
infrastructure. The successive Five-year plans looked upon the co-
operation movement as the balancing sector between public sector
and the private sector.

In India we find that the states of Maharashtra and Gujarat are well
developed. Whereas the states of Andhra Pradesh, Rajasthan and
Karnataka have shown remarkable progress in the co-operative
movement and there is a vast potential for the development of co-
operative in the remaining states.

This project is mainly focusing on the importance of co-operative

bank in the regional rural areas of our country. Because of that
reason The Government has introduced several schemes for
promoting the spirit of co-operation. Both the Indian Government as
well as the Government of the State of Maharashtra has introduced
several schemes for the co-operative bank. The NABARD role in the
building of the co-operative credit structure was that of an active

1
collaborator in drawing up schemes of development with the
government of India and the State Governments, and the provider of
finance, first to the State Governments for contribution to the share
capital of co-operative credit institutions at various levels.

2
 CO-OPERATIVE MOVEMENT IN THE WORLD

The earliest co-operatives were set-up among the weavers, in other

words workers in cottage industries, who were the first and the
hardest hit by the development of the mercantile economy and the
industrial revolution.

So the weavers, in order to gain access to the market in the tools of

their trade or to the market in foodstuffs set up the first co-operative
in Scotland (Fenwick, 1761; Govan, 1777 ; Darvel, 1840 ), in France
(Lyons, 1835 ), in England (Rochdale, 1844 ) and in Germany
( Chemnitz, 1845 ).

Though co-operation and mutual enterprise has been an essence of

human-society ever since it evolved, the real co-operative movement
can be credited to the Rochdale Pioneers who established a co-
operative consumer store in North England. This store can be called
as the first in the co-operative consumer movement.

The "Rochdale Pioneers", made their first aim to establish co-

operatives where the members would not only be their own
merchants but also their own producers and their own employers.

Around this time the co-operative movement was more at an

utilitarian level. The concept though old, was just being
implemented and was growing slowly. Many great thinkers, far-
sighted men and visionaries were applying their minds to find
practical solutions to the new problems and to work out better
systems of social organization.

3
In Great Britain Robert Owen (1771-1858) conceived and set up
self-contained semi-agricultural, semi-industrial communities.

Dr. William King (1758-1865) helped to spread Owen’s doctrine;

his ideas were more reasonable than Owen’s and achieved more
results.

In France Charles Fourier (1722-1837), a commercial clerk,

published in 1822 his main work, a Treatise on Domestic
Agricultural Association. This could be one of the first works on co-
operation.

Though all these visionaries had articulated the philosophy of co-

operation it was not until the World-War II that an Authoritative
Commission was appointed by the International Co-operative
Alliance.

This Commission formulated or rather formalized the principles of

co-operation. They are

 Voluntary and open membership

 Democratic Management
 Limited interest on capital
 Patronage dividend in proportion of members’ transactions
 Education and Training and
 Co-operation among co-operatives

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 CO-OPERATIVE MOVEMENT IN INDIA

Co-operation occupies an important place in the Indian economy.

Perhaps no other country in the world is the co-operative movement

as large and as diverse as it is India. There is almost no sector left
untouched by the co-operative movement.

The main areas of operation of co-operatives in India are as under.

 Agricultural Credit
 Agricultural Marketing
 Agricultural Processing
 Industrial co-operatives
 Urban credit Co-operatives

Co-operative movement in India is the result of a deliberate policy

of the state and is vigorously pursued through formation of an
elaborate governing infrastructure. The successive Five-year plans

5
looked upon the co-operation movement as the balancing sector
between public sector and the private sector.

And the success is evident. Almost 50 percent of the total sugar

production in India is contributed by sugar co-operatives and over
60 percent of the total fertilizer distribution in the country is handled
by the co-operatives. The consumer co-operatives are slowly
becoming the backbone of the public distribution system and the
marketing co-operatives are handling agricultural produce with an
astounding growth rate.

Further there is the Indian Farmers Fertilizer Co-operative LTD

(IFFCO), which has been successful in setting up an effective
marketing network in most of the states for selling modern farming
technology instead of fertilizers alone. The operations of IFFCO are
handled through its more than 30,000 member co-operatives.

The National Agricultural Co-operative Marketing Federation

(NAFED) has over 5000 marketing societies. These societies operate
at the local wholesale market level and handle agricultural produce.
Thus the farmers have a market for their produce right at their door-
step

In India we find that the states of Maharashtra and Gujarat are well
developed. Whereas the states of Andhra Pradesh, Rajasthan and
Karnataka have shown remarkable progress in the co-operative
movement and there is a vast potential for the development of co-
operative in the remaining states.

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 INTRODUCTION OF RURAL CO-OPERATIVE
BANKS

Co-operative banks, another component of Indian banking system,

originated with the enactment of the co-operative credit societies Act
of 1904, which provided for the formation of co-operative credit
societies. Under the Act of 1904, a number of co-operative credit
societies were started.

Co-operative banks were established in India to facilities rural

credit, and to cater to the needs of small farmers and businessmen.
They were popular with middle and lower income groups because of
the high interest rates they offered as compared to commercial
banks.

However, with the passage of time, most co-operative banks lost

their purpose. Excessive state control and politicization further led to
their deterioration. By the 1990’s, none of the privet or public sector
banks were willing to deal with co-operative banks and thus even
otherwise healthy co-operative banks were facing a tough time. In
2001-2002, many co-operative banks were rocked by scams that
exposed the malpractices in these banks. Many of these banks did
not adhere to the prudential norms prescribed by the Reserve Bank
of India.

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The distinct point between the co-operative banking sector and
commercial banking sector is the focus. First, co-operative banks
focus on the local population and micro banking among middle and
low income state of the society. As compare to nearly 300scheduled
commercial banks, inclusive of regional banks, there were more than
90000 primary agricultural credit societies in rural sector as at the
end of 2002.

Co-operative banks are an important segment of the organized sector

of the Indian banking system. They have been organized under the
provision of the co-operative society’s law of the states. They have
grown with the specific purpose of financing agriculture and other
economic units in the unorganized sector of the economy.

Both commercial banks and co-operative bank perform the main

banking functions of deposit mobilization, supply of credit, and
provision of remittance facilities. The major beneficiary, in the case
of commercial bank, is industry, trade and commerce whereas co-
operative bank have been concern with agricultural finance.

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PRINCIPLES FOLLOWED BY CO-OP BANKS

There have been also other principles like the principles of political
neutrality, correct weight and measures, purity of goods and thrift
which were also taken into consideration.

These principles have been reformulated recently by the Manchester

Congress in 1995 and now the principles of co-operation are as
follows:

I Principle: Voluntary and Open Membership:

Co-operatives are voluntary organizations; open to all persons who
use their services and willing to accept the responsibilities of
membership, without gender, social, racial, political or religious
discrimination.

II Principle: Democratic Member Control:

Co-operatives are democratic organizations controlled by their
members, who actively participate in setting their policies and
making decisions. Men and women serving as elected
representatives are accountable to the membership. In

Primary co-operatives members have equal voting rights (one

member, one vote) and co-operatives at other levels are also
organized in a democratic manner.

III Principle: Autonomy and Independence:

Co-operatives are autonomous, self-help organizations controlled by
their members. If they enter into agreements with other

9
organizations, including governments or raise capital from external
sources they do so on terms that ensure democratic control by their
members and maintain their co-operative autonomy.

IV Principle: Education, Training and Information:

Co-operatives provide education and training for their members,
elected representatives, managers and employees so that they can
contribute effectively to the development of their co-operatives.
They inform the general public particularly young people and
opinion leaders about the nature and benefits of co-operation.

V Principle: Co-operation among Co-operatives:

Co-operatives serve their members most effectively and strengthen
the co-operative movement by working together through local,
regional, national and international structures.

VI Principle: Concern for Community.

Co-operatives work for the sustainable development of their
communities through policies approved by their members. The
seventh Principle was added at the Manchester Congress of 1995.

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 STRUCTURE OF CO-OPERATIVE BANKS

In India co-operative banks have different institutions at various

levels coming under the category of co-operative banks. They are
categorized under two main heads: agriculture and non agriculture.
In the field of agriculture credit there is separate institution to meet
the need for short and medium-term credit and for long term credit.
The co-operative credit structure for short and medium-term credit is
a three tire federal one, with state co-operative banks at apex in each
state, the central co-operative bank, at the district level, and the
primary credit societies in the village. Long-term agriculture credit
is provided by the land development banks. The structure is a two
tire one, with central land development banks at the state level and
primary land development banks or district level. In some states the
structure is unitary,

In order to adhere to the discipline of the three-tier structure and also

possibly RBI can not lend directly to primary credit societies
because of its large number, funds flow down wards from a SCBs to
the DCBs under its jurisdiction and from the latter to the primary
credit societies, which then lend to their borrowing members. The
need for higher financing agencies arises, because the PACs are not
able to raise enough funds by way of deposits from the public. The
SCBs them selves, apart from raising funds by way of owned
funds(share capital and reserve) and deposits from co-operative
societies and individual and others, borrow large amount from
mainly the RBI. This is one direct in which the RBI as the country’s

11
central bank makes its credit available to the co-operative banking
system. Further, the RBI also extends credit to state Government (in
the form of long-term loans for contribution to the share capital of
co-operative credit institutions) and through NABARD.

There are also reserve flow o funds from the primary credit societies
to CCBs and from them to SCBs. This is affected by way of
contribution to the share capital of the higher financing agencies and
by way of deposits. The loan extended by the higher financing
agencies to their affiliates is linked with the share capital holdings
by this affiliate of the lending agencies. Thus, normally a primary
credit society can borrow from a CCB at most upto 10 times its
contribution to the share capital of the CCB. A similar condition
governs the borrowing limits of CCBs from their SCBs.

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CREDIT STRUCTURE OF CO-OPERATIVE BANKS

The PACSs
The Primary Agricultural Credit Societies (PACS) constitute the
`hub’ of the Indian co-op movement. Every fourth co-operative in
India is a primary credit society. The main objectives of a PACS are:

• To raise capital for the purpose of giving loans and supporting

the essential activities of the members.
• To collect deposits from members with the objective of
improving their savings habit.
• To supply agricultural inputs and services to members at
remunerative prices.

The Primary Agricultural Co-operative Societies

Indicators Value

Village covered by PACS 99.5%

Total Number of PACS 100000

Membership per PACS 10,00,00,000

(Average)

The DCCBs
The PACS are affiliated to the District Central Co-operative Banks
(DCCBs) who perform the following functions.

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o Serve as balancing centre in the district central financing
agencies
o Organize credit to primaries
o Carry out banking business

District Central Co-operative Banks

Indicators Value

No. of Banks 361

Total membership 1.579

(Million)

Total loans advanced Rs.326,995Million

The SCBs
The DCCBs in turn are affiliated to State Co-operative Banks
(SCBs), which perform the following functions.

o Serve as balancing centre in the States

o Organize provision of credit for credit worthy farmers
o Carry out banking business
o Leader of the Co-operatives in the States

Indicators Value

No. of Banks 28

No. of branches 742

Total membership 139,676

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 OBJECTIVES OF CO-OPERATIVE BANKS

1) To understand the structural features of the credit delivery system

in a village,
2) To assess the operational dynamics of financial services rendered
by formal credit institutions especially the co-operative,

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3) To analyze the profile of borrowers of Service C6operative Bank,
their economic empowerment and perception level regarding loan
repayment, and
4) To identify reasons for non-viability of rural credit institutions
and suggest measures.
5) The rural financial system in the country calls for a strong and
efficient credit delivery system, capable of taking care of the
expanding and diverse credit needs of agriculture and rural
development. More than 50% of the rural credit is disbursed by the
Co-operative Banks and Regional Rural Banks. In this direction
NABARD has been taking various initiatives in association with
Government of India and RBI to improve the health of Co-operative
banks
6) To provide cheap and liberal credit facilities to small and
marginal farmers, agriculture laborers, artisans, small entrepreneurs
and other weaker section.
7) To save the rural poor from the money lenders.
8) To act as a catalyst element and thereby accelerate the economic
growth in the particular region.
9) To cultivate the banking habits among the rural people and
mobilized savings for the economic development of rural areas.

CO-OPERATIVE BANKS-A PROFILE

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

particularly in rural areas was non existent. There was no organized
institutional credit for agricultural and related activities. People in

16
the rural areas largely depended on money lenders who lent money
at very high rates of interest. Thus, there was need to create an
institution which would cater to the needs of ordinary people and
was based on the principles of co-operative organization and
management. In 1904, the first legislation on cooperatives was
passed. In 1914, the Maclagen committee suggested a three tire
structure for cooperative banking i.e. Primary agricultural credit
societies at the grass root level, Central cooperative banks at the
district level and State cooperative banks at the state level.
Cooperative banks were expected to serve as substitutes for money
lenders, and provide both short term and long term institutional
credit at reasonable rates of interest.

Features of cooperative banks

1) Cooperative banks are organized and managed on the principal

of co-operation, self help, and mutual help. They function with the
rule of “one member, one vote”. Function on “no profit, no loss”
basis. Co-operative banks, as a principle, do not pursue the goal o
profit maximization.
2) Co-operative banks perform all the main banking functions of
deposit mobilization, supply of credit and provision of remittance
facilities.
3) Co-operative banks provide limited banking products and are
functionally specialist in agriculture related products. However, co-
operative banks now provide housing loans also.

17
4) Primary Agricultural credit societies provide short term and
medium term loans
5) Co-operative banks do banking business mainly in the
agriculture rural sector. However, UCBs, SCBs, CCBs operate in
semi urban, urban and metropolitan areas also.
6) The SCBs, CCBs and UCBs can normally extend housing loans
upto Rs. 1 lakh to an individual.

CATEGORIES:
There are two categories of the co-operative banks.
a. Short term lending oriented co-operative banks – within this
category there are three sub categories of banks viz. State co-
operative Banks, DCBs, PACs.
b. Long term lending oriented co-operative banks – within the
second category there are land development banks at three levels
state level, district level and village level.

The co-operative banking structure in India is divided into following

main 5 categories
1) Primary Urban Co-operative banks
2) Primary Agricultural Credit Societies
3) District Central Co-operative banks
4) State Co-operative Banks
5) Land Development Banks

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 DIFFERENCE BETWEEN RURAL CO-OPERATIVE
BANKS & RRBs
RRBs are by nature co-operative banks but are different from the co-
operative banks

1) Aim: RRBs have been established to supplement the resources

of the co-operative banks and not to complete with them. The
principle of co-operation is “all for each and each for all”. Its aim is
to provide an institutional framework to organized ‘self help’ among
persons of small means. Its basis is self-help through mutual help. It
combines economic, social and political objectives. It aims at
bringing about socio-economic changes in the country. The RRBs
aim at ‘providing credit and other facilities especially to the small
and marginal farmers, agricultural laborers, artisans and small
entrepreneurs in the rural areas.

2) Act applicable: The RRBs are governed by the regional rural

banks Act 1976, RBI Act, NABARD Act, whereas the co-operative
banks are governed by co-operative societies Act 1965.

3) Status: The co-operative banks do not become scheduled banks

automatically, whereas RRBs are scheduled commercial banks. The
scheduled status given automatically.

4) Area of operation: Area of operation of the co-operative banks

is restricted to only one district only. But the area of operation of a
RRBs is extending upto one or more districts of a state.

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5) Coverage of population: the co-operative banks are voluntary
organization for masses. But the beneficiaries of the RRBs are
specially class of rural area. It includes small and marginal farmers,
agricultural laborers, artisans and small entrepreneurs in the rural
areas.

6) Organization: the organizational set up of the co-operative

banks is pyramidal. At the apex level, state co-operative banks
functions as apex body, at district level Central co-operative banks
and village level Primary agricultural credit societies. It has federal
set up and each unit is partially autonomous managed by depositors
and borrowers on the basis of one men one vote. The RRBs are
bureaucratic institutions whereas co-operatives are democratic
institutions

7) Beneficiaries: the Beneficiaries of the co-operative banks are

mainly rural masses. Whereas the Beneficiaries of the RRBs
includes special class of people i.e., the weaker section of societies

8) Resources: The RRBs have owned funds which include share

capital and reserve funds as well as procured funds which include
deposits and borrowings/ refinance. But the co-operative banks
depend on the RBI and deposits from members.

9) Lending operations: the Co-operative banks lend mainly to the

farmers.

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10) Monitoring and control: the RRBs are controlled by the Central
Government, RBI, State Government and Sponsor Banks, whereas
the co-operative banks are controlled by RBI and Registrar of co-
operatives.

11) Staff: the co-operative banks get talented staff. Whereas RRBs
attract less talented staff

FUNCTION OF CO-OPERATIVE BANK

NABARD being an Apex Development Bank promotes agriculture

and rural development through refinance support to all banks for
investment credit and to Co-operative and RRBs for production

21
credit. The objective of providing refinance to eligible institutions is
to supplement their resources for delivering credit for agriculture,
cottage and village industries, SSIs, rural artisans, etc. thus
influencing the quantum of lending in consonance with the policy of
the government of India. It directs the policy, planning and
operational aspects in the field of credit for agriculture and
integrated rural development.

Besides the refinancing activity it discharges the developmental

functions which are as under:

1) It co-ordinates the operation of rural credit institutions

2) It ensures institution building to improve absorptive capacity of
credit delivery system.
3) It develops expertise to deal with agriculture and rural problems
4) It assists Govt., RBI and other institutions in rural development.
5) It provides facilities for training, research and dissemination of
information in rural banking.
6) It assists the State Government to enable them to contribute to
the share capital of eligible institutions
7) Under Rural Infrastructure Development Fund, NABARD
extends financial assistance to State Govt. for completion of various
incomplete rural projects such as Irrigation, Rural Bridges, and
Roads and new projects also.
8) It undertakes inspection of Co-operative Banks and RRBs as a
part of Regulatory function.

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The function of District Development office
The basic function of district development office is planning,
monitoring and co-ordination.

1) The Potential Linked Credit Plan (PLP) prepared by district

development office has been used as reference by the credit planning
agency.
2) The monitoring of service area approach was assigned o
NABARD by RBI as it was considered advantageous to have a
single rural agency to plan, co-ordinate and monitor the credit
programme of banks. They also monitoring RIDF projects
sanctioned to various NGOs, SHF formation and linkages.
3) The district office of NABARD will be the principal agency for
coordinating agriculture and rural development activities of various
credit agencies as also liaisoning with the development departments
of State Govt.
4) Member of various district level standing committees and other
committees related to agriculture and rural development
5) Associated with the inspections of Co-operative banks and
RRBs in the districts

THE SCHEMES OF RURAL CO-OPERATIVE BANK

& IT’s PROGRESS

The Government while understanding the importance of co-

operatives has introduced several schemes for promoting the spirit of

23
co-operation. Both the Indian Government as well as the
Government of the State of Maharashtra has introduced several
schemes for the co-operatives. A few of them are listed here. Take
benefit of them.

Scheme 1: Share Capital Contribution to Credit Institutions under

LTO Fund (State Level Scheme)
The Government sanctions share capital contribution to District
Central Co-operative Banks. This contribution is given out of the
LTO Fund of the NABARD. The provision is made every year to
repay this loan.

Scheme 2: Loans to Co-operative Credit Institutions for conversion

of short term loans into medium term loans

Scheme 3: National Agricultural Credit Stabilization Fund

(Centrally Sponsored Scheme)
In drought conditions the members of Agricultural Credit Societies
may not be able to repay the crop loans. This scheme helps to
convert their short-term loans into medium term loans and fresh crop
loans are made available to the members.

Scheme 4: Crop Production Incentive to Agriculturists

(Dr.Punjabrao Deshmukh Crop Production Incentive Scheme)
this scheme is applicable for Kharif and Rabbi Crops taken from
1.4.90 onwards. The farmers borrowing loans of RS.25, 000 or less
and who repay their loans fully before the due date are eligible for 4
% of the principal amount as an incentive.

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Scheme 5: In the industrial co-operative societies of weaker sections
of the societies, the Government has several schemes.

1. The Government sanctions share capital in the ratio 1:3, to enable

the societies to borrow funds from the financial institutions.
2. Financial Assistance for Tools and Equipment's
3. Interest Subsidy for Working capital:
The government gives an interest subsidy up to 3.5% to 4.5% on the
amount borrowed by the co-operative. This scheme helps to reduce
the burden of interest on the co-operative society which is to be paid
to financial agencies.

Scheme 6: Central Sector Scheme for Development of Women Co-

operatives Under this scheme financial assistance would be provided
by the Central Government on 100 % basis to the newly formed co-
operative societies by the women as well as existing women’s co-
operatives. The financial assistance is as under

No. Item Share Capital Working Capital

Subsidy Total

1. New Societies 40,000 40,000 20,000

1, 00,000

2. District Federation 80,000 80,000 40,000

2, 00,000

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3. State Federation 2, 00,000 2, 00,000 1, 00,000
5, 00,000

Scheme 8: Co-operative Godowns: The Warehousing Corporation

90% assistance for the construction of Godown out of which 50% is
loan and 40% is Government share capital.

IMPLEMENTATION OF DEVELOPMENT ACTION

PLAN (DAP)/MEMORANDUM OF
UNDERSTANDING (MOU)

In order to strengthen Cooperative Credit Institutions both in Short-

Term and Long-Term Structures as viable units on a sustainable
basis, NABARD had introduced a mechanism of DAP/MoU aiming

26
at institution specific measures in 1994-95. The cooperative banks,
throughout the country had prepared the base DAPs and executed
the base level MoUs for 5 years terminating March 2000. The
second round of DAPs, and MoUs covered the period 2000-01 to
2002-03 which was extended by one more year i.e.upto March 2004.
Since then the base-level DAP/MoU covered a larger period of 3 to
5 years. The first phase of DAP/MoU (1994-2000) concluded in
March 2000 and thereafter second phase was started to cover 3 years
(i.e. 2001-03) Annual MoU for 2002-03 and was entered for the year
2003-04. The third phase of DAP/MoU started from the year 2004-
05 for a period of 3 years. During the third phase of DAP/MoU
covering the period 2004-05 - 2006-07 for the first time PACS have
been introduced to planning process. They are required to prepare
DAP and enter into an understanding with the branch of DCCB.

The mechanism of DAP/MoU has helped in building appreciation

and awareness for strategic planning facilitating, in turn, sustainable
viability at all levels. The feedback received indicates that there was
positive impact on the performance of banks as a result of
introduction of DAP/MoU through reduction of CoM and cost of
resources. The DAP planning process, as an internal strategy for
corporate planning, had facilitated in creating an awareness in the
cooperative banking structure and RRBs about the need for strategic
planning for corporate success.

The process of preparation of Bank-specific Development Action

Plans (DAPs) introduced for RRBs during the year 1994-95 has

27
been continued during the year 2004-05 for improving the
performance of RRBs in a specified time frame.

RBI’S POLICIES IN RELATION TO CO-

OPERATIVE CREDIT

The RBI since its inception has been concerned with the problems of
agriculture credit. It has been conducting studies to identify the
problems of agricultural credit. It was found in the studies conducted
in 1930’s that almost entire finance required by agriculturists in

28
India was supplied by money lenders the part played by co-operative
and other agencies being negligible. In 1951, the RBI appointed an
All-India Rural credit survey committee to conduct a
comprehensive rural credit survey. It was found that only 3.1 per
cent (of Rs.750 crores worth of borrowings of the cultivators) was
owed to co- operative societies.

It was found that co-operative credit fell short of the right quantity
was not of the right type ,did not serve the right purpose and often
Failed to go to the right people . The committee concluded that
thought co-operation has failed but it must succeed. It was realized
that only the co-operative credit system can play the prime role in
the provision of rural finance. This was rightly thought so since
there is the existence of vast network of village level primary credit
societies through- out the country. further , these societies have
intimate knowledge of local problems .A require structure was
already available for an effective credit delivery system for rural
areas, therefore, RBI has made all possible efforts to strengthen and
improve the co-operative credit structure.

The RBI was assigned a crucial role on three main items:

 The development of co-operative credit,
 Expansion of co-operative economic activity and
 Training of co-operative personnel.

29
The RBIs role in the building of the co-operative credit structure was
that of an active collaborator in drawing up schemes of development
with the government of India and the State Governments, and the
provider of finance, first to the State Governments for contribution
to the share capital of co-operative credit institutions at various
levels, and secondly, to the co-operative credit structure it self to
meet its requirements of short- term, and long-term, finance. The
details are given as below:

PROVISION OF FINANCE
The RBI extends finance under two
a) Agriculture finance: the RBI extends finance to agriculturists
indirectly through co-operative sector. The credit extended is of
three types i.e. short term, medium term and long term.

To meet its aforementioned financial obligation, the RBI had

established in 1956 two national funds
1) The national a Agriculture credit fund (long term operations)
2) The national Agriculture credit (Stabilization) fund, the first und
is used for:
a. Advancing to state co-operative banks- medium term loans for
agriculture and allied purposes,
b. Making loans to state land development banks etc,
c. Purchasing the debentures of state land development banks, and
d. Making loans and advances to NABARD, started with an initial
contribution of Rs. 10 crores in 1956, the total outstanding under this
fund had grown to Rs. 3,315 crores by the and of June 1990 through

30
annual subscription from the profits of the RBI. The second fund,
viz. NAC (stabilization) fund, is used for converting the RBI’s short
term loans and advances to state co-operative banks into medium
term loans whenever they are enable to pay their dues in time owing
to drought. Famine or other natural calamities. This fund was set up
in 1956 with an initial contribution o Rs. 1 crore. The total
outstanding under this fund stood at Rs. 660 crore at June end 1990.

b) Non Agricultural finance: the RBI also provides short- term

finance for
a. The production marketing activity of cottage and small-scale
industries, and
b. The purchase and distribution of fertilizers, these loans are
generally provided through state co-operative bank against
guarantees of the state governments. However, all such finances
have constituted a small property (less than %) of the total RBI
short-term finance to co-operatives. The bulk of it goes to
agricultural co-operatives

RURAL BANKING - Present Scenario

Households availing banking Services

• Rural penetration of banking and Insurance is very low

• Excess Dependence on Private Financiers at very high interest
rate

31
Rural People

 Distancing themselves due to lack of awareness

 Difficulty in fulfilling Bank ’ formalities

• Number of Rural Branches was maximum in 1993

• Thereafter number of Rural Branches has been declining
• Reason for Reduction of Rural Branches

 Closure
 Reclassification of the Area due to population growth

• Rural Sector Reforms started in 1991

• As the focus on the profitability has been increasing the rural
Branches are being closed.
• In earlier decades, In spite of re-classification, number of Rural
Branches increased
• Rural Branches Growth and Decline

Population and Bank Branch Coverage

• Level of Urbanization has increased during the decade

• The share of urban and Metro population increased due to

 Up gradation of certain Semi Urban areas into Urban areas

 Migration from Rural / Semi Urban to Urban / Metros

32
• In Urban and Metros Population per Branch has decreased whereas
in Rural and Semi Urban population per branch has increased
during the last decade
• The shift will be more towards Urban / Metro if we consider the
ATMs and other delivery channels available in Metros which are
equivalent to part of a branch but not added to the number of
branched
Strategies for successful Rural Banking

• Co-operative bank are Rural oriented and their operating expenses

are less

 They have to play a lead role in Rural financing and expanding the
Rural customer base

• Commercial Bank can select the route of financing through

agencies

 Micro Credit Institutions

 NBFCs

• Encourage linkage of more Self help Groups

Solutions of problem of co-op bank in rural area

Training Needs

• Bank to take up entrepreneurial skill development programmes

• Training to develop Business Skills
• Training on Leadership Skills

33
• Training on Proper Accounting practices
• Training to create Quality awareness
• Training and Knowledge dissemination on Industrial and
Tertiary Sector Opportunities
• Provision of Know How Technologies
• Activities and Success Stories of other SHGs should be shown
under video coverage

Technology implementation for Prosperity of Rural Poor

Technology Implementation in Bank in Rural

• To bring down the transaction cost

• Packaging and delivering Rural Credit
• Technology can handle large number of transactions at less cost
• Can facilitate

 Document management
 People identification

Technology in Rural India – Key Issues

• Improving Networking and Communication facilities through

wireless technology and last mile connectivity
• Processor & other Hardware should be made cost
effective with multiple economic options

34
 • Indigenization of Technology equipments and making them
user friendly for mass adoption (on the lines of NOKIA mobile
phones)
• Enable continuous functioning through in built power back up
• Enable them to function in hot and humid conditions without
necessitating Air conditioning equipments

Limitations for bringing technology to Rural India

• Lack of Electrification & Uninterrupted Power supply

• Communication networking – Cabling and other issues – Non
viable
• Distance factor, low requirement and lack of good roads and
transport facilities deter suppliers and service providers
• Lack of persons with technical knowledge in the Rural areas
• For trouble shooting / up gradation / maintenance technicians
have to come from nearby towns - Time consuming and
expensive
• Alternative Delivery Channels could not be extended to Rural
areas

 Due to lack of infrastructure

Strategies of co-operative banks for successful Rural Banking

• Full computerization

 Less manpower requirement

 Can handle large volume of accounts

35
 Processing of Loan Applications, Maintenance of huge number
of documents, dealing with renewal, identification of borrowers are
made easy and effective
 Many Banks have started computerization of Rural and Semi
Urban Branches

• Alternative delivery channels to Complement / Supplement

Branch Banking

Providing urban infrastructure at Rural Centre (PURA)

• Now large number of small villages depend on few big towns

• Excess dependence of Rural People on Urban Centre for
purchase of Inputs and marketing their output will be reduced
• Transaction / Intermediary cost will be less resulting in better
margin
• Migration towards existing Urban Centres will be reduced and
the population pressure on Urban centres will reduce
• IT related Infrastructure hubs to be developed in such centres
similar to development of IT parks in Urban Centres where
from all types of technical services will be made available to
surrounding villages within a specific radius
• Hardware and software services, Communication towers and
Communication services should be made available in those
centres

Banking in Rural Areas - Challenges

36
 • Some Banks are unwilling to operate Branches in Rural areas
because

 Low Profitability
 Large Number of accounts
 Low Value Transactions
 Less Number of Transactions
 Few activities and less opportunities for services other than deposit and
Credit
 Huge Staff Cost
 Difficult to implement Technology
 Large area of Operation – Difficult Reach

TASK FORCE ON REVIVAL OF RURAL

COOPERATIVE CREDIT INSTITUTIONS

1) The Government of India had set up a Task Force in August 2004

to suggest an action plan for reviving rural cooperative credit

37
institutions including legal measures necessary for facilitating this
process. The Task Force has carefully examined available literature
on the subject including the work of earlier committees and has also
met about 150 cooperators, officials, and politicians from all over
the country before arriving at its recommendations.
The Task Force considered all the comments and its responses are
annexed to the report.

2) The cooperative movement was started in our country on the

initiative of the government more than 100 years ago and can be
divided into four phases. In the First Phase (1900-30), the
Cooperative Societies Act was passed (1904). The major
development during the Second Phase (1930-50) was the pioneering
role played by Reserve Bank of India in guiding and supporting the
cooperatives. However even during this phase, signs of sickness in
the Indian rural cooperative movement were becoming evident. In
the Third Phase (1950-90), the All India Rural Credit Survey was set
up which not only recommended state partnership in terms of equity
but also partnership in terms of governance and management. The
Fourth Phase from 1990s’ onwards saw an increasing realization of
the disruptive effects of intrusive state patronage and politicization
of the co-operatives, especially financial cooperatives, which
resulted in poor governance and management and the consequent
impairment of their financial health. A number of committees were
therefore set up to suggest reforms in the sector.

38
3) At present the rural cooperative credit structure consists of
112,309 primary agricultural credit societies (PACS), 367 district
cooperative banks (CCBs) and 30 state cooperative banks (SCBs).
On an average, there is one PACS for every 6 villages; these
societies have a total membership of 12 crore but only about 50
percent of them borrow from the PACS. A large proportion of PACS
also serve as outlets for inputs and for the public distribution system
for food and other essential items.

4) The financial position of the system is weak and deteriorating.

The accumulated losses of PACS are estimated roughly on the basis
of available incomplete data at Rs. 4,595 crore as on 31 March 2003.
The position of DCCBs is also equally unsatisfactory; with
accumulated losses aggregating Rs.4, 401 crore and erosion in
deposits being Rs.3, 100 crore. Due to such financial impairment,
cooperatives have been steadily losing their capacity to meet the
Rapidly growing credit needs of agriculture. In the early 1990s, they
accounted for over 60 percent of the total institutional credit to
agriculture, while currently their share has fallen to about one-third.
This situation gives cause for serious concern.

5) The revival package is therefore aimed at first bringing the PACS

to an acceptable level of financial health through cleansing of their
balance sheets and strengthening their capital base and then move on
to upper tiers. This step will enable PACS to clear their dues to the
upper tiers and thereby reduce the accumulated losses of
DCCBs.The DCCBs will then be provided an assistance to clear any

39
remaining balance of accumulated losses and to reach a minimum
norm of capital adequacy.

The Financial Package

6) Assistance will be available for the following purposes: wiping
out accumulated losses, covering invoked but unpaid guarantees
given by the state governments, increasing the capital to a specified
minimum level, retiring government share capital and technical
assistance.

7) Accumulated losses will cover losses on account of the following:

i. Non-repayment of loans for agricultural and other businesses
given by the cooperatives
ii. Non-repayment of loans to individuals for other purposes like
consumer goods, housing, gold loans etc.

8) Since cooperatives do not have a standardized accounting system,

and PACS in many states do not make adequate provisions against
non-repaid loans, and also because of delays in auditing, as well as
lack of uniform standards, their latest audited balance sheets may not
provide a true picture. The Task Force has therefore recommended
special audit of accounts as of 31st March 2004 be undertaken for
this purpose, and the cost of these special audits (Rs. 46 crore) will
also be borne by the revival package.

40
Accumulated losses at various level
9) It has been reported that as on 31 March 2003, accumulated losses
of PACS aggregated Rs. 4,595 crore. The true picture can be
obtained only after conduct of special audits on uniform basis. As
mentioned earlier, PACS in most states undertake both credit
business and non-credit business (like PDS etc.). Although PACS
give loans for agriculture and many other purposes, most of their
loans are

For agricultural purposes.

10) The accumulated losses of SCBs aggregate Rs. 281 crore. Most
of these losses are expected to get wiped out after the package is
implemented and losses of PACS and DCCBs are covered. The
residual losses will however, be covered.

Minimum Capital requirement in cooperatives

11) All commercial banks and RRBs are now required to maintain a
capital to risk weighted assets ratio (CRAR) of a minimum of 9%
and are expected to increase it further. This norm has so far been not
applied to cooperatives. However, as cooperatives work in smaller
areas and also primarily with one major activity – agriculture – they
in fact need a higher CRAR than others. The Task Force has
recommended that assistance necessary to bring all cooperatives,
Including PACS, to a minimum CRAR of 7% may be provided and
cooperatives then may be asked to increase it to 12% within five
years from their internal resources.

41
Technical assistance
15. Cooperatives will need assistance to computerize them and
install sound accounting and monitoring systems to remain
competitive. They will also need to train their staff and board
members in a large way. The costs for all these activities will be met
through grant assistance. The total technical assistance of Rs. 670
crore under the package therefore includes Rs. 46 crore for special
audits, Rs. 516 crore for accounting systems and computerization
and Rs. 108 crore for training and capacity building.

Registrar of Cooperative Societies:

16. As making legal amendments is time consuming process, the
Task Force has recommended that under the existing powers, the
state governments may issue Executive Orders to bring in the
desired reforms which will relate to:
i. Ensuring full voting membership rights on all users of financial
services including depositors
ii. Removing state intervention in administrative and financial
matters in cooperatives
iii. Withdrawing restrictive orders on financial matters

17. The Task Force had also suggested a model Cooperative Law
that can be enacted by the state governments. It also recommends
that in states where there are already two laws, the old cooperative
societies Act and the new Act on the lines of the model Act, it would
be better to gradually converge and have only one Act so as to

42
reduce confusion and legal problems. In respect of states which do
not pass the model Act, the Task Force has recommended for
inclusion of a separate chapter for Agricultural and Rural Credit
Societies incorporating the
Provisions salient in the model Act in the extant Cooperative
Societies Acts.

WEAKNESS OF CO-OPERATIVES IN RURAL

CREDIT

There is a three-tire wide network of co-operative credit structure

meeting the rural credit requirement. Though the co-operative credit
movement in India developed in numbers but its performance

43
considered as poor due to reason more than one. So far as financial
weakness of the co-operative credit institutions is concerned, their
low income and low credit worthiness is mainly responsible for the
affairs. As a result, large number of societies became dormant i.e.
societies which do not advance or collect loans for quite a few years.

The administrative problem was another major obstacle stood in the

way of effective functioning of the co-operative credit institution.
While lack of sense of business management and administrative led
to insolvency of many primary credit societies, it also accounted for
the poor recovery performance of many credit societies particularly
after 1981. The mounting overdues are another factor inhibiting
expansion of coverage and lending of these societies. Thus, overdue
took the effect of choking of the credit channel.

In India the co-operative credit structure is also victim of the

problem of organizational weaknesses. Lack of organizational skills
in the co-operative credit structure was also responsible for the
fragmented approach of the co-operative towards finding solutions
to rural problems without trying to meet all the wants of activities. It
was found that in many cases co-ordination between the central co-
operative banks and primary agricultural societies as also between
credit and non-credit societies was lacking. The necessity or the re-
organization o large number of societies has not been denied in
government reports.

Though the number of co-operative credit societies has increased but

their scale of activities and coverage is not satisfactory. In fact the

44
size of credit societies accounted for a low volume of loan
transactions and this is supposed to have endangered the viability of
the credit societies. Further, the coverage of credit societies is not
considered as satisfactory and it is reported that a relatively small
proportion of the total cultivators borrowed from the co-operatives.
The status of borrower, it will be clear that among the cultivators
who obtain loans, were the relatively big farmers more than
relatively the poor and small cultivators.

DIFFICULTIES FACED BY CO-OPERATIVE BANKS

IN RURAL AREA

45
1) Slow progress: The progress of co-operative banks is not upto the
expectation and is slow when comparing other type of banks
because of many restrictions on their operations.

2) Limited scope of investment: the main objective of co-operative

banks is to provide credit facilities to the poor people i.e., to small
and marginal farmers and other weaker sections. They were
originally having limited scope to invest their surplus funds freely.

3) Delay in decision making: the co-operative banks directly or

indirectly by various agencies i.e., NABARD, RBI. Thus it takes
long time to take decision on some important issues. This, in turn
affects the progress of co-operative banks.

4) Lack of training facilities: generally the staff of co-operative

banks is urban oriented and they may not know the problems and
conditions of rural areas. Lack of training facility concerning these
areas also affects the growth of co-operative banks.

5) Poor recovery rate: the recovery performance of the co-operative

banks is not up to the mark. the reason for poor recovery of loans
and mounting overdue are; inadequate supervision and follow up
action to assess the end use of credit by co-operative banks due to
inadequate staff in banks, poor identification of beneficiaries,
inadequate generation of output and income by the beneficiaries,
poor marketing facilities.

46
6) Lack of local participation: rural co-operative banks have not
received sufficient local participation. The co-operative banks have
been trust upon the rural people from above without involving local
people in its operation and management. In this connection, it is
suggested that knowledgeable persons in the rural areas need be
associated with the management of co-operative banks.

7) Lack of co-ordination: there is lack of proper co-ordination

between co-operative banks and other institutional financing
agencies like commercial banks and RRBs. Also, there is inadequate
co-ordination between co-operative banks and other developmental
agencies operating in rural areas. This has hampered the progress of
co-operative banks.

8) Poor development of rural areas: in spite of several efforts made

during the course o development plans to promote the development
of rural areas, it has not taken place in a significant way. The areas,
at present lack economic infrastructures like; facilities of marketing
storage and distribution of inputs. Besides, social infrastructure like;
schools, medical facilities. As a result, co-operative banks find it
extremely difficult to operate in such areas.

MAIN PROVISIONS OF THE ACT AS APPLICABLE

TO CO-OPERATIVE BANKS

47
The Amending Act has added to the principle Act a new Part-Part V,
which consists of Section 56.

Section56 of the principle Act, added as above, provides to the effect

that the provisions of the Act as in force for the time being shall
apply to, or in relation to, co-operative societies as they apply to
banking companies, but subject to the modifications laid down in the
section and that all references to a “banking company” or “the
company” or “such company” in the Act shall be construed as
references to such co-operative banks to which the Act applies, as
specified in the preceding paragraphs.

Section 56 then proceeds to specify the modifications in several

sections of the Act to make them applicable to co-operative banks.
Thus, when the Act is to be applied to those co-operative banks to
which it is made applicable, its sections are to be read a modified by
Section 56.

The second amending Act 58 of 1968 while imposing social control

over banks, introduced some amendments to Section 56 of the Act,
Section 56 has also been amended by the National Bank for
Agriculture and Rural Development Act, 1981(Act 61 of 1981) and
the Act 1 of 1984. The following is the summary of some of the
main provisions of Section 56:

RESTRICTION ON LOANS AND ADVANCES

Section 20 of the Act as applicable to co-operative banks and as

amended by Act 23 of 1956 and Act 58 of 1968 reads as under:

48
1) No co-operative bank shall-

a) Make any loans or advances on the security of its own shares

b) Grant unsecured loans or advances-
i) to any of its director
ii) to firm or private companies in which any of its directors is
interested as partner or managing agent or guarantor

2) Every co-operative banks shall, before the close of the month

succeeding that to which the return relates; submit to the reserve
bank a return in the prescribed form and manner showing all
unsecured loans and advance granted by it to companies in cases
(other than those in which the co-operative bank in prohibited under
sub- section 1) to make unsecured loans and advances) in which any
of its directors is interested as director or managing agent or
guarantor

It will be observed that section 20 as now applicable to co-operative

banks is practically similar section 20 as was applicable to banking
companies before the social control. All the restriction now imposed
after 1-2-1969 on loans and advances by banking companies are not
applicable to co-operative banks.

BANKING PRODUCTS & SERVICES: For Service,

Security & Prosperity

• Current Account

49
• Savings Bank Account
• Recurring Deposit Scheme
• Fixed Deposit Scheme
• Fixed Deposits linked with Recurring Deposits Scheme
• Monthly Income Deposit’s Scheme
• Loan Linked Housing Deposit’s Scheme
• Loan Linked Children Education Deposits Scheme

1. CROP LOANS
Short terms loans are provided for Seasonal Agricultural operation
to Farmers, (cash & kind) through Service Co-operative Societies
spread all over Meghalaya as per approved scales of finance, time
schedule both under NCL, Cash Credit Systems & Kisan Credit
Cards.

2. TERM LOANS
Medium & Long Term Loans are extended to the Farmers through
the affiliated Service Co-operative Societies direct for allied
agricultural activities like land development, minor irrigation,
purchase of farm machinery, poultry, goat rearing, pisciculture,
diary, horticulture, plantation & Horticulture schemes.

3. CASH CREDIT ACCOMMODATION

Cash Credit accommodations are provided to Co-operative Societies

50
for procurement, marketing of agriculture and minor forest produces
and also for dealing in consumer goods, etc.

4. HOUSING LOANS
Salaried persons are extended Housing Loan facilities for
construction of their residential houses in CD Block Head Quarters
and other selection areas against adequate securities.

5. TRANSPORT VEHICLE LOANS

The Bank provides M.T. Loans to Transport Societies and educated
unemployed youths for creation of self-employment generation &
extension of easy mobility to the people of the State.

6. CONSUMER DURABLES LOANS

Salaried persons are provided consumer durables loans for purchase
of T.V. Set, Radio, Refrigerator, Two-Wheelers, Musical
Instruments, Cooking Gas, Furniture and various other approved
items.

7. CASH CREDIT FACILITIES

Govt. appointed whole sellers are extended Cash Credit/Loan
facilities for dealing in controlled commodities against adequate
securities.

8. TERM LOANS FOR TOURISM DEVELOPMENT

Term Loans are provided for encouraging young & enterprising
entrepreneurs and unemployed persons for creating self-employment
opportunities through Tourism Development.

51
9. DEPOSIT LINKED HOUSING LOANS AND SCHEMES
The scheme is intended for regular constituents of the Bank for
construction of their residential houses with financial assistance
from the Bank.

10. INTEGRATED VILLAGE DEVELOPMENT SCHEME (IVDS)

The scheme is intended to help formation of homogeneous groups
with 5 to 20 members in the rural areas in the co-operative sector
and extend loan assistance to them for improving their socio-
economic conditions by undertaking various economic activities
which are socially useful and economically viable.

11. PERSONAL LOAN

Salaried persons are provided Personal Loans for any bonafide need
of unspeculative nature in the shape of overdraft facilities against
adequate securities.

12. EDUCATIONAL LOAN

Educational Loans are provided to parents/deserving students for
higher studies in India/abroad adequate securities.

13. LOAN FOR PROFESSIONAL & TECHNOCRATS

Credit facilities are extended to Doctors, Lawyers, Technocrats and
other Professionals to set up Clinic, Consultancy firms etc. against
adequate securities.

52
OTHER SCHEMES AND SERVICES

• Financial Assistance to Urban Banks, Weavers Co-ops,

Industrial Co-ops, Joint Farming Societies, etc.
• Conversion of short term (Agri) Loans affected by Natural
Calamities into Medium Term Loans.
• Implementation of comprehensive Crop Insurance Scheme for
the benefit of the farmers.
• Godown Loans to Service Co-operative Societies.
• Overdraft facilities to regular constituents of the Bank.
• Kisan Credit Card Scheme for Farmers

NEW POLICY IN THE RURAL CREDIT FOR BANKS:

As indicated earlier, after 1969, there was a rapid spread of branches

of commercial banks in the rural areas. As a result, there was
duplication of efforts and scattered lending over wider areas. In

53
order to avoid this, a new policy was adopted in 1988 which is
known as the” Service Area Approach". Under this policy, each
semi-urban and rural branch of commercial bank is assigned a
specific area comprising of a cluster of villages within which it will
operate. Thus, the compactness in the area of operation will make it
easy for the clientele to approach the bank for credit. It will also help
the bank in credit planning and monitoring of the Funds. The banks
are supposed to prepare annual credit plans for all the adopted
villages.

AGRICULTURAL CO-OPERATIVE AND NABARD:

REFINANCING

While it is fact that outreach of the primary co-operative banks

extends to almost every corner, the fact remains that their
disbursement of Rs. 12,500 million is much higher than the total
deposits and share capital (including the government share).

54
Moreover, Kerala alone accounts for nearly 50 per cent of the total
mobilization by PACS which reflects rather poor credit mobilization
by PACS in the rest of the country. The objectives of the PACS
when they were set up were primarily mobilization of local resource
and disbursement of credit. Most primary societies in the country,
with the exception of Kerala, have failed miserably in these tasks. In
fact, if refinance from higher structure were not available, these co-
operative societies would soon have to close shop. The availability
of easy finance from NABARD is therefore preventing growth and
development potential of the primary agricultural co-operative
societies. Likewise in the case of district Central Co-operative
Banks, we see that the borrowings from SCB/NABARD account for
88.7% of the total borrowings. Similarly, the sate Co-operative
Banks borrowings from NABARD are to the extent of 78.8%. The
message is quite clear – without the support of NABARD, the entire
structure would become unviable.

SUPERVISION OF BANKS
9
The National Bank is vested with the powers of inspecting State Co-
operative Banks (SCBs), District Central Co- operative Banks
(DCCBs) and Regional Rural Banks (RRBs) under the Banking
Regulation Act, 1949. In addition to the statutory inspections, the
National Bank also conducts voluntary inspection of State Co-

55
operative Agriculture and Rural Development Banks (SCARDBs),
Apex Weavers’ Co-operative Societies, State Co-operative
Marketing Federations, etc. The basic objective of inspection is to
assess the financial soundness and managerial efficiency of these
banks and their compliance with banking rules and regulations, etc.,
in order to protect the interests of the depositors.

Supervisory Concerns
Against the backdrop of financial sector reforms, the supervision of
financial institutions has assumed greater importance. The Basle
Committee recommendations on Income Recognition, Asset
Classification and Provisioning were adopted internationally. To
keep pace with the internationally accepted standards/practices, the
National Bank re-engineered its supervision strategy and adopted
CAMELSC approach with emphasis on core areas like Capital
adequacy, Asset quality, Management, Earnings, Liquidity,
Systems/Procedures and Compliance. In the changed scenario, the
inspection process has gone beyond fault finding/’catch-all-
approach’ to the broader concept of supervision which encompasses
on-site inspection, off-site surveillance and supplementary
appraisals. Of the above, Off-Site Surveillance System (OSS) which
was introduced in 1998-99, has gained importance as a means of
ensuring continuous supervision. OSS is a mechanism for on-desk
evaluation for continuous and closer monitoring of client institutions
through various statutory and special returns. A computer-based
system has been developed in-house to scrutinise/analyse the off-site
returns and to issue warning signals to the banks wherever

56
warranted. During the year, bank officials as also officials of the
National Bank dealing with OSS, were sensitized through
workshops on OSS, operational problems, etc. The Fifth
‘Conference of Chief Co-operative Audit officers’ of various states
was also convened during the year. The conference has provided a
forum for useful interaction/discussions with ‘State Audit
Departments’ on issues of common interest. With a view to
developing the necessary skills to effectively perform in the
changing scenario, the inspecting officers of the National Bank were
deputed for various domestic/overseas training in different areas
relating to supervision.

THE CHALLENGE TO THE CO-OP SECTOR

The biggest challenge to the co-op sector, especially in the area of

agri-credit co-ops is one of sustainability and relevance. As
mentioned earlier, in the absence of any transaction cost advantages
to the primary co-operative, the village level branch of a CB/RRB
may find it easier to access funds from its own headquarters than the
PACS. There are no easy solutions to this dilemma of easy credit

57
adversely affecting the relationships of primary societies with their
members and their federal structures.

The process of change has already begun in India with the ILO CO-
OPNET/CO-OPREFORM Programme supporting the change in the
macro-policy environment for co-ops. As co-ops become member
centered, and mobilizes their own resources, the quality of capital
and management is bound to improve. They will then be able to
function as true member organizations, with supplemental
/incremental support from state agencies, but not critically
dependent as the scenario is today. This will require that the co-op
credit structure at all three levels make a comprehensive effort to
manage the funds and resources internally. There are several
examples within the country to show that primary co-op societies
can manage and finance the entire credit requirements of agricultural
operations in a village.

The fact that rural lending can be run on commercially sound

principles has been vindicated by the success of several thrift and
credit societies in different regions of the country. The GRAMEEN
Bank in Bangladesh, the SEWA in Ahmedabad and CDF supported
groups in AP (although operating on different principles) are
instances which show that a proper design, management and
governance structure with involvement of stakeholders holds the key
to succession fact, NABARD is now encouraging the CBs to set up
SHGs for group loaning in the rural areas- both in the farm and the
non-farm sector.

58
 CO-OPERATIVES AND CREDIT

Cooperatives all over the world have become an effective and

potential
Instrument of economic development. There are 4510 Primary
Agricultural Co-operative banks at the village level, providing short
term and medium term credit facilities to the agriculturists. The

59
Primary Agricultural Co-operative banks have covered 85.96 per
cent of the agricultural families in the State and 79.57 per cent of the
agricultural families of weaker section in terms of their operational
holdings.

ACHIEVEMENTS DURING THE NINTH AND TENTH FIVE

YEAR PLAN PERIOD AND THE PROGRAMME FOR 2005-2006

1. Credit Cooperatives
i) Issue of short term and Medium Term loans:
The quantum of short term and medium term loans issued by the
Primary Agriculture Co-operative Bank It has been programmed to
issue loans to the extent of Rs.1097.50 Crores under short term and
Rs.59.80 Crores under Medium term loans during the year 2005-
2006.

(ii) Issue of Long Term loans:

The long term credit needs of the agriculturists are met by 181
Primary Agriculture and Rural Development Banks. The details of
long term loans issued by the Primary Agricultural and Rural
Development Banks during IX and X Five Year It has been
programmed to issue long term loans to the extent of Rs.220.00
Crores during 2005-2006.

(iii) Issue of Jewel Loans:

60
The Jewel loan provided by the credit Cooperatives during the year
2004-2005 is Rs.4849.32 Crores. The programme for issue of jewel
loans for the year 2005-2006 will be Rs.5800.00 Crores.

iv) Crop Loan:

The State Government set a target of Rs.1037 crores to be given as
crop loan to the farmers by the Co-operative banks during the year
2004-05 as against the provision of Rs.616.59 crores during the last
year. So far an amount of Rs.955.31
crores has been provided as crop loans benefiting 4.76 lakh farmers.
The State Government have over the last four years, provided
various concessions to the farmers who have been affected by
natural calamities. The concessions given on the credit front are as
given below:- (Rs. in Crores)
1 Relief to farmers on interest and Penal Interest scheme 2001
310.51
2 Waiver of interest to Small and Marginal farmers who got
annavari certificates in 2002 61.05 %
3 15% State Government share in the conversion of the crop loans of
kharif 2002 20.00 %

2. Consumer Cooperatives
The Consumer Co-operative through their network in the State,
distribute consumer goods at reasonable prices to the public both in
urban and rural areas.

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The value of retail sales affected during 2004 -2005 was Rs.2348.18
crores. The programme for 2005-2006 is 2780.00 crores.

NEW SCHEMES –2005-06

1) Interest free loans to Women members of Primary Agricultural

Co-operative Banks for enhancing their borrowing power:
The Women in the rural areas belonging to weaker sections are
finding it Difficult even to contribute the share capital for availing
the loan facility extended by the Primary Agricultural Co-operative
Banks. The borrowing power of a member is linked to share capital
subscriptions. The sanction of share capital loan at Rs.500/- per
women member will enable them to raise loans for agricultural
purposes which will generate employment opportunities for women
members. It is proposed to assist 2000 women members of
respective primary Agricultural Co-operative banks at the rate of
Rs.500/- per member and the outlay will be Rs.10 lakhs during
2005-06. This will help to improve the standard of living.

2) Interest free loans to Women members of Urban Co-operative

Banks for
Enhancing their borrowing power:
The Urban Co-operative Banks provide credit facilities to urban and
Semi-Urban population for various purposes like carrying out
repairs or additions to Houses, carrying on petty trades, small scale
cottage industries etc., and the sanction of loans by these banks are
linked to the share capital subscription by the members. Considering

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the hardships experienced by women members of these banks in
remitting the required level of share capital for availing loan
facilities. A provision of Rs.5 lakhs has been made for the benefit of
1000 women members at the rate of Rs.500/- each during 2005-06.

3) Interest free loans to Women members of Primary co-operative

Agricultural and rural Development Banks for enhancing their
borrowing
Power: In the case of Primary co-operative Agriculture and rural
Development Banks (PCARDB) the borrowers have to contribute
5% of the loan amount towards the share capital. These banks cater
to the long-term credit needs of the rural people. As the Rural
women folk are mostly unemployed and economically weak, they
find it difficult to invest the required share capital for availing credit
from the banks. A sum of Rs.5 lakhs has been provided for the year
2005-06 towards sanction of loan to 500 women members at the rate
of Rs.1000/ per member.

4) Interest free loan to physically handicapped women for availing

credit
From co-operative Bank.
The Government is keen on promoting economic rehabilitation of
persons with disabilities through loan assistance by the co-operative
Banks. Further the economic conditions of the physically
handicapped women are far from satisfactory as most of them are
below poverty line. This scheme envisages in interest free loan to
physically handicapped women to facilitate them to invest a share

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capital to avail loan assistance from Co-operative banks so as to
improve their standard of living. Under this scheme, 1000
physically handicapped women will be benefited at the rate of
Rs.500/- per member. An amount of Rs.5 lakhs is provided for
2005-06.

PRIMARY DATA

1) What are the act prevailing in co-operative Societies?

The co-operative societies Act was passed in 1904 & a new co-
operative societies Act was passed in 1912.

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2) What is the Objective of co-operative banks when it started in
India?
Co-operative banking in India was started with the objective of
providing finance to the agriculturist and thus relieving him from the
clutches of the village money lenders, i.e., to solve the problem of
rural people.

3) What type of loan provided by co-operative banks in rural area?

The Co-operative banks provide two types of loan i.e.
a. Short term loans
b. Long term loans
The short term finance is purely for seasonal basis like Crop Loan. It
is generally for 12 months. But can be increased by 6 months if the
farmers face some problems. When loans are repayable by farmers
then again farmer can able to take loans.

4) What about the interest schemes offered to the customer?

The interest rate that is changed in respective schemes. Interest rate
is flexible. But normally interest rate is 7% on loan taken by
farmers. It depends on loan.

5) What are the problems faced by co-operative banks in rural area?

The co-operative banks faced lots of problem in the rural area i.e.
the main problem of co-operative banks is recovery of loans from
the farmers.
The recovery performance of the co-operative banks is not up to
the mark. the reason for poor recovery of loans and mounting

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overdues are; inadequate supervision and follow up action to assess
the end use of credit by co-operative banks due to inadequate staff in
banks, poor identification of beneficiaries, inadequate generation of
output and income by the beneficiaries, poor marketing facilities
The progress of co-operative banks is not upto the expectation
and is slow when comparing other type of banks because of many
restrictions on their operations.
The co-operative banks directly or indirectly by various
agencies i.e., NABARD, RBI. Thus it takes long time to take
decision on some important issues.

6) Why rural co-operative bank widely preferred in rural area?

Rural co-operative banks are preferred in rural areas because it
gives loans at a relatively low interest rate & they try to help the
farmers while repayment by increasing their time duration &
provide tailor made schemes to the farmers. Because the main aim
of co-operative banks is to help the farmers.

7) How C-operative banking help in development of rural area?

Co-operative banks play vary important role in development of
rural area by providing short term and long term loans to the
farmers. The short term finance is purely for seasonal basis. And co
operative banks provide various schemes to the farmers like
KISHAN CREDIT CARD.
Also help in repayment of loan by extending duration.

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8)In order to make rural population aware of the banking facility
what step bank should be taken?
1) Demonstration
2) Road shows
3) Person to Person
Co-operative banks more prefer third option. Direct communication
is better than any other communication. As rural people or farmers
are illiterate so face to face communication is better through this
bank can able to solve the difficulties of the farmers. So Co-
operative banks more prefer third option for explaining their benefits
of the banking facility like various schemes & product of the bank.

9) What is the three tire structure of co-operative banks?

The rural co-operative banking follows the three tire structure for
provide adequate finance to the rural people. The three tie structure
is as follows;

NABARD

State Level Co-Operative Banks (SCB)

District Central Co-operative Banks (DCCB)

Primary Agriculture Credit Society (PACS)

Farmers &
67 small Entrepreneur
The NABARD is Apex institution NABARRD not provide direct
loans to the farmers. It provides finance to the State Level Co-
Operative Banks (SCB).NABARD provides state wise finance for
rural development. Then (SCB) gives finance to the (DCCB) this
bank not directly deals with the farmers. This bank gives finance to
the Primary Agriculture Credit Society (PACS). And this bank gives
direct finance to the farmers. PACS provide different types of loan
to the farmers with less interest rate. Also provide different schemes
for rural development.

10) Credit structure of the co-operative banks?

Credit Structure
NABARD not involved in the direct credit helps to any rural
development activities, since NABARD is apex institution it has
three tire systems for refinancing rural development activities: which
is explained following
Primary Agriculture Credit Society (PACS)
Primary Agriculture Credit Societies are the bottom payer in the
Credit these societies are directly in contact with the local farmers.
They have all necessary information, such as land occupied by him,

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his requirement etc of the farmers. They give loans to the farmers at
decided rate of interest.
District Central Co-operative Banks (DCCB)
These banks provide refinance to PACS to meet their credit needs
for granting loans to farmers. District level Co- Operative bank have
many PACS under in it so not all loan granted by the PACS are
refinance by DCCB. Only 80% to 90% are refinanced by the DCCB.
State Level Co-Operative Banks (SCB)
All the DCCB are the member of the SCB. And these DCCBs
depend upon the SCB for the credit requirement as DCCB have
many PACS under in it. Like not all Credit to farmers by PACS is
refinanced by the DCCBs, SCB also not refinanced by the SCB.
Apex level institution (NABARD)
NABARD plays very vital role in the credit distribution channel. It
provides refinance facility to all SCB against loan sanctioned to
DCCBs.

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 BIBLIOGRAPHY

BOOKS REFERRED:

 Indian banking.

Newspaper referred:

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  Times of India
 Economic times

WEBSITES REFFERED

 www.nabard.org
 www.google.com

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