COMPARATIVE STUDY OF COMMERCIAL BANKS AND CO-

OPERATIVE BANKS

Introduction

The robust macroeconomic environment continued to underpin the financial

performance of Indian banks during 2004-05, with major bank groups successfully
weathering the impact of an upturn in interest cycle. The demand for credit was
broad-based during 2004-05 with agriculture and industry joining the housing and
retail sectors to drive up the demand for credit. A sharp increase in net interest
income mitigated to a large extent the impact of a sharp decline in non-interest
income mainly on account of decline in trading profits. Banks continued to earn
sizeable profits albeit somewhat lower than last year. Asset quality of scheduled
commercial banks improved further during 2004-05. Capital base of banks kept
pace with the sharp increase in risk-weighted assets.

ORIGIN AND EVOLUTION OF INDIAN BANKING

Opinions differ as to the origin of the work "Banking". The word "Bank" is said to be
of Germanic origin, cognate with the French word "Banque" and the Italian word
"Banca", both meaning "bench". It is surmised that the word would have drawn its
meaning from the practice of the Jewish money-changers of Lombardy, a district in
North Italy, who in the middle ages used to do their business sitting on a bench in
the market place. Again, the etymological origin of the word gains further relevance
from the derivation of the word "Bankrupt" from the French word "Banque route"
and the Italian word "Banca-rotta" meaning "Broken bench" due probably to the
then prevalent practice of breaking the bench of the money-changer, when he
failed.
Banking is different from money-lending but two terms have in practice been taken
to convey the same meaning. Banking has two important functions to perform, one
of accepting deposits and other of lending monies and/or investment of funds. It
follows from the above that the rates of interest allowed on deposits and charged
on advances must be known and reasonable. The money-lender advances money
out of his own private wealth, hardly accepts deposits and usually charges high
rates of interest. More often, the rates of interest relate to the needs of the
borrower. Money-lending was practised in all countries including India, much earlier
than the recent type of Banking came on scene.

DEFINATION AS PER BANKING REGULATION ACT 1949

A Bank borrow by accepting deposits of money from the public, the deposits are to
be repaid on demand or after fixed period. They can be withdrawn by the depositors
by means of cheque, draft, order or any other way. A Bank accepts deposits (i.e.
borrows) for the purposes of lending mainly to traders, industrialists and
manufacturers and the like as also, for the purposes of investing in government
securities to fulfill statutory obligations. Thus, Banking Regulations Act, 1949
defines “Banking as accepting for the purposes of lending or investment of deposits
of money from the public repayable on demand or otherwise and withdrawable by
cheque, draft , order or otherwise.”
By and large, this definition can be satisfactory. As per the provision of the Banking
Regulation Act, every company willing to do banking business must obtain license
from the Reserve Bank for carrying on banking business in India. Besides, all
companies carrying on banking business must use the word bank, banker or
banking as per of their names. It may be noted that money-lenders are not bankers.

Basic Concepts of Banking

Banking is different from money lending, but the two terms, usually carry the same
significance to the general public. The money lender, advances money out of his
own private wealth, hardly accepts deposits from general public and usually
charges high rate of interest. More often, the rates of interest relate to the needs of
the borrower and at times the rates may be exorbitant. On the other hand the
banking is defined in section 5(b) of the Banking Regulation Act, 1949, as the
acceptance of deposits of money from the public for the purpose of lending or
investment. Such deposits of money from the public are used for the purpose of
lending or investment. Such deposits may be repayable on demand or otherwise
and with drawable by cheque, draft order or otherwise. Thus a bank must perform
two basic and essential functions:
(i) acceptance of deposits and
(ii) lending or investment of such deposits.
The deposits may be repayable on demand or a for a period of time as agreed by
the banker and the Customer. In terms of the definition, the banker can accept
deposits of money and Not Anything Further accepting deposits form frolic
unapplied that a banker accepts deposits form anyone who offers money for such
purpose Accepting of deposits for lending and investments have been the original
functions of banking but gradually there functions were extended and others were
added from time to time and presently banks perform a number of economic
activities which may affect all walks of economic life.

Significance of Banks

The importance of a bank to modern economy, so as to enable them to develop,

can be stated as follow:

(i) The banks collect the savings of those people who can save and allocate them to
those who need it. These savings would have remained idle due to ignorance of the
people and due to the fact that they were in scattered and oddly small quantities.
But banks collect them and divide them in the portions as required by the different
investors.

(ii) Banks preserve the financial resources of the country and it is expected of them
that they allocate them appropriately in the suitable and desirable manner.

(iii) They make available the means for sending funds from one place to another
and do this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and
uncrossed, which is the easiest and most convenient, Besides they also care for
making such payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious
possessions intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for
financing the developmental process, is governed by banks.

(vii) It makes the monetary system elastic. Such elasticity is greatly desired in the
present economy, where the phase of economy goes on changing and with such
changes, demand for money is required. It is quite proper and convenient for the
government and R.B.I. to change its currency and credit policy frequently, This is
done by RBI, by changing the supply of money with the changing the supply of
money with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and

lending, the banks have now spread their wings far and wide into many allied and
even unrelated activities.

Banking as an Ancestral Service

For the history of modern banking in India, a reference to the English Agency
Houses in the days of East India Company is necessary. Those agency houses, with
no capital of their own and depending entirely on deposits, were in fact trading
firms carrying on banking as a part of their business and vanished form the scene in
the crises of 1829-32. In the first half of the 19th century, the East India company
established 3 banks The Bank of Bengal in 1809, the Bank of Bombay in 1840 and
the Bank of Madras in 1843.
The Bank of Bengal was given Charter with a capital of Rs.50 Lakhs. This bank was
given powers in different years as to:

(i) Rate of interest was limited to 12%.

(iii) Power to issue currency notes was given in 1824.

(iii) Power to open new branches given in 1839.

(iv) Power to deal in inland exchange was given in 1839.

These 3 banks were also known as Presidency Banks. The currency notes issued by
presidency banks were not popular, those were replaced by Government Paper
Money in 1862. In 1860, the principle of limited liability was introduced in India in
Joint Stock banks, to avoid mushroom growth of banks, which failed mostly due to
speculation, mismanagement and fraud. During the .crises in between 1862-75,
numerous banks failed, including

Bank of Bombay. The Bank of Bombay was later restarted in the same year; with
the same name. Due to failure of banks, during 1862-75 only only one bank was
established in 1865 i.e. the Allahabad Bank Ltd. Indian banks were restarted
functioning in the year 1894, when the Indian mints were closed to the free coinage
of silver. The only important bank registered after the closure of the mints was the
Punjab National Bank Ltd. with its head office at Lahore in 1895.

In the Swadeshi movement, number of banks were opened by Indians during 1906-
13. Those new banks were:
· Peoples Bank of India Ltd.
· Bank of India Ltd.
· Central Bank of India Ltd.
· Indian Bank Ltd.
· Bank of Baroda Ltd.

This boom of opening new banks was overturned by the most severe crises of 1913-
17. Therefore the period of amalgamation started. All the three presidency banks
were amalgamated on 27th. Jan. 1921 and the Imperial Bank of India was
established This bank was allowed to hold Government balances and to manage the
public debt and clearing houses till the establishment of the RBI in 1935. With the
passing of the State Bank of India Act, 1955, the undertaking of Imperial bank of
India, was taken over by the newly constituted SBI. It had the largest number
branches, which gave it the privilege of conversion into Government business
institution of the country
Pursuant to the provisions of the State Bank of India (Subsidiary Bank) Act, 1959,
The following banks were constituted as subsidiary of SBI :

· State Bank of Bikaner & Jaipur

· State Bank of Indore
· State Bank of Travancore
· State Bank of Hydrabad
· State Bank of Patiala
· State Bank of Saurashtra
· State Bank of Mysore

In 1960, the Palai Central Bank in Kerala failed and that gave suspicion to the
depositors. As such Deposit Insurance of Credit Guarantee Corporation (DIGGC) was
established to guarantee repayment of deposits up to Rs. 10,000 to each depositor
in case of failure of banks. On 19th July, 1969, 14 Joint Stock banks were
nationalized which were having minimum depositors of Rs.50 crores and above.
This brought into its fold 50% of banks' operations Again in April, 1980, 6 more
banks were brought under area of nationalised banks, to total business of 95% in its
fold. These 6 banks were giving tough competition to nationalized bankers and were
indulged into irregularities causing concern to depositors.
Business Position of scheduled banks as on 29/4/05

Deposits Rs. 17,81,580 Crore

Credits Rs. 11,27,433 Crore

Bank Rate 6% (even in Oct 2005)

Prime Lending Rate (PLR) in between 10.5% -11.50%

CRR 4.50%

SLR 25%

Presently, as a part of deregulation many new generation private sector banks have
been permitted viz. ICICI 1 (IDBI) HDFC and the nationalized banks are being
privatized to the extent of 49%.

INTRODUCTION OF COMMERCIAL BANK

Commercial banks are the oldest, biggest, and fastest growing intermediaries in
India. they are also the most important depositories of public saving and the most
important disburses of finance. commercial banking in India is a unique systems,
the like of which exist nowhere in the world. the truth of this statement becomes
clear as one studies the philosophy and approaches that have contributed to the
evolution of the banking policy, programmes and operation in India.

The banking systems in India works under the constraints that go with social control
and public ownership. the public ownership of banks has been achieved in three
stages:1955,July1969, and April 1980. Not only the private sector and foreign banks
are required to meet targets in respect of sectoral development of credit, regional
distribution of branches, and regional credit- deposits ratios. the operations of
banks have been determined by Lead Bank Scheme, Differential Rate of Interest
Scheme, Credit Authorisation Scheme, inventory norms and lending systems
prescribed by the authorities, the formulation of the credit plans, and Service Area
Approach.

Balancing Profitability with Liquidity Management

Commercial banks ordinarily are simple business or commercial concerns which

provide various types of financial services to 'customers in return for payments in
one form or another, such as interest, discounts, fees, commission, and so on. Their
objective is to make profits. However; what distinguishes them from other business
concerns (financial as well as manufacturing) is the degree to which they have to
balance the principle of profit maximization with certain other principles.

In India especially, banks are required to mod their performance in profit-making if

that clashes with their obligations in such areas as 'social welfare, social justice, and
promotion of regional balance in development. In any case, compared to other
business concerns, banks in general have to pay much more attention to balancing
profitability with liquidity/It is true that all business concerns face liquidity constraint
in various areas of their decision-making and, therefore, they have to devote
considerable attention to liquidity management. But with banks, the need for
maintenance of liquidity is much greater because of the nature of their liabilities.
Banks deal in other people's money, a substantial part of which is repayable on
demand.- That is why for banks, unlike other business concerns, liquidity
management is as important as profitability management
This is reflected in the management and control of reserves of commercial banks.

MANAGEMENT OF RESERVES

The banks are expected to hold voluntarily a part of their deposits in the form of
ready cash which is known as cash reserves; and the ratio of cash reserves to
deposits is known as the (cash) reserve ratio. As banks are likely to be tempted not
to hold adequate amounts of reserves if they are left to guide themselves on this
point, and since the temptation may have extremely destabilising effect on the
economy in general, the Central Bank in every country is empowered to prescribe
the reserve ratio that all banks must maintain. The Central Bank also undertakes, as
the lender of last resort, to supply reserves to banks in times of genuine difficulties.
It should be clear that the function of the legal reserve requirements is two-fold:
(a) to make deposits safe and liquid, and
(b) to enable the Central Bank to control the amount of checking deposits or
bank money which the banks can create.

Since the banks are required to maintain a fraction of their deposit liabilities as
reserves, the modern banking system is also known as the fractional reserve
banking.

CREATION OF CREDIT

Another distinguishing feature of banks is that while they can create as well as
transfer money (funds), other financial institutions can only transfer funds. In other
words, unlike other financial institutions, banks are not merely financial
intermediaries. This aspect of bank operations has been variously expressed. Banks
are said to create deposits or credit or money, or it can be said that every loan
given by banks creates a deposit. This has given rise to the important concept of
deposit multiplier or credit multiplier or money multiplier.

The import of this is that banks add to the money supply in the economy, and since
money supply is an important determinant of prices, nominal national income, and
other macro-economic variables, banks become responsible in a major way for
changes in economic activity. Further, as indicated in Chapter One, since banks can
create credit, they can encourage investment for some time without prior increase
in saving.

BASIS AND PROCESS OF CREDIT CREATION

Creation of money by banks. In modern economies, almost all exchanges are

effected by money. Money is said to be a medium of exchange, a store of value, a
unit of account. There is much controversy as to what, in practice in a given year, is
the measure of supply of money in any economy. We do not need to go into that
controversy here. Suffice it to say that everyone agrees that currency and demand
deposits with banks are definitely to be included in any measure of money supply.
Thus, apart from the currency issued by the government and the Central Bank, the
demand or current or checkable deposits with banks are accepted by the public as
money. Therefore, since the loan operations of banks lead to the creation of
checkable deposits, they add to the supply of money in the economy. To
recapitulate, the money-creating power of banks stems from the fact that modern
banking is a fractional reserve banking, and that certain liabilities of banks are
accepted (used) by the public as money.

Credit Ratio
Non-food credit grew at a high rate during 2004-05.Normally, the rate of credit is
higher than the rate of growth of deposits due to the base effect- the outstanding
deposits is much higher than the outstanding credit. For instance, while the
outstanding deposits at end-March 2005 were Rs,18,19,900 crore, the outstanding
credit was Rs, 11,04,913 crore. Also, in any given year, the accretion to credit has
generally remained lower than the accretion to deposits. During 2004-05, however,
incremental credit and deposits were more or less of the same magnitude, while
incremental investments in relation to deposits during the year were much lower
than in the previous year. This resulted in some unusual behaviour of the credit-
deposit (C-D) ratio and investment-deposit (I-D) ratio Among bank-groups, the new
private sector banks had the highest C-D ratio, followed by foreign banks, old
private sector and public sector banks

Bank Credit

Volume of Credit Commercial banks are a major source of finance to industry and
commerce. Outstanding bank credit has gone on increasing from Rs 727 crore in
1951 to Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in
1989-90, Rs 2,82,702 crore in 1997, and to Rs 6,09,053 crore in 2002. Banks have
introduced many innovative schemes for the disbursement of credit. Among such
schemes are village adoption, agricultural development branches and equity fund
for small units. Recently, most of the banks have introduced attractive educational
loan schemes for pursuing studies at home or abroad. They have moved in the
direction of bridging certain defects or gaps in their policies, such as giving too
much credit to large scale industrial units and commerce, and giving too little credit
to agriculture, small industries, and so on.

Types of Credit Banks in India provide mainly short-term credit for financing working
capital needs although, as will be seen subsequently, their term loans have
increased over the years. The various types of advances provided by them are:

(a) loans, (b) cash credit, (c) overdrafts (0D), (d) demand loans, (e) purchase and
discounting of commercial bills, and (h) installment or hire-purchase credit.

Cash Credit and Overdraft

Cash credits and overdrafts are said to be running accounts, from which the
borrower can withdraw funds as and when needed up to the credit limit sanctioned
by his banker. Usually, while cash credit is given against the security of commodity
stocks, overdrafts are allowed on personal or joint current accounts. Interest is
charged on the outstanding amount borrowed and not on the credit limit
sanctioned. In order to curb the misuse of this facility, banks used to levy a
commitment charge on unutilised portion of the credit limit sanctioned. However,
this practice has now been discontinued. Although these advances are mostly
secured and of a self-liquidating character, banks are known to provide them on
'clean basis' in certain cases. Technically, these advances are repayable on
demand, and are of a short-term nature. Actually, the widespread prevalent
practice is to roll over these advances from time to time.
As a result, cash credits actually become long-term advances in many cases.
Although, technically these advances are highly liquid, it has been pointed out that
it is a myth to regard them so because even the most profitable borrower would
hardly be in a position to repay them on demand.

Purchasing and Discounting of Bills

Purchasing and discounting of bills-internal and foreign-is another method of

advancing credit by banks. It is adopted mainly to finance trade transactions and
movement of goods. Bill finance is either repayable on demand or after a period not
exceeding 90 days. It has been observed that bills traded in India are often fake
bills created out of book debts of industrial and business units. Bill financing has
certain favourable features. Banks can raise funds in the secondary markets by
rediscounting bills with the RBI and financial institutions like IDBI and Discount and
Finance House of India (DFHI).

They can also earn some money if the rediscount rate is lower than the discount
rate. Further, the buying and selling of bills expand the banks' business more
quickly by the faster recycling of funds.
Among these different systems of bank credit, cash credit/overdraft system remains
the most important one. The shift away from it has been slow. Of the total bank
credits, the outstanding cash credit and overdrafts accounted for about 66 per cent
in 1935, 69 per cent in 1949, 57 per cent in 1973, 52 per cent in 1976, 45 per cent
in 1986 and 48 per cent in 1994, and 36 per cent in 2002.

MONETARY AND CREDIT POLICY

The policy Statements of the Reserve Bank provide a frame work for the monetary,
structural and prudential measures that are initiated from time to time consistent
with the overall objectives of growth, price stability and financial stability.
SPECIAL ROLE OF BANKS

As said earlier, commercial banks have a special role in India. In fact, many financial
experts even abroad have, of late, been emphasising the special place that banks
hold in their countries also. The "privileged role" of the banks is the result of their
unique features. For example, the liabilities of banks are money, and, therefore,
they are an important part of the payments mechanism of any country; they also
have access to the discount window of the RBI, call money market (as both
borrowers and lenders), and the deposit insurance. It would be difficult to eliminate
such distinctive features of banks in the near future. There is also an important
question as to whether they should be wiped out, and, if it is done, whether it would
not have adverse consequences on the financial system.

For a financial system to mobilise and allocate savings of the country successfully
and productively, and to facilitate day-to-day transactions, there must be a class of
financial institutions that the public views as safe and convenient outlets for its
savings. In virtually all countries, the single dominant class of institutions that has
emerged to play this crucial role as both the repository of a large fraction of the
society's liquid savings and the entity through which payments are made is the
commercial banks. The structure and working of the banking system are integral to
a country's financial stability and economic growth.

Bank lending is specially important for companies. The theory of financial

contracting under asymmetric information holds that information-intensive and
information-problematic firms submit to the tight and detailed loan covenants so as
to reduce agency costs. They delegate the tasks of monitoring and renegotiating
debt contracts to financial intermediaries because these tasks are costly and the
intermediaries are in a better position to reduce the costs. Intermediaries are more
efficient in monitoring debt contracts because they are unlikely to free-ride on
information-production by others as they have a larger stake, and they can
renegotiate contracts more cheaply than the dispersed debenture holders. The
public bond covenants tend to set their conditions on events that are relatively easy
to verify, viz., a major change in capital structure or a downgrading of credit rating.
In contrast, the intermediary loan contracts are conditioned by performance
measures such as working capital and net worth which are less easily controlled by
the managers.
Further, the violation of a financial covenant often triggers financial distress. When
this happens, banks can restructure the terms of contracts, viz., wave covenants,
extend maturity, extend more loans, and require more collateral. Such a flexibility
reduces the cost of financial distress. Information asymmetries and free-riding by
bond-holders, on the other hand, may force the financially distressed firms into
inefficient spending cutbacks, and even bankruptcy. It has been found in the US
that the firms' stock prices rise after an announcement that they have received
bank loans, while they fall in response to announcement of a public bond offering.

Similarly, there are reasons why loans from even other financial institutions may not
be a perfect substitute for bank loans. The economies of scope between deposit
taking and lending give banks an information advantage over finance companies
and other financial institutions. The deposit history of firms may inform banks about
the credit risk involved in lending to these firms. Information on deposits activity
may also make it easier for banks to monitor working capital covenants. The
phenomenon of "compensating balances" can mostly exist only in the case of
banks, and not other institutions. The lending and deposit-taking activities of banks
are complementary, and, go to build up banking relationship which increases the
availability of funds to the firms, which, in turn, enables them to partially avoid
taking more expensive trade credit. Personal relationships are far less important in
borrowing from other financial institutions than from banks. Moreover, significant
differences in collateral requirements exist between banks and other financial
institutions. All such differences effectively segment the market for business
lending, and make bank loans highly unsubstitutable.

The Indian banking system has a very wide reach and deep presence in
metropolises, cities, semi-urban areas, and the remotest corners of the rural areas
with its vast number of branches. It is one of the largest banking systems in the
world. It has been rightly claimed in certain circles that the diversification and
development of the Indian economy are in no small measure due to the active role
banks have played in financing economic activities of different sectors They have
been playing an important role in developing mutual funds, merchant banks,
Primary Dealers, asset management companies, and debt markets. They operate as
issuers, investors, underwriters, guarantors in financial-markets. By their
participation, banks influence the growth and liquidity of debt markets.
They would help in securitisation of debt market. They hold about 60 per cent of
debt stock of government securities, and they account for more than 50 per cent of
the issuance of bonds through public issues and private placements.

Because of such considerations, the important position which banks have

historically come to occupy in India should not be unwittingly destroyed or
undermine in the name of promoting equity culture. Otherwise, monetary
authorities would find it more and more difficult to achieve the goal of stability of
the financial system and of the prices. The banking reforms, therefore, must aim not
only at profitable banking but also at a viable, sound, safe, and social banking.
GROWTH OF COMMERCIAL BANKS IN INDIA
INDIAN BANKING SYSTEM

RESERVE BANK OF INDIA

AGGREGATE DEPOSITS OF SCHEDULED COMMERCIAL BANKS

Aggregate deposits of SCBs increased at a lower rate during 2004-05 as compared

with the previous year during 2004-05 on account of slowdown in demand deposits
and savings deposits. Decline in demand deposits was due mainly to the base effect
as demand deposits had witnessed an unusually high growth last year. Reversing
the trend of the previous year, bank credit registered a robust growth during the
year. Although banks investment in government securities during the year 2004-05
slowed down significantly, the banking sector at end March 2005 held about 38.4%
of its net demand and time liabilities in SLR securities, much in excess of the
statutory minimum requirement of 25%. The non SLR investments of SCBs
continued to decline during 2004-05, reflecting the portfolio adjustments by banks
subsequent to guidelines on non-SLR securities issued by the Reserve Bank in
November and December 2003

PRUDENTIAL REGULATION

A key element of the ongoing financial sector reforms has been the strengthening of
the prudential framework by developing sound risk management systems and
encouraging transparency and accountability. With a paradigm shift from micro-
regulations to macro-management, prudential norms have assumed an added
significance. The focus of prudential regulation in recent years has been on
ownership and governance of Banks Basel II.

OWNERSHIP AND GOVERNANCE OF BANKS

Banks are special for several reasons. They accept and deploy large amount of
collateralized public funds and leverage such funds through credit creation. Banks
also administer the payment mechanism. Accordingly, ownership and governance of
banks assume special significance. Legal prescription relating to ownership and
governance laid down in the Banking Regulation Act, 1949 have, therefore, been
supplemented by regulatory prescriptions issued by the Reserve Bank from time to
time.

The existing legal framework and significant current practices cover the following
aspects:

i) composition of Boards of Directors:

ii) guidelines for acknowledgement of transfer/allotment of shares in private sector
banks issued as on February 3, 2004:
iii) guidelines and corporate governance
iv) foreign Investment in the banking sector, which is governed by he Press Note of
March 5, 2004 issued by the Ministry of Commerce and Industry, Government of
India.

The Reserve Bank in consultation with government of India, laid down a

comprehensive policy frame work on February 28, 2005.

The broad principles underlying the framework ensure that

i) ultimate ownership and control is well diversified

ii) important shareholders are ‘fit and proper’

iii) directors and CEO are ‘fit and proper’ and observe sound corporate governance
principles.

iv) Private sector banks maintain minimum capital (initially Rs 200 crore, with a
commitment to increase to Rs 300 crore within three years )/net worth (Rs. 300
crore at all times) for optimal operations and for systematic stability:

v) Policy and process are transparent and fair.

IMPLEMENTATION OF THE NEW CAPITAL ADEQUACY FRAMEWORK (BASEL II

NORMS)

Given the financial innovations and growing complexity of financial transactions, the
Basel Committee on Banking Supervision released the New Capital Adequacy
Framework on June 26, 2004 which is based on three pillars of minimum capital
requirements, supervisory review and market discipline. The revised framework has
been designed to provide options to banks and banking systems, for determining
the capital requirements for credit risk, market risk and operational risk and enables
banks/supervisors to select approaches that are most appropriate for their
operations and financial markets. The revised framework is expected to promote
adoption of stronger risk management practices in banks. Under Basel II, banks’
capital requirements will be more closely aligned with the underlying risks in
banks’balance sheets. One of the important features of the revised framework is the
emphasis on operational risk.

NPA Management by Banks

The Reserve Bank and the Central Government have initiated several institutional
measures to contain the levels of NPAs. These include Debt Recovery Tribunals
(DRTs), Lok Adalats (people's courts), Asset Reconstruction Companies (ARCs) and
Corporate Debt Restructuring (CDR) mechanism. Settlement Advisory Committees
have also been formed at regional and head office levels of commercial banks.
Furthermore, banks can also issue notices under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, 2002 for enforcement of security interest without intervention of courts. Thus.
banks have a menu of options to resolve their NPA problem. With a view to
providing an additional option and developing a healthy secondary market for NPAs,
guidelines on sale/purchase of nonperforming assets were issued in July 2005 where
securitisation companies and reconstruction companies are not involved.

The guidelines include several specific provisions:

i) A nonperforming asset in the books of a bank shall be eligible for sale to other
banks only if it has remained a non-performing asset for at least two years in the
books of the selling bank and such selling should be only on a cash basis;

ii) A nonperforming financial asset should be held by the purchasing bank in its
books at least for a period of 15 months before it is sold to other banks;

iii) A bank may purchase/sell non-performing financial assets from/to other banks
only on a 'without recourse' basis;

iv) Banks should ensure that subsequent to sale of the non-performing financial
assets to other banks, they do not have any involvement with reference to assets
sold and do not assume operational, legal or any other type of risks relating to the
financial assets sold:

v) A non-assume operational, legal or any other type of risks relating to the financial
assets sold; performing financial asset may be classified as 'standard' in the books
of the purchasing bank for a period of 90 days from the date of purchase.
Thereafter. the asset classification status of the account shall be determined by the
record of recovery in the books of the purchasing bank with reference to cash flows
estimated while purchasing the asset. The asset shall attract provisioning
requirement appropriate to its assets classification status in the books of the
purchasing bank;

vi) Any recovery in respect of a non- performing asset purchased from other banks
should first be adjusted against its acquisition cost. Recoveries in excess of the
acquisition cost can be recognized as profit;

vii) The asset classification status of an existing exposure to the same obligor in the
books of the purchasing bank will continue to be governed by the record of recovery
of that exposure and hence may be different;
viii) For the purpose of capital adequacy, banks should assign 100 per cent Risk
weights to the non-performing financial assets purchased from other banks;
ix) In the case the non- performing asset purchased is an investment, then it would
attract capital charge for market risk also; and

x) The purchasing bank should ensure compliance with the prudential credit
exposure ceilings (both single and group) after reckoning the exposures to the
obligors arising on account of the purchase.

DEBT RECOVERY TRIBUNALS

Debt Recovery Tribunals (DRTs) were set up under the Recovery of Debts Due to
Bank and financial Institutions Act, 1993 for expeditious adjudication and recovery
of debts due to banks and financial institutions.On the recommendation of the
Reserve Bank, the Government of India set up a Working Group in July 2004 to
improve the functioning of DRTs. The Working Group is expected to examine issues
and recommend appropriate measures regarding:

(a) The need to extend the provisions of the Recovery of Debts Due to
Banks And Financial Institutions Act to cases for less than Rs.10 lakh;

(b) Redistribution of jurisdiction of the various DRTs;

(c) Modification in the existing strength of the DRTs/Debt Recovery

Appellate Tribunals (DRATs); and

(d) Legal and institutional provisions.

Progress in Implementation of Risk Based Supervision

Several initiatives have been taken for a gradual roll out of the risk based
supervision (RBS) process since the announcement made in the Monetary and
Credit Policy of April 2000. There were two rounds of pilot run of RBS covering 23
banks in public sector, private sector (old and new) and foreign banks categories
during 2003-2005. Evaluation of the findings of first pilot run revealed that the bank
level preparedness for RBS/Risk Based Internal Audit (RBIA) process was very slow.
There were certain overlaps under both the business and control risks. Several
steps were, therefore, taken to streamline the RBS process.
¨ First, pending amendment to risk profile templates, changes were made in the
structure of inspection report to capture and report business risk and control risk in
one place.
¨ Second, a work book together with a sample of on-site inspection report was
designed to help the inspecting officers to undertake the RBS.
¨ Third, natural resource group with officers from different departments of the
Reserve Bank and the Executive Director Chairperson is in existence to analyse risk
models employed by banks in India.
¨ Fourth internal group was formed to revisit the Profile Templates (RPTs).The
revised RPTs, methodology for risk assessment and also guidelines for arriving at
the supervisory rating of the bank were discussed in Conference of Regional Offices
of the Reserve Bank held on July 22 and 23, 2005.

Monitoring of Frauds

With a view to reducing the incidence of frauds, the Reserve Bank advised banks in
October 2002 to look into the existing mechanism for vigilance management in their
institutions and remove the loopholes, if any, with regard to fixing of staff
accountability and completion of staff side action in all fraud cases within the
prescribed time limit, which would act as a deterrent. Banks were also urged to
bring to the notice of the Special Committee of the Board constituted to monitor
large value frauds and the actions initiated in this regard.

A Technical Paper on Bank Frauds covering various aspects such as nature of

frauds, present arrangement for follow-up of frauds, international legal framework
relating to frauds, possible further measures with regard to legal and organisational
perspectives was prepared and placed in the BFS meeting held on April 8, 2004.
The Technical Paper recommended the constitution of a separate Cell to monitor
frauds not only in commercial banks but also in financial institutions, Local Area
Banks, urban co-operative banks and non-banking finance companies. As the
proposal was accepted by the BFS, a separate Fraud Monitoring Cell (FrMC) was
constituted on June I, 2004 under the overall administrative control of the
Department of Banking Supervision. The FrMC is expected to adopt an integrated
approach and pay focused attention on the frauds reported by financial entities
mentioned above.

A Master Circular dated October 18, 2002 on "Frauds - Classification and Reporting"
was revised on August 7, 2004 and was placed on Reserve Bank's website. The
formats in the Master Circular have been revised according to requirements of
Fraud Reporting and Monitoring System (FRMS) package.

With a view to having integrated approach and ensure uniformity in reporting

requirements for all the institutions under the ambit of Fraud Monitoring Cell, the
Master Circular was made applicable to FIs local area banks (LABs) as well.

Modification in Format of Declaration Indebtedness from Statutory Auditors

Statutory auditors of banks were required to provide a declaration to banks in which

are undertaking audit to the effect that no Credit facility (including guaranteeing
any facilities availed of by third party) was availed of by the proprietor/any of the
partners of the audit firm/ members of his/their families or by the firm/ company in
which he/they are partners/ or Director/s from any other bank/financial institution.

Banks were also advised that while appointing their statutory central/branch
auditors, they should obtain a declaration from concerned audit firms duly signed
by their main partner/proprietor to the effect that credit facilities, if any, availed of
from other banks/FIs by them/their partners/members of family/company in which
they are partners/ Directors or the credit facilities from such institutions guaranteed
by them on behalf of third parties had not turned non-performing in terms of the
prudential norms of the Reserve Bank.

The format of declaration of indebtedness to be obtained from the

partners/proprietors of audit firms to be appointed as statutory auditors of banks
was modified in January 2005 to include that neither the proprietor/main partner nor
of the partners/members of their families or the firm/company in which they are
partners/directors has been declared as a willful defaulter by any bank/financial
institution.

Payment and Settlement Systems

The payment and settlement systems are at the core of financial system
infrastructure in a country. A well-functioning payment and settlement system is
crucial for the successful implementation of monetary policy and maintaining the
financial stability. Central banks have therefore, always maintained a keen interest
in the development of a payment and settlement system as part of their
responsibilities for monetary and financial stability .In India, the development of a
safe, secure and sound payment and settlement system has been the key policy
objective. In this direction, the Reserve Bank, apart from performing the regulatory
and supervisory functions, has also been making efforts to promote functionality
and modernization of the payment and settlement systems on an on-going basis, In
order to provide focused attention to the payment and settlement systems, the
Reserve Bank constituted the Board for regulation and supervision of Payment and
Settlement Systems (BPSS) as a Committee of its Central Board.

The Reserve Bank of India (Board for regulation and supervision of Payment and
Settlement Systems) Regulations, 2005 were notified in the Gazette of India on
February 18, 2005. The BPSS is headed by the Governor of the Reserve Bank with
the Deputy Governor in-charge of Payment and Settlement Systems as the Vice-
Chairman and the other Deputy Governors and two members of the Central Board
of the Reserve Bank as members. The Executive Directors in-Charge of the
Department of Payments and Settlement Systems (DPSS) and Financial Market
Committee and Legal Adviser-in-Charge are permanent invitees. The Board also has
an external expert as a permanent invitee.

Functions and powers of the BPSS include formulating policies relating to the
regulation and supervision of all types of payment and settlement systems, setting
standards for existing and future systems, authorising the payment and settlement
systems and determining criteria for membership. The National Payments Council,
which was set up in 1999, has been designated as a Technical Advisory Committee
of the BPSS. To assist the BPSS in performing its functions, a new department, the
Department of Payments and Settlement Systems (DPSS), was set up in Reserve
Bank in March 2005.
The BPSS has met three times since constitution in March 2005.

The Board at its meetings, inter alia, has emphasised that

(i) Payment system services in India should taken to a level comparable with the
best in world;

(ii) Appropriate legal infrastructure may be created as early as possible;

(iii) A plan drawn up to "leapfrog" from cash to electronic modes of payment,

Wherever possible; cheque clearing system would have to be made more efficient
through cheque truncation system; and

(iv) Usage of the Real Time Gross Settlements (RTGS) System be increased both in
terms of opening additional branch outlets and more number of transactions being
put through.

For modernising the payment and settlement systems in India, a three-pronged

approach has been adopted with due emphasis on consolidation, development and
integration. The consolidation of the existing payment systems involves the
strengthening of computerized cheque clearing and expanding the reach of Electro
Clearing Services (ECS) and Electronic Fund Transfer (EFT).
.
Legal Reforms in the Banking Sector

An efficient financial system requires a regulatory framework with well-defined

objectives, adequate and clear legal framework and transparent supervisory
procedure. This, in turn, requires comprehensive legislations to enable the
regulatory authorities to discharge their responsibilities effectively. The Reserve
Bank has, therefore, been making constant efforts to upgrade and strengthen the
legal framework in tune with the changing environment.
The Enforcement of Security Interest, Recovery Debts Laws (Amendment) Act, 2004
(Act NO.30 of 2004) has amended Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest 2002 (SARFAESI), the Recovery of
Debts to Banks and Financial Institutions Act, 1993 and the Companies Act, 1956.
By this amendment Act, the SARFAESI Act has been amended, inter alia, to:

(i) Enable the borrower to make application before the Debt Recovery Tritbunal
against the measures taken by the creditor without depositing any portion of money
due;

(ii) Provide that the Debt Recovery Tribunal shall dispose of the application as
expeditiously as possible within a period 60days from the date of application; and

(iii) Enable any person aggrieved by any order made by Debt Recovery Tribunal to
file an appeal before the Debt Recovery Appellate Tribunal after depositing with the
Appellate Tribunal fifty percent of the amount of debt due from him as claimed by
the secured creditor or as determined by the Debt Recovery Tribunal, whichever is
less.

The Credit Information Companies (Regulation) Act, 2005 is aimed at providing for
regulation of credit information companies and to facilitate efficient distribution of
credit. The Act will come into force after it is notified by Government in the official
Gazette. After the Act comes into force, no company can commence or carry on the
business of credit information without obtaining a certificate of registration from the
Reserve Bank.

The Act sets out procedures for obtaining certificate of registration, the
requirements of minimum capital and management of credit information
companies. The Act also empowers the Reserve Bank to determine policy in relation
to functioning of credit information companies and to give directions to such
companies, credit institutions and specified users.

The Act also lays down the functions of credit information companies, powers and
duties of auditors, obtaining of membership by credit institutions in credit
information companies, information privacy principles, alterations of credit
information files and credit reports, regulation of unauthorized access to credit
information, offences and penalties, obligations as to fidelity and secrecy. Other
salient features of the Act include settlement of disputes between credit institutions
and credit information companies or between credit institutions and their
borrowers. The Act also provides for amendment of certain enactments so as to
permit disclosure of credit information

LIABILITIES OF BANKS

Deposits

Commercial banks deal in other people's money which they receive as deposits of
various types. These deposits serve as a means of payment and as a medium of
saving, and are a very important variable in the national economy. Deposits
constitute the major source of funds for banks, and in 1996 they were about 92 per
cent of total liabilities of all scheduled commercial banks.

Types of Deposit Indian banks accept two main types of deposits-demand deposits
and term deposits.

Demand Deposits: Demand deposits can be sub-divided into two categories-current

and savings.

¨ Current Deposits

Current deposits are chequable accounts and there are no restrictions on the
amount or the number of withdrawals from these accounts. It is possible to obtain a
clean or secured overdraft on current account. Banks also extend to the account-
holders certain useful services such as free collection of out-station cheques and
issue of demand drafts. At present banks generally do not pay interest on current
deposits. All current deposits are included in order to estimate the volume of money
supply in a given period of time.
Savings deposits earn interest; the rate of this interest was 5 per cent in 1990 and
is 4.5 per cent at present. Certain categories of banks are however allowed to pay
interest (both on saving and fixed deposits) at rates higher than the general level
fixed for them. For example, with effect from July 1, 1977, banks with demand and
time liabilities of less than Rs 25 crore were allowed to pay interest rate higher by
0.25 to 0.50 per cent per annum on savings deposits and term deposits up to and
inclusive of five years. Although cheques can be drawn on savings accounts, the
number of withdrawals and the maximum amount that might, at any time, be
withdrawn from an account without previous notice are restricted. The practice with
regard to the division of savings deposits into demand and time liabilities has
undergone a change.

Earlier, in respect of each account, the maximum amount withdrawable without

prior notice (or where the balance in the account was not more than this maximum,
the whole of the balance) was regarded as a demand liability; and the excess over
the maximum amount was treated as a time liability.

With effect from August 16, the average of the monthly minimum balances in a
savings account on which interest is being credited is to be regarded as a time
liability and the excess over the said amount, as a demand liability. In other words,
before August 1978, demand deposits included that portion of savings deposits
which was freely withdrawable, whereas after the new regulation, what is included
is the portion of savings deposits that is freely drawn upon by the depositors, while
the portion which remains with the banks earning interest is taken as time deposits.
The new rule has resulted in an increase in time deposits, and a decrease in
demand deposits and money supply.

Call Deposit

Call deposits is the third sub-category of demand deposits. They are accepted from
fellow bankers and are repayable on demand. These deposits carry an interest
charge. They form a negligible part of total bank liabilities.
Term Deposits Time deposits are also known as fixed deposits or term deposits and
they are a genuine saving medium. They have different maturity periods on which
depends the rate of interest.

BANKING ASSETS

Investments

Banks have four categories of assets:

¨ Cash in hand and balances with the RBI,
¨ Assets with the banking system,
¨ Investments in government and other approved securities, and
¨ Bank credit.
Among these assets, investment in cash and government securities serves the
liquidity requirements of banks and is influenced by the RBI policy. Quantitatively,
bank credit and investment in government securities are banks' most important
assets. Commercial banks in India invest a negligible part of their resources in
shares and debentures of joint stock companies. In fact, for a long time they were
discouraged from undertaking such investments. However, since 2/3 years, the
policy in this regard has been liberalised and at present banks are allowed to invest
five per cent of their incremental deposits in corporate shares and convertible
debentures.

Commercial banks' investments are of three types:

(a) Government of India securities;

(b) other approved securities, and

(c) non- approved securities.

While the first two types are known as SLR securities, the third one is known as non-
SLR securities.

Investment in SLR Securities

At present, the banks are statutorily required to invest 25 per cent of their demand
and time liabilities in the first two types of securities. The investments in the first
type of securities is the major part of banks' investments. The government
securities accounted for 95.59 per cent of their total investment portfolio in 2002-
03. Their investments in the second type are marginal, while those in the third type
are emerging as substantial investments.

The commercial banks' investments in Central government securities were 28.1 per
cent and 31. 6 per cent of their total assets in 2001-02 and 2002-03, respectively.
The other approved securities accounted for hardly one-or two per cent of the
assets of commercial banks in the years just mentioned.

The phenomenon of investments in government securities far in excess of statutory

requirements has been due to
(a) high fiscal deficit effect,
(b) capital adequacy norms effect,
(c) foreign exchange sterilisation effect, and
(d) slack credit demand effect.
All these effects are easy to understand. The fiscal deficit has been largely financed
through public borrowings, and the banks have been the major subscribers to the
government borrowing programme. Similarly, due to unprecedented and heavy
increase in foreign exchange accruals, the RBI has been carrying out an intensive
sterilisation Programme which has resulted in a significant increase in the supply of
government securities, which the banks have been purchasing. Further, all
scheduled banks are required to maintain minimum capital to total risk weighted
assets ratio which was nine per cent in 2002-03. Given the very-low-risk (risk less)
nature of the government securities, banks have preferred to buy and hold
substantial amount of government securities for this purpose also. Finally, due to
industrial recession in the recent past, the industrial sector's credit off take has
been slack, and banks, therefore, have invested their surplus liquidity in
government securities.

Thus, the banks' investments in government securities cannot really be decided in

terms of the ideology of public vs. private sector. The large size of the State and the
attendant enormous volume of government expenditure, the portfolio management
considerations of banks, the accrual of resources to the banks, foreign capital flows,
and demand for credit, have always determined and will continue to determine the
level of investment-deposit ratio of banks. Hence, it is erroneous to argue, as the
RBI has done, that a large recourse of banks to gilts to invest their resources is a
dissipation of "banking knowledge capital" regarding credit appraisal, or a
possibility of severing of the link between liquidity, credit, money, and economic
activity.
Investment in Non-SLR Securities

After 1985, there has been a liberalisation of investment norms for banks which has
enabled them to be active players in financial markets. The ambit of eligible
investments has been enlarged to cover Commercial Paper (CP)" units of mutual
funds, shares and debentures of PSUs, and shares and debentures of private
corporate sector, which are all known as non-SLR investments. Similarly, the limit
on investments in the capital market has been gradually increased. Now, banks can
invest in equities to the extent of five per cent of their outstanding (and not
incremental as earlier) advances. Effective May 2001, the total exposure of a bank
to stock markets with sub-ceilings for total advances to all stock brokers and
merchant bankers has been limited to five per cent of the total advances (including
CPs) as on March 31 of the previous year.

The aggregate balance sheet of SCBs expanded at a higher rate of 19.3% excluding
the impact of conversion of a non-banking entity into a banking entity since October
1, 2004) during 2004-2005 as compared with 16.2 percent in 2003-04. The ratio of
assets of SCBs to GDP at factor cost at current prices increased significantly to 80%
from 78.3% in 2003-04 reflecting further deepening of leverage enjoyed by the
banking sector. The degree of leverage enjoyed by the banking system as reflected
in the equity multiplier declined to 15.8-16.9 in the previous year.

The behavior of major balance sheet indicators show that a divergent during 2004-
05. on the back of robust economic growth and industrial recovery, loans and
advances witnessed strong growth, while investment in rising interest rate scenario,
slowed down significantly. Deposits showed a lackluster performance in the wake of
increased competition from other saving instruments. Borrowings and net-owned
funds however, increased sharply underscoring the growing importance of non-
deposits resources of SCBs.

Bank group-wise, assets of new private sector banks grew at the highest rate.
(19.4%),followed by public sector banks(15.1%eacluding the conversion
impact),foreign banks (13.6%) and old private sector banks (10.6%).PSBs continued
to accounts for the major share in he total assets, deposits, advances and
investments of SCBs at end-March 2005, followed distantly by new private sector
banks. The share of foreign banks in total assets and advances was higher than that
of old private sector banks.

Deposits
Deposits of SCBs grew at a lower rate 15.4 per cent (excluding the conversion
impact) during 2004-05 as compared with 16.4 per cent in the previous year on
account of slowdown in demand deposits and savings deposits. Deceleration in
demand deposits was due mainly to the base effect as demand deposits had
witnessed an usually high growth last year. The growth in demand deposits,
however was in line with the long-term average. Savings deposits, which reflect the
strength of the retail liability franchise and are at the core of the banks’ customer
acquisition efforts grew at a healthy rate, though the growth was somewhat lower
than the high growth of last year. The higher growth of term deposits was mainly o
ac count of NRI deposits and certificate of deposits (CDs).Excluding these deposits,
the growth rate of term deposits showed a declaration, which was on account of a
possible substitution in favour of postal deposits and other investments products,
which continued to grow at a high rate benefiting from tax incentives and their
attractive rate of return in comparison with time deposits.
Factors Affecting Composition of Bank Deposits

The following factors appear to be relevant:

(a) Increase in national income.
(b) Expansion of banking facilities in new areas and for new classes of
people.
(c) Increase of banking habit.
(d) Increase in the relative rates of return on deposits.
(e) Increase in deficit financing.
(f) Increase in bank credit.
(g) Inflow of deposits from Non-Resident Indians (NRIs).
(h) Growth of substitutes.

DEPOSIT INSURANCE

Bank deposits are insured up to a specified amount by the Deposit Insurance and
Credit Guarantee Corporation (DICGC). Deposit Insurance Corporation (DIC) was set
up in January 1962, and it became a part of DICGC subsequently: The insured
amount has been increased in successive stages from Rs 1,500 in 1962, to Rs 5,000
in January 1968, Rs 10,000 in April 1970, Rs 20,000 in July 1976, Rs 30,000 in June
1980, and Rs 1,00,000 in May 1993. It is necessary to raise this amount further
now. The fully protected accounts as a proportion of the total number of accounts
have increased from 78 per cent in 1962 to 99 per cent in 1995-96. The proportion
of insured deposits to total assessable deposits (i.e., the entire amount of deposits
including those which are not provided insurance cover) has also gone up from 24
per cent in 1962 to 75 per cent in 1995-96.
Deposit Insurance Scheme covers commercial banks, co-operative banks, and the
RRBs. As at the end of March 1996, it covered 2,122 banks comprising 102
commercial banks, 196 RRBs and 1,824 cooperative banks.
Maturity profile of Assets and Liabilities of Banks
The maturity structure of commercial banks’ assets and liabilities reflects various
concerns of banks pertaining to business expansion, liquidity management, cost of
funds, return on assets, assets quality and also risk appetite during an industrial
upturn. In general, major components of balance sheet, including deposits,
borrowings, loans and advances and investments , for all bank groups encompassed
a non-linear portfolio structure across the spectrum of maturity during 2004-05.
Furthermore, for all banks groups, the maturity structure of loans and advances
depicted a synchronous behaviour with that of deposits. The maturity structure of
deposits and that of investments differed across bank groups.
PSBs and old private banks held a larger share of their investment in higher
maturity bucket, particularly more than five year maturity bucket, while private
sector and foreign banks held more than 50% of their investments in up to one year
maturity bucket. The residual maturity classification of consolidated international
claims reveals that banks continued to prefer to invest in/lender for short-term
purposes, particularly ‘upto 6 months’ period whose share in total claims incrased
by3.4% points to 73.6% during 2004-05.

MONETARY CONDITION

Monetary condition remained comfortable during 2005-06, despite a sustained pick-

up in credit demand from the commercial sector. Banks were able to finance the
higher demand for commercial credit by curtailing their incremental investments in
Government securities. Strong growth in deposits on the current fiscal year and
higher investment by non-bank sources in government securities also enabled
banks to meet credit demand. The year on year growth in M at 16.6% up to
September 30, 2005 was higher than the indicative trajectory of 14.5% indicated in
the Annual Policy Statement for 2005-06.

Banks’ Operations in the Capital Market

In an increasing market oriented environment, banks need to continuously raise
capital to sustain the growth in their operations. Several banks therefore, accessed
the capital market during 2004-05 to strengthen their capital base.
BANK GROUP WISE DISTRIBUTION OF BRANCHES OF SCHEDULED COMMERCIAL
BANKS (As at end-June 2005)

CAPITAL BASED

The capital base of commercial banks has become a subject of great attention in
the whole world in the recent past. In India, it had become progressively very weak;
the ratio of paid-up capital and reserves to deposits of Indian banks had declined
from 6.7 per cent in 1956 to 4.1 per cent in 1961, 2.4 per cent in 1969, 1.2 per cent
in 1984, and 2.1 per cent in 1986. It increased to 7.53 per cent in 1995. which was
the result of the prescription of capital adequacy norms by the authorities since
1992-93.

The Bas1e Committee on Banking Supervision appointed by the Bank for

International Settlement (BIS) established in 1988 a system in which minimum
capital requirements were set for banking firms based on the risk of bank assets. It
specified Capital to Risk (weighted) Assets Ratio (CRAR) of eight per cent as the
capital adequacy norm. This risk-based capital standard has been adopted by many
countries including India where it came into force in 1992-93. In the following years,
a multi-pronged policy has been implemented to reach the said eight per cent level.
First, the government has been providing budgetary support to banks for this
purpose.

In fact, it has contributed Rs 20,446 crore by way of capital to the banks during
1985 to 2002. Since 1992, it has contributed over Rs 17,746 crore to the capital
base of the nationalised banks. Second, a number of banks have raised equity
capital on the stock market. In addition, banks have been allowed since 1993-94 to
issue, with the prior approval of the RBI, subordinated debts in the form of
unsecured redeemable bonds qualifying for Tier II capital. Seven public sector banks
raised a sum of Rs 1145.74 crore during 1995-96 through such an instrument. The
twelve PSBs have raised capital through fresh capital issues to the tune of Rs 6501
crore during 1993-2002. Three PSBs raised another Rs 773 crore of equity capital
during 2002-03. Further, the nationalised banks have returned the capital of Rs
1253 crore to the government till the end of 2002-03. As a result, the government
shareholding in PSBs has declined. The share of the government in the equity
capital of various banks ranged from 57 per cent to 75 per cent in 2003.

By the end of March 2003, all the PSBs have achieved CRAR above the stipulated
minimum. In fact, 26 out of 27 PSBs had a CRAR above 10 per cent. For PSBS as a
whole, the CRAR stood at 12.64 percent at the end of March 2003. Similarly, now all
the old private sector banks and foreign banks also have the CRAR above the
stipulated level now. The number of PSBs paying dividend to the government has
increased from seven in 1995-96 to 14 (out of 19) in 2000-01, and the total amount
of dividend paid has been about Rs 2294 crore during 1995-96 to 2001-01.

RISK EXPOSURES OF BANKS

The overall risk exposure of banks is determined by their lending to sensitive

sectors such as capital market, real estate, and commodities' and off-balance sheet
activities. comprising forward exchange contracts, guarantees, acceptances and
endorsements. The exposure of scheduled commercial banks in India on both of
these counts has gone up significantly at present.

BANKS FOREIGN BUSINESS

Indian banks do business in foreign countries also and this business has grown
slowly over time. Banks' foreign business actually began during early 1940s on a
very modest scale; it expanded to a certain extent during the 1950s and 1960s; and
the fastest growth of this business occurred really during 1975-1982. This business
is mainly concentrated in areas inhabited largely by Indian expatriate population,
and in countries which are important trading partners of India.

In 1985, 13 Indian banks had 139 offices in 26 countries. Bank of Baroda, Bank of
India, State Bank of India, and Indian Overseas Bank accounted, respectively, for
41, 17, 17, and 8 per cent of total branches. Indian banks also have three deposit-
taking companies, three wholly-owned subsidiaries, two majority-owned subsidiaries
and four joint venture banks abroad. There was a reduction in this business after
1985. As a result of the closure of branches by some banks, the number of foreign
offices of nine banks was 114 as on 30 April, 1990, and the four banks had 11
representative offices in that year. The banks have never done well in their
overseas business. About $1 billion had to be provided in 1992-93 Jo meet
provisioning requirements of overseas branches, some of which are being closed
even now.

The total number of overseas branches of Indian banks was reduced from 101 to 97
as at the end of June 1996, of which 96 branches belonged to eight public sector
banks, and the remaining one belonged to a private sector bank. The number of
wholly-owned subsidiaries, joint venture banks, and representative offices were
11,7, and 14, respectively in 1996.

BANKS AS AUTHORISED DEALERS

The RBI has designated 92 banks, including 35 foreign banks, as Authorized Dealers
(ADs) in foreign exchange, an they are functioning in this capacity through their
27,762 branches. ADs can buy and sell foreign exchange on behalf of their clients,
subject to limits deemed sufficient. Increase in capital flows and the relaxation of
balance sheet restrictions in respect of foreign exchange operations has
transformed banks into active participants in the foreign exchange market. The
changes in capital flows directly affect bank liquidity, profitability. The turnover in
the foreign exchange business of banks has increased over the years.

RETAIL BANKING

Banks today operate under their spreads, declining margins, and rising costs.
Consumer finance was not a favoured avenue for banks in India till the other day.
They were primarily financing production-based activities. but the industrial
recession, economic downturn, industrial sickness, mounting NPAs with corporates,
failure of many big companies have made banks prefer to be selective in their
lending to corporates which has become more risky. As a result, banks are diverting
their resources to retail lending In addition to financing working capital of
corporates and giving term loans, banks are diversifying into retail banking or
personal banking which appears to be a viable alternative to cope up with the poor
credit offtake and far augmenting business in the current situation. The reduction in
SLR/CRR, poor credit demand due to recession, greater risk due to high NPAs in
traditional lending, and similar changes have made banks to diversify their business
in the form of retail, personal loans such as education loans, home loans, auto
loans, white goods loans, credit card loans, travel loans (along with entering into
treasury operations). The Indian commercial banks' retail lending has almost
doubled during 2000-03. Their housing loans disbursals increased from Rs 14746
crore in 2001-02 to Rs 33841 crore in 2002-03. Information technology, net
banking, mobile banking, telebanking, A TMs, and demat accounts have facilitated
the growth of retail banking.
The retail banking has created challenges before the banks to set up and invest
heavily in new credit delivery or distribution channels which can economise on
transactions costs, increase sales productivity, and offer greater convenience in
service provision. Banks are increasing off-site delivery channels which are helping
ill new product development, increasing speed of transactions processing and
reducing transactions costs. It has been suggested that banks should follow the
following steps for making new distribution channels successful (RBI, Bulletin,
January 2004, pp. 103-105):
Understand customers' current transaction behaviour and their underlying attitude.

Use sophisticated experimental customer research to assess the economic impact

of tactics designed to change that behaviour.
Develop an integrated channel migration plan which blends economic and non-
economic incentives to ensure !hat right initiatives are targeted at the right
customers Protect sales effectiveness by utilising the non-branch channels .Design
non-branch channels to emphasise personalised interaction to counteract
decreased / loyalty among remote customers.

Resources Raised by Banks From the Primary Capital Market

Scheduled Commercial banks, both in public and private sectors, raised large
resources from the domestic and international capital markets. Total resource
mobilization by banks through public issues (excluding offer for sale) in the
domestic capital market increased sharply by 263.3 per cent during 2004-05.
Encouraged by a firm trend in the prices of the banking sector scrips in the
secondary market and satisfactory financial results, seven banks raised Rs. 7,444
crore from the equity market during 2004-05. This included two equity issues
aggregating Rs.3,336 crore (including premium) by public sector banks and five
equity issues aggregating Rs.4,108 crore by private sector banks.

Regional Rural Banks

Regional Rural Banks (RRBs) form an integral part of the Indian banking system with
focus on serving the rural sector. There are 196 RRBs operating in 26 States across
518 districts with a network of 14,446 branches as on March 31, 2004. Majority of
the branches of RRBs are located in rural areas. RRBs combine the local feel and
familiarity with rural problems, which the co-operatives possess, and the degree of
business organisation as well as the ability to mobilise deposits, which the
commercial banks possess. RRBs are specialised rural financial institutions for
catering to the credit requirements of the rural sector. In the context of recent focus
of the Government of India on doubling the flow of credit to the agricultural sector,
it is felt that the RRBs could be used as an effective vehicle for credit delivery in
view of their rural orientation

Development of co-operative bank

Co-operative banks in India have come a long way since the enactment of the
Agricultural Credit Co-operative Societies Act in 1904. The century old co-operative
banking structure is viewed as an important instrument of banking access to the
rural masses and thus a vehicle for democratisation of the Indian financial system.
Co-operative banks mobilise deposits and purvey agricultural and rural credit with a
wider outreach. They have also been an important instrument for various
development schemes, particularly subsidy based programmes for the poor.

The co-operative banking structure in India comprises urban co-operative banks and
rural co-operative credit institutions. Urban co-operative banks consist of a single
tier, viz., primary co-operative banks, commonly referred to as urban co-operative
banks (UCBs). The rural co-operative credit structure has traditionally been
bifurcated into two parallel wings, viz., short-term and long-term. Short-term co-
operative credit institutions have a federal three-tier structure consisting of a large
number of primary agricultural credit societies (PACS) at the grass-root level,
central co-operative banks (CCBs) at the district level and State co-operative banks
(StCBs) at the State/apex level. The smaller States and Union Territories (UTs) have
a two tier structure with StCBs directly meeting the credit requirements of PACS.
The long-term rural co-operative structure has two tiers, viz., State co-operative
agriculture and rural development banks (SCARDBs) at the State level and primary
co-operative agriculture and rural development banks (PCARDBs) at the
taluka/tehsil level. However, some States have a unitary structure with the State
level banks operating through their own branches; three States have a mixed
structure incorporating both unitary and federal systems

The Co-operative Movement was launched in India by the acts of 1904 and 1912
passed by the Central Government .There are a number of State Co-operative
banks, Central co-operative Banks, Land Development Banks and a host of Credit
Societies. The resources of Co-operative Credit institution mainly consist of deposit
and borrowings. Owing to the limited resources of the members, these institution do
not have much of share capital. Unfortunately, sufficient reserves have also not
been built up owing to meagre profits.

PUBLIC SECTOR BANKS

The term public sector banks by itself connotes a situation where the major/ful l
stake in the banks are held by the government.
Excepting the Reserve Bank of India which was nationalized in 1949 there was no
other bank which had the tag of public sector bank till 1969. with the nationalization
of banks brought in by Banking Companies Act,1970, 14 Banks each of which had a
level of more than Rs 50 crores in time and demand liabilities acquired the
character of nationalized banks effective from 19 July 1969. This was subsequently
followed by nationalization of 6 more private Sector Commercial banks, each of
which had crossed the deposit limit of Rs 200 crore in the year 1980, effective from
15/4/1980. Thus, as on date there are totally 19 nationalised banks existing as on
date, consequent to the merger of New Bank of India with Punjab National Bank in
September 1993. Consequent to an Amendment made to the Banking Companies
Acts, 1970/1980 in 1994, Nationalised banks have been permitted to offer their
equity shares to the public to the extent of 49% of their capital.

Public sector banks are as follows

Nationalised Banks

Ø Allahabad Bank
Ø Andhra Bank
Ø Bank of India
Ø Bank of Baroda
Ø Bank of Maharashtra
Ø Canara Bank
Ø Central Bank of India
Ø Corporation Bank
Ø Dena Bank
Ø Indian Bank
Ø Indian Overseas Bank
Ø Oriental Bank of Commerce
Ø Punjab and Sind Bank
Ø Punjab National Bank
Ø Syndicate Bank
Ø UCO Bank
Ø Union Bank of India
Ø United Bank of India
Ø Vijaya Bank

State Bank Group

§ State Bank of India

§ State Bank of Bikaner and Jaipur
§ State Bank of Hyderabad
§ State Bank of Indore
§ State Bank of Mysore
§ State Bank of Patiala
§ State Bank of Saurashtra
§ State Bank of Travancore
· IDBI LTD.
Private Sector Banks
By private sector banks we mean those banks where equity is held by private share
holders, that is to say there is no government holding of the equity shares.
This category of banks also occupies a significant position in the Banking Scenario.
There are already 25 private Sector operating in our country for quite some time.
These banks are also listed as under
v The ING Vysya Bank Ltd.
v The Federal Bank Ltd.
v The Jammu Kashmir Bank Ltd.
v Bank of Rajasthan Ltd.
v Karnataka Bank Ltd.
v The South Indian Bank Ltd.
v The United Western Bank Ltd.
v The Catholic Syrian Bank Ltd.
v The Karur Vysya Bank Ltd.
v Tamilnadu Mercantile Bank Ltd.
v The Laxmi Vilas Bank Ltd.
v The Sangli Bank Ltd.
v The Dhanlaxmi Bank Ltd.
v Bharat Overseas Bank Ltd.
v City Union Bank Ltd.
v Lord Krishna Bank Ltd.
v Bareilly Corporation Bank Ltd.
v Nanital Bank Ltd.
v The Ratnakar Bank Ltd.
v The Ganesh Bank of Kurundwad Ltd.
v SBI Comm. & Int. Bank Ltd
v Development credit Bank Ltd
v Madura Bank Ltd.
There has been a growing presence of private sector banks more so, after the
introduction of financial sector reforms from 1991. Six new private banks listed as
under were issued licences in 1994-95.
New Private sector Banks
¨ Centurion Bank of Punjab Ltd.
¨ HDFC Bank
¨ ICICI Bank Ltd.
¨ Indusland Bank Ltd.
¨ Kotak Mahindra Bank Ltd.
¨ UTI Bank Ltd.
Again, during 1995-96, the following three banks were issued the licence and
commenced their operations:
v Times Bank Ltd.
v Bank of Punjab Ltd.
v IDBI Bank Ltd.

Thus apart from the twenty-five old private sector banks, we have got nine private
sector banks which became operational subsequent to 1992.
The size of the private sector banks in our country as on date is furnished
hereunder (as at June’97)
v Number of private sector banks in operation : 35
v Number of bank branches of private sector banks : 4,473
v Amount of advances(as at March’96) : 31,692 crores
v Amount of advances(as at March’96) : 21,5888 crores( Sources RBI)
Private Sector Banks have been rapidly increasing their presence in the recent
times and offering a variety of newer services to the customer and possing a stiff
competition to the group of public sector banks

New Technology in Banking

The importance of sophisticated or high technology for improving customer service,

productivity, and operational efficiency of banks is well-recognised. As a part of
their action plans, banks in India have introd, :ed many new techniques and a
considerable degree of mechanisation and computerisation in their operations. By
the end of June 1996, they had installed 13,522 Advance Ledger Posting Machines
(ALPM) at 4,238 branches, and 895 mini-computers at their regional and zonal
offices at 441 branches. Three banks had installed mainframe computers and others
were at various stages of doing so. They are developing and standardising suitable
computer softwares in a big way. They have introduced mechanised cheque
clearance, using magnetic ink character recognition (MICR) technology. The
computerisation of clearing house settlement has been completed at a number of
centres. They are in the process of setting up exclusive data communication
network for banks known as BANKNET. For this, the RBI and 36 banks have become
members of the Society for Worldwide Inter-bank Financial Telecommunications
(SWIFT) and have installed two SWIFT Regional Processors at Mumbai. Through this
network, any bank will be able to establish connection with its own offices and with
any other banks' offices/computers in the national and international network.

Banks are now switching to Personal Computers (PCs) and LAN/W AN systems. At
the end of June 1996, the banks had installed 2,120 PCs, LAN at 916 branches, WAN
at 175 branches, 937 signature storage and retrieval systems, and 315 on-line
terminals. The RBI has put in place Electronic Funds Transfer (EFT) system, Delivery
vs. Payments (DVP) system, Electronic Clearing Services, and RBINET. It has also
taken steps to set up a Very Small Aperture Terminal (VSAT) Network which will
cover all banks and financial institutions to serve a number of tasks like MIS, data
warehousing, transaction processing, currency chest accounting, ATMs, EFT, EDT,
Smart/Credit cards, etc. It will cover 2,800 centres soon. So far all the PSBs have
crossed the 70 per cent level of computerisation of their business. As a part of
Indian Financial Network (INFINET), the number of VSATs has increased from 924 in
March 2002 to more than 2000 in June 2003. Banks are sharing A TMs by forming
alliances as it was done by UTI Bank, Citi bank, IDBI Bank, and Standard Chartered
Bank, which formed "Cashnet" alliance in 2003. Now, there are 27 cities where
cheque clearing is performed using mechanised technology of reader sorter which
process cheques at more than 2000 per minute. The 'currency verification and
processing systems' have been made operational at various offices of the RBI which
has resulted ill the "clean note policy".

In not a very far off future, the banking system in India and the payments
mechanism (system) which it operates would witness the following technological
innovations, which are already a reality in a country like USA. The place of physical
transfer in the form of cash or cheques is being taken there by "On-line electronics
payments method" comprising fedwire, CHIPs, and ACHs. The Fedwire is a
communication system that allows banks to transfer deposits and government
securities. It is an electronic equivalent of payment by cash. The electronic
equivalent of payment by cheque is the Clearing House Interbank Payment System
or CHIPs. Then there is ACHs which involves exchange of magnetic tapes rather
than pieces of paper (Automated Clearing Houses).

While Fedwire and CHIPs execute payments immediately, ACHs is a slower method
of electronic payments. The most ubiquitous medium of electronic payment
spreading in developed countries is the electronic debit card or cash card which is
inserted in a machine and after punching in a personal identification number (PIN)
which gives access to the electronic payment systelH. There are two principle types
of machine into which card can be inserted: the automated teller machines (ATMs)
and the electronic funds transfer at point of sale (EFTPOs).

Other Diversifications in Banking

Since the mid-1980s, many far-reaching changes have taken place in the Indian
banking sector. Many banks have set up specialised subsidiary companies and
assets-liabilities management companies, and either through them or on their own,
they have entered into related activities, such as merchant banking, mutual funds,
hire-purchase finance, housing finance, venture capital, equipment leasing,
factoring, securities booking and trading, and a host of other financial services. By
the end of June 1996, 11 banks had set up 11 equipment leasing and merchant
banking subsidiaries, while five public sector banks had set up their mutual funds,
which floated many investment (unit) schemes. Some banks have also launched
venture capital funds. The total number of housing finance subsidiaries of banks
was eight at the end of June 1996. They are entering into the areas of factoring,
computer-related services and equity participation also. Two subsidiaries of banks
have invested in the equity capital of OTCEI. Banks have begun to have portfolio
investment in hire purchase companies and venture capital funds. Through these
changes, the interface and links of the banking sector with the capital market and
other financial institutions have been growing..

Asset-Liability Management

In the recent past, banks in India have started using the Asset-Liability Management
(ALM) as the technique or strategy for financial management. ALM aims at planning,
directing, and regulating the levels, changes, mixes of assets and liabilities of banks
in the short-run, usually three to twelve months, with a view to enable them to
achieve their long-term objectives. The net interest margin and its variability are
the focus of its attention so as to maximise Return On Equity (ROE), and to minimise
fluctuations in ROE. It also links capital, non-interest income and expenses, and
strategic choices regarding products, markets, and bank structure. ALM involves
giving balanced emphasis necessary in a competitive environment characterised by
deregulatiom. and greater viability (volatility) of interest rates, variable rates
pricing, and the use of interest rates derivatives.

Co-operative Banks

INTRODUCTION

Co-operative banks are an important constituent of the Indian financial system,

judging by the role assigned to them, the expectations they are supposed to fulfills,
their number, and the number of offices they operate. The co-operative movement
originated in the West, but the importance that such banks have assumed in India is
rarely paralleled anywhere else in the world. Their role in rural financing continues
to be important even today, and their business in the urban areas also has
increased in recent years mainly due to the sharp increase in the number of primary
co-operative banks.
ORIGIN AND GROWTH OF CO-OPERATIVE BANKS

Co-operative banks are a part of the vast and powerful superstructure of co-
operative institutions which are engaged in the tasks of production, processing,
marketing, distribution, servicing, and banking in India. The beginning of co-
operative banking in this country dates back to about 1904 when official efforts
were initiated to create a new type of institution based on the principles of co-
operative organisation and management, which were considered to be suitable for
solving the problems peculiar to Indian conditions. In rural areas, as far as
agricultural and related activities were concerned, the supply of credit, particularly
institutional credit, was woefully inadequate, and unorganised money market
agencies, such as money lenders, were providing credit often at exploitatively high
rates of interest. The co-operative banks were conceived in order to substitute such
agencies, provide adequate short-term and long-term institutional credit at
reasonable rates of interest, and to bring about integration of the unorganised and
organised segments of the Indian money market.

When the national economic planning began in India, co-operative banks were
made an integral part of the institutional framework of community development and
extension services, which was assigned the important role of delivering the fruits of
economic planning at the grassroot levels. In other words, they became a part of
the arrangements for decentralised plan formulation and implentation for the
purpose of rural development in general, and agricultural development in particular.
Today co-operative banks continue to be a part of a set of institutions which are
engaged in financing rural and agricultural development. This set-up comprises the
RBI, NABARD, commercial banks, regional rural banks, and co-operative banks. The
relative importance of co-operative banks in financing agricultural and rural
development has undergone some changes over the years. Till 1969, they
increasingly substituted the informal sector lenders. After the nationalisation of
banks and the creation of RRBs and NABARD, however, their relative share has
somewhat declined. All the institutional sources contributed about 4 per cent of the
total rural credit till 1954. The contribution increased to 62 per cent by 1990. The
share of
co-operative banks in this institutional lending has declined from 80 per cent in
1969 to about 42 per cent at present. The percentage of rural population covered
by the agricultural credit co-operatives was 7.8 in 1951, 36 in 1961, and about 65
per cent at present.

Cooperative banks in India finance rural areas under:

· Farming
· Cattle
· Milk
· Hatchery
· Personal finance
Cooperative banks in India finance urban areas under:
· Self-employment
· Industries
· Small scale units
· Home finance
· Consumer finance
· Personal finance
FEATURES OF CO-OPERATIVE BANKS

Some distinguishing characteristics of the nature of co-operative banks are as

follows:

(i) They are organised and managed on the principles of co-operation, self-help, and
mutual help. They function with the rule of "one member, one vote".

(ii) They function on "no profit, no loss" basis. For commercial banks also,
profitability is no longer the main objective, but in their case this change has been
brought about as a result of social or public policy, while co-operative banks, by
their very nature, do not pursue the goal of profit maximisation.

(iii) Co-operative banks perform all the main banking functions of deposit
mobilisation, supply of credit and provision of remittance facilities. However, it is
said that the rang~, of services offered is narrower and the degree of product
differentiation in each main type of service is much less in the case co-operativetive
banks, compared to commercial banks. In other words, co-operative banks are
characterised by functional specialisation. It should be added that this is true with
much less force now, because many changes have taken place in the co-operative
banking system since the Banking Commission arrived at the above-mentioned
conclusion. For example,\co-operative banks now provide housing loans also. The
UCBs provide working capital loans \and term loans as well. The State Co-operative
Banks (SCBs), Central Co-operative Banks (C0)3s) and Urban Co-operative Banks
(UCBs) can normally extend housing loans up to Rs one 1akh to an individual. The
scheduled UCBs, however, can lend up to Rs three lakh for housing purpose. The
UCBs can provide advances against shares and debentures also.

(iv) As said earlier, co-operative banks do banking business mainly in the

agricultural and rural sector. However, certain types of banks viz., UCBs, SCBs and
CCBs operate in semi-urban, urban, and metropolitan areas also. The urban and
non-agricultural business of these banks has grown over the years. The co-operative
banks demonstrate a shift from rural to urban, while the commercial banks, from
urban to rural.

(v) Co-operative banks are perhaps the first government-sponsored, government-

supported, and government-subsidised financial agency in India. They get financial
and other help from the RBI, NABARD, Central government and state governments.
They constitute the "most favoured" banking sector with no risk of nationalisation.
For commercial banks, the RBI is a lender of last resort, but for co-operative banks,
it is the lender of first resort which provides financial resources in the form of
contribution to the initial capital (through state governments), working capital, and
refinance. The promotional role of the RBI can be seen in respect of co-operative
banks, and this role supersedes its regulatory role, in respect of these banks.

A corollary of government help to co-operative banks is that there is much

government intervention in their working. Co-operative banks are subject primarily
to the control, audit, supervision and periodic inspection of the co-operative
department of the state government under the Cooperative Societies Act, but less
rigorously, by the RBI under the Banking Regulation Act. The RBI and the state
government lay down rules for investment of surplus resources, reserves, and the
loan policy of co-operative banks. Consequently, compared to commercial banks,
they have less freedom and flexibility in conducting their operations.

(vi) Co-operative banks belong to the money market as well as to the capital
market. Primary agricultural credit societies provide short-term and medium-term
loans. Land Development Banks LDBs) provide long-term loans, DCBs meet working
capital as well as fixed capital requirements, and SCBs and CCBs also provide both
short-term and term loans. Similarly, they accept short-term and long-term
deposits, and some of them mobilise resources through the issue of debentures.

(vii) Co-operative banks are financial intermediaries only partially. The sources of
their funds resources) are: (a) Central and state governments, (b) the RBI and
NABARD, (e) other cooperative institutions, (d) ownership funds, and (e) deposits or
debenture issues. It is interesting to note that intra-sectoral flows of funds are much
greater in co-operative banking than in commercial banking. Inter-bank deposits,
borrowings, and credi\t form a significant part of assets and liabilities of co-
operative banks. This means that intra-sectoral competition is absent and intra-
sectoral integration is high for co-operative banks.

However, co-operative banks face stiff competition from commercial banks and
other financial intermediaries. Till their nationalisation, commercial banks did not
pose any competition to coperative banks. In fact, till then, certain areas of
operations were deliberately left to co-operative anks. But recently, the cornpetition
from LIC, DTII and small-savings organisation has become quite tough, and co-
operative banks are in a disadvantageous position in this area of inter-sectoral
competition.

(viii) Co-operative banks have a federal structure of three-tier linkages. Further,

their operation - of mixed banking type. Primary credit societies are unit banks;
many DCBs also are unit banks. But SCBs, DCBs (CCBs), and SLDBs, PLDBs and
many DCBs have a number of branches. object to this, it can be said that each co-
operative institution in each tier is a separate entity with definite jurisdiction and
has an independent board of management.

(ix) Some co-operative banks are scheduled banks, while others are non-scheduled
banks. For instance, SCBs and some DCBs are scheduled banks but other co-
operative banks are non-scheded banks.At present, 28 SCBs and 11 DCBs with
Demand and Time Liabilities over Rs 50 crore each are included in the Second
Schedule of the RBI Act.

x) As said earlier, co-operative banks accept current, saving, and fixed or time
deposits from individuals and institutions including banks. Some DCBs numbering
about 40 in 1989 are allowed open and maintain NRI accounts in rupees but not in
foreign currency. Deposits mobilised by them in a given area are used for financing
activities in that locality.

Some co-operative banks, namely, Land Development Banks (LDBs), issue

debentures to raise resources for their operations. These debentures are secured by
mortgaging lands belonging to borrowers from LDBs and are often guaranteed by
the state government. They are regarded as -tee securities and are treated on par
with government securities for making advances. There are three types of such
debentures: ordinary, rural, and special. These debentures are almost entirely
subscribed by such institutional investors as banks, LIC, and the government.

xi) The co-operative banks are subject to CRR and liquidity requirements as other
scheduled non-scheduled banks are. However, they are required to maintain the
CRR and SLR only at = level of three per cent and 25 per cent respectively, at
present. They are subject to SCCs also. Further, the DCBs have been advised to lend
60 per cent of their total advances to the priority ors. It means that the target for
priority sector lending has been fixed at a higher level for these banks compared to
commercial banks. Similarly, while the CAS has now/been withdrawn in the e of
commercial banks, it is still applicable to the DCBs, although in a liberalized form.
With effect from January 1989, they have to seek prior approval of the RBI for grant
of advances to a single party exceeding certain credit limits, which vary from bank
to bank depending on their size.

xii) Since 1966, the lending and deposit rates of commercial banks have-been
directly regulated by the RBI. Although the RBI had powers to regulate the 'rates of
co-operative banks also, these powers were not exercised much till about 1979, in
respect of their lending rates. From the early years till 1979, the SCBs and CCBs
were expected to provide finance for agricultural and allied activities to the ultimate
borrowers at reasonable rates, i.e., at concessional rates, by virtue of their being
entitled to concessional refinance from the RBI. In case of their non-agricultural
advances for the purpose of production and marketing activities of cottage and
small scale industries, the RBI imposed certain conditions as regards rates to be
charged by these banks for such purposes. In respect of their non-agricultural
advances, they were free to charge any rates at their discretion. The RBI did not
regulate at all the lending rates of DCBs, because of which there was little
uniformity in the rates charged by different DCBs. The SCBs were also exempted
from the levy of interest tax.

In early 1979, the RBI decided to maintain parity with regard to the rates of interest
on all agricultural advances irrespective of the credit agency. As a result, the rates
of interest charged to the ultimate borrowers by co-operative banks were also
brought in line with those charged by commercial banks. Accordingly, the RBI
advised all SCBs in 1980 to charge certain ceiling rates on agricultural advances.
While ceiling rates were prescribed for short-term agricultural advances, the lending
rates for medium-term agricultural credit were stipulated as fixed rates. Similarly,
lending rates of co-operative banks including DCBs for non-agricultural advances
also became subject to the directives issued by the RBI with effect from 1981. As a
result of measures adopted by the RBI in 1980 and 1981, a certain amount of
uniformity has been brought about with regard to the lending rates charged by co-
operative banks in different states, and between commercial banks and co-
operative banks.

However, since 1974, the deposit rates of co-operative banks including DCBs, have
been regulated by the RBI. To begin with, the RBI policy in this respect was to
specify that the rates prescribed for commercial banks should be considered as the
minimum to be offered by the cooperative banks. This was unlike the directives in
the case of commercial banks for whom fixed rates have been stipulated for
different types of deposits. Their current accounts were also excluded from the
purview of the directive, while commercial banks were prohibited from paying
interest on current accounts. This, however, led to relatively higher rates being paid
by co-operative banks on their deposits which adversely affected the deposit
mobilisation efforts of the commercial banks. Therefore, the RBI once again
changed its policy in 1974 and began to direct co-operative banks not to pay
interest at rates in excess of certain percentages over the minimum rates
prescribed by the RBI for commercial banks. The ceilings laid down over the
minimum rate were 0.25, 0.5, and 1.0 per cent with regard to SCBs, CCBs, and
Primary Agricultural Credit Societies (PACSs) respectively, on term and saving
deposits. Likewise, they have been prohibited since 1975, from paying interest at a
rate exceeding 0.5 per cent per annum on current accounts. deposits up to 14 days,
and those subject to withdrawal or repayment after a notice of 14 days or less. The
latter facility, however, has been withdrawn with effect from March 1989 in respect
of DCBs.

In the recent past, the RBI has introduced changes in interest rates of co-operative
banks also. along with changes in interest rates of commercial banks. The interest
rates structure of cooperative banks is quite complex. The rates charged by them
depend upon the type of bank, th3 type of loans, and vary from state to state.

(xiii) Although the main aim of the co-operative banks is to provide cheaper credit
to the members, and not to maximise profits, they may access the money market to
improve their income so that they remain viable. This is in keeping with the opening
up of the non-farm sector to them in the recent past. Their need to access money
market arises due to a variety of factors. First, CCBs are mainly in the field of
financing seasonal agricultural operations, which creates cycles of flows of funds.
Second, the short-term agricultural loans are given at a concessional rate of
inter~st whereas interest rates paid on deposits by co-operative banks are higher
than those paid by the commercial banks. It is true that they get concessional
refinance from the NABARD, but its availability depends upon fulfilling conditions
such as minimum involvement, non-overdue cover, etc. Similarly, many DCBs often
have surplus funds which they mostly keep with the SCBs at a fixed rate of interest.
There is, therefore, a need for co-operative banks to access money market to
deploy their short-term funds profitably and cross-subsidise their lending
operations.

(xiv) Co-operative banks (COBs), in short, have played a pivotal role in the
development of short-term and long-term rural credit structure in India over the
years. The co-operative credit endeavour is said to be the first ever attempt at
micro-credit dispensation in India. The entire cooperative credit system covers more
than 74 per cent of rural credit outlets, and it has a market share of about 46 per
cent of total rural credit in the country. From being the providers of loans for
redemption of debt, COBs have gone on to meet the investment requirements of all
activities in rural areas. The co-operative credit structure had a membership of 1.3
crore, net owned funds of Rs 3191 crore, and outstanding loans and advances of Rs
17261 crore in 20012. The COBs have borne the major share of the task of widening
institutional agricultural credit because their retail outlets are so widespread and far
flung that no other type of agency can percolate to all corners of the country as
COBs have done. However, too much intervention by the State in day-to-day
management has contributed to the lack of involvement and ownership of people in
their functioning. The COBs need to become member-driven banks. There is also a
need to do away with the duality of control over them by the RBI and state
government. They need support in respect of infrastructure, resource base,
professional management, etc.

SALIENT FEATURES OF THE OPERATION OF CO-OPERATIVE BANKING'

SYSTEM
A few salient features of the operations of the co-operative banking system which
emerge from this, and related information are as follows:

(1) There was an increase in the number of all types of co-operative banks except
the CCBs (which declined), during the two decades after 1951. During the 1970s
and 1980s, the number of all types of banks except thy PACSs remained constant;
the number of the latter declined drastically. As a result, the total number of co-
operative banks increased till 1970 and declined thereafter.
The co-operative banks now operating in India outnumber the commercial banks. At
present, we have about 297 commercial banks (including RRBs) compared to about
92,571 co-operative banks including the PACSs and 3101 co-operative banks
excluding the PACSs.

In 1989, the total number of offices of co-operative banks was 1,02,184 including
those of PACSs and 15,184 excluding them, the latter being one-fourth the size of
the total number of offices of commercial banks. Similarly, the deposits and credit
of co-operative banks were about 15 per cent and 35 per cent respectively of those
of commercial banks in 1988-89. In 1996, the total number of offices of co-operative
banks was 1,10,137 including those of PACSs and 20,137 excluding them, the latter
being about 32 per cent of the offices of the commercial banks. Similarly, the
deposits and credit of co-operative banks were about 14 per cent and 29 per cent
respectively of those commercial banks in 1994-95. The co-operative banks
excluding PACs had the total deposits of Rs 2,12,859 crore, or about 17 per cent of
the total deposits of scheduled commercial banks in 200-03. Similarly, their total
outstanding credit was Rs 1,81,912 crore or about 25 per cent of commercial bank
credit in that year. The SBI alone has a far higher amount of deposits than the
whole of the co-operative banking sector. It follows that co-operative banking,
unlike commercial banking, is small-scale banking and it does not suffer from the
concentration of business in the hands of a few. Table 9.2 gives an idea about the
average (per bank) size of different types of co-operative banks in 1950-51, and
1994-95 and 2002-03 in terms of deposits and credit. The average size has
increased over the years.

(2) Deposits, credit, working capital and other indicators of all types of co-operative
banks and the co-operative banking sector as a whole have also grown manifold
over the period, 1951 to 2003. Their growth has not been uniform over the span of
53 years. On the whole, the annual rate of growth of all co-operative banks (in
terms of deposits) has varied between 13 to 19 per cent in different quinquenniums
during 1961-1986.

3) If we rank different types pf banks, it would be found that in terms of deposits,

CCBs were the most important, followed by UCBs, SCBs and PACSs, in that
descending order in 1988-89. however, in terms of outstanding credit, the
descending order in that year was CCBs, PACSs, SCBs, and LDBs. in 1994-95 was
CCBs, UCBs PACSs, SCBs and SLDBs. In period 2002-03, the descending order was
UCBs, CCBs, SCBs, SLBs and PLDBs in term of deposits as well as outstanding credit.

(4) The composition of resources and other operational ratios of different types of
co-operative banks differ significantly from those of commercial banks. The ratios
also vary among the cooperative banks themselves.

(5) In the recent past, a number of COBs have come under stress or failed. Many
DCBs are in precarious conditions. Some of them have been found to have
manipulated government securities transactions. In 2003, as many as 163 DCBs out
of the total number of 2104 of DCBs were under liquidation ..

(6) The co-operative banks are not allowed to approach debt recovery tribunals, and
are not covered under the Securitisation and Reconstruction Ordinance. They are
also not allowed to access capital markets, bullion markets, and derivatives
markets.

(10) Capital adequacy requirements for the COBs are, at present, lower than those
prescribed for commercial banks. However, all DCBs and other COBs would have to
achieve the CRAR level which is applicable to commercial banks by March 31, 2005.
They are required to adhere to capital adequacy standards in a phased manner over
a period of three years beginning with 2002.
(11) The state co-operative bank is the apex co-operative financial institution in
each state.

PROBLEMS AND POLICY

As in the case of commercial banks, the quantitative growth of co-operative banks

has not been accompanied by a qualitative growth. There have always been a
number of weak..'1esses in their performance. Many of these weaknesses were
identified by the All India Rural Credit Survey Committee (AIRCSC) in the early
1950s. By that time, co-operative banks had been in the business for 45 years and
the AIRCSC had concluded that co-operatives had failed, but that they must
succeed. As a result, special measures were introduced by the government and the
RBI to revive and strengthen co- operative banks. Even after a span of 35 years, an
assessment of the cooperative banks shows that" ... many of the weaknesses of the
co-operative credit system identified by the Rural Credit Survey Committee
continue to persist even today.

In the same vein, the Khusro Committee asserts: "No credit system has been
subjected to as much experimentation at the dictates of those outside the system
as the co-operative credit system has been The history of co-operative credit
system has been the history of alternating periods of growth, stagnation and
reorganisation and yet quantitatively the achievements of the co-operative systems
have by no means been insignificant. Thus looking to the stake of the movement
even in the limited sphere of credit, the classic assertion of the Rural Credit Survey
made 35 years ago still seems valid that Co-operation has failed but Co-operation
must succeed.”

Main weakness of Co-operative Banks

The main weaknesses of co-operative banks are as follows:

(a) The vital link in the co-operative credit system namely, the PACSs, themselves
remain very weak. They are too small in size to be economical and viable; besides
too many of them are dormant, existing only on paper.

(b) With the expanding credit needs of the rural sector, the commercial banks have
come in actively to meet the credit requirements of this sector, and this has
aggravated the difficulties of co-operative banks. The theory that co-operative
banks would be buoyed up by the competition from other financial institutions does
not appear to have worked.

(c) Co-operative banks are not doing well in all the states; only a few account for a
major part of their business. For example, 75 per cent of total deposits mobilised by
SCBs was from only seven states in 1987-Andhra Pradesh, Gujarat, Karnataka,
Madhya Pradesh, Maharashtra, Tamil Nadu, and Uttar Pradesh.

(d) These banks still rely very heavily on refinancing facilities from the government,
the RBI, and NABARD. They have yet not been able to become self-reliant in respect
of resources through deposit mobilisation.

(e) They suffer from dangerously low or weak quality of loan assets, and from highly
unsatisfactory recovery of loans.

(f) They suffer from infrastructural weaknesses and structural flaws. They do not
look like banks and do not inspire confidence in the potential members, depositors
and borrowers.

(g) They suffer from too much officialisation and politicisation. Undue governmental
interventions have prevented them from developing steadily as a self-reliant and
resilient credit system. Most of them are headed by politicians.

(h) They unduly depend on government capital rather than member capital. (i)
There is no active participation of their members in their working, which can come
about if they work with members' money rather than government largesse.
(j) They have been resorting to unethical practices. There are many regulators for
them, but still there are many lacunea in their regulation. In fact, the existence of
multiple regulatory authorities has come in the way of effective regulation, control,
and monitoring of COBs.

GOVERNMENT INITIATIVES TO STRENGTHEN THE DEVELOPMENT OF CO-

OPERATIVE BANKS

Even before the submission of the Khusro Committee Report, the government and
the RBI had initiated certain measures to strengthen the development of co-
operative banks. Some of these policy initiatives were as follows:

(i) The NABARD had formulated a scheme for the reorganisation of PACSs and the
implementation of this scheme had started in those states which have accepted it.

(ii) The programme for development of selected P ACSs into truly multi-purpose co-
operative societies has been implemented in many states and Union Territories.

(iii) In addition to such programmes, certain state governments like Andhra

Pradesh, Madhya Pradesh West Bengal had also initiated development programmes
to strengthen the working of the co-operative credit institutions at the base level.

(iv) On the basis of their financial position as on 30 June 1987, 175 CCBs and 7 SCBs
in the country were identified as 'weak' banks and brought under the programme of
rehabilitation which, however, did not really work quite well.

(v) With a view to enabling weak banks which were either ineligible or were on the
verge of becoming ineligible for refinance SUPP011, a 12-Point Action Programme
had been formulated and circulated by NABARD to all the state governments.

.
Urban Co-operative Banks

Primary (urban) co-operative banks play an important role in meeting the growing
credit needs of urban and semi-urban areas. UCBs mobilise savings from the middle
and lower income groups and purvey credit to small borrowers, including weaker
sections of the society. The number of UCBs stood at 1,872 at end-March 2005,
including 79 salary earners' banks and 119 Mahila banks. Total number of
scheduled UCBs were 55 at end-March 2005. Scheduled UCBs are under closer
regulatory and supervisory framework of the Reserve Bank.

Various entities in the urban co-operative banking sector display a high degree of
heterogeneity in terms of deposits/asset base, areas of operation and nature of
business. In view of its importance, it is imperative that the sector emerges as a
sound and healthy network of jointly owned, democratically controlled and
professionally managed institutions. In order to achieve these objectives, the
Reserve Bank took a series of policy initiatives in 2004-05. The most significant
initiative in this regard was the Vision Document and Medium-Term Framework
(MTF) for UCBs. With a view to protecting depositors' interests and avoid contagion
on the one hand, and enabling UCBs to provide useful service to local communities
and public at large on the other, a draft Vision Document was prepared and placed
in public domain for eliciting comments. Based on the feedback received from
different quarters, the necessary modifications were carried out in the vision
document to evolve as the medium-term framework for the sector

Regulatory Initiatives for UCBs

UCBs have grown rapidly since the early 1990s. During the phase of rapid
expansion, however, the sector showed certain weaknesses arising out of lack of
sound corporate governance, unethical lending, comparatively high level of loan
defaults, inability to operate in a liberalised and competitive environment. The
Reserve Bank, therefore, has been striving to harness the growth of UCBs with
appropriate application of prudential regulation and supervision to safeguard the
interests of depositors. The Reserve Bank initiated several regulatory measures
during 2004-05 to ensure the growth of UCBs along sound lines.

Regulation and Supervision UCBs

The Reserve Bank is entrusted with the responsibility of regulation and supervision
of the banking related activities of primary co-operative banks under the Banking
Regulation (B.R.) Act, 1949 As Applicable to Co-operative Societies (AACS). Other
aspects such as incorporation, registration, administration, management and
winding-up of UCBs are supervised and regulated by the respective State
Governments through Registrars of Co-operative Societies (RCS) under the Co-
operative Societies Acts of the respective States. UCBs with a multi state presence
are registered under the Multi State Co-operative Societies Act, 2002 and are
regulated and supervised jointly by the Central Government through Central
Registrar of Co-operative Societies and the Reserve Bank.

The current legislative framework provides for dual control over UCBs. For resolving
problems arising out of dual control regime, a draft legislative bill proposing certain
amendments to the Banking Regulation Act, 1949 (AACS), based on the
recommendations of the High Powered Committee on UCBs, was forwarded to the
Government. Pending the amendment to the Act, the Reserve Bank is entering into
a regulatory arrangement with the State Governments through Memorandum of
Understanding (MoU) to facilitate proper and coordinated regulation and supervision
of UCBs. MoUs have already been signed between the Reserve Bank and three
States that have a large network of UCBs, viz., Andhra Pradesh, Gujarat and
Karnataka. As a follow-up to the signing of MoUs, the Reserve Bank has constituted
TAFCUBs in these States. Efforts are being made to enter into MoUs with other
States having a large number of UCBs.

Licensing of New Banks/Branches

Consequent upon the easing of licensing norms in May 1993, more than 800
licences were issued (up to June 2001) for setting up urban cooperative banks.
However, close to one-third of these newly licensed UCBs became financially weak
within a short period There was, thus, a need to moderate the pace of growth of this
sector, particularly given the vexatious issue of dual control over CBs. The Reserve
Bank proposed certain amendments to the Banking Regulation Act,1949 (AACS) to
overcome the difficulties arising out of dual control. Pending enactment of these
amendments it was announced in the Annuall Policy Statement for 2004-05 that
issuance of fresh licences would be considered only after a comprehensive policy on
UCBs including an appropriate legal and regulatory framework for the sector, is put
in place and a policy for improving the financial health of the urban co-operative
banking sector is formulated. Accordingly, at present, applications for banking
licence, including licence for opening of new branches, are not considered.
Supervisions of UCBs

Inspections

The on site financial inspection carried out by the Reserve Bank continues to be one
of the main instruments of supervisions over UCBs. The Reserve Bnak carried out
statutory inspections of 812 UCBs during 2004-05 as against of 848 UCBs
conducted during the previous year.

Off-site Surveillance

The off-site surveillance system (OSS) for supervision was made applicable to all
scheduled UCBs from March 2001.The returns for OSS were reviewed and a revised
set of 8 returns was prescribed from March 2004.The OSS returns of UCBs are
designed to monitor compliance and obtain information from them on areas of
prudential regulations. The main objective of the OSS returns is to obtain relevant
information on areas of prudential interest, address the management information
needs, strengthen the management information system (MIS) capabilities within the
reporting institutions and to sensitise bank managements about concerns of the
supervisory authority. Compliance monitored through these returns covers assets
and liabilities, earnings, assets quality, sector/ segment-wise analysis of advances,
concentration of exposures, connected or related trending and capital adequacy.
These concerns earlier were being addressed through periodical on-site inspections
of banks undertaken at intervals ranging from one to non-scheduled banks with
deposit base base of over Rs.100 crore from June 2004.
Operational and Financial Performance of Urban Co-operative Banks

Operations of UCBs ( both scheduled and non scheduled) have expanded Rapidly
since 1966, when they were brought under the purview of the Banking Regulation
Act, 1949 (AACS). Deposits and advances of UCBs Increased sharply from RS.153
crore and Rs.167 crore, respectively, in 1966 to Rs1,02,089 crore and Rs,65,951
crore ,respectively, at end March 2003, registering an
annual compound growth rate of 19.2 per cent and 17.5
Per cent, respectively .The annual compound growth rate of deposits and Advances,
however, slowed down to 1.4 per cent and 0.7 per cent, respectively, during last
two years, i,e.,2003-04 and 2004-05.

Regulation of Rural Co-operative Banks/Central Co-operative Banks

Licensing of State Co-operative Banks / Central Co-operative Banks

No new licence was granted during 2004-05. Total number of licensed State co-
operative banks (StCBs) and Central co-operative banks (CCBs) Were 13 and 73,
respectively, at end-March 2005, show cause notices Were issued to six CCBs in
2004-05 for rejection of their licence applications As at end-March 2005, nine CCBs
were placed under the Reserve Bank’s Directions prohibiting them from granting
loans and advances to certain areas and/or accepting fresh deposits. No scheduled
status was granted to any StCB during the year for inclusion in the Second Schedule
under Section 42 of the RBI Act,1934. Total number of scheduled StCBs remained at
16at end-March 2005.
Supervision of the Rural Co-operative Structure

NABARD undertakes inspection of RRBs, StCBs and CCBs in accordance with the
powers vested under Section 35(6) of the Banking Regulation Act, 1949 (AACS).
Besides, NABARD conducts voluntary inspection of SCARDBs, Apex weaver Co-
operative Societies and State Co-operative Marketing Federations. The frequency of
statutory/voluntary inspections by NABRAD is being increased from 2005-06.
Accordingly, statutory inspections of all StCBS as well as of those CCBs and RRBs
which are not complying with minimum capital requirements as required under the
B.R.Act,1949 (AACS) and the Reserve Bank of India Act, 1934, respectively, and
voluntary inspections of all SCARDBs will be conducted on an annual basis. The
statutory inspections of CCBs and RRBs with positive net worth as also the voluntary
inspections of Apex co-operative Societies/Federations would continue to be
conduct once in two years. With the introduction of annual inspection, the system of
conducting quick inspection has been dispensed with. Inspection of 326 banks
(12StCBs,181CCBs and 133 RRBs) and voluntary inspection of 11 SCARDBs and four
Apex institution were carried out during the year.

State Co-operative Banks

Operation of state Co-operative

Asssets/liabilities of StCbs grew at a higher rate during 2003-04 as compared with

the preceeding year. Deposits of StCBs grew significantly during the year. Most of
such deposits were deployed in investments, a trend which wa observed in respect
of other financial institution as well. Many financial institutions increased their
exposure to investments for making capital gains in a declining interest rate
scenario. Loans and advances extended by StCBs. However, decelerated further
from the low growth witnessed in the previous year

Financial performance of state Co-operative Banks

Interest income of the StCBs declined by Rs 267 crore during 2003-04.This,

however, was more than compensated by a sharp increase in other income, on the
one –hand, and decline in interest expense ded and operating expenses, on the
other. As a result, operating profits of StCBs improved marginally during the year.
However, a sharp increase in provisions and contingencies resulted in declined in
net profits by Rs 20.6 crore at end-March 2004 from Rs.343 crore at end of the
previous year.twenty seven out of 31 StCBs earned profits, while four incurred
losses during the year. Twenty StCBs earned higher Profits during 2003-04, while
seven earned lower profits. Losses incurred by three loss making StCBs declined
while it increased for one

Central Co-operative Banks Operation of Central Co-operative Banks

Total Assets and Liabilities of Central co-operative banks (CCBs) expanded at a

lower rate during 2003-04 as compared with the previous year mainly due to
slowdown of deposits, borrowings and internal generation. The impact of this
slowdown was felt mainly on loan and advances, which grew at a much lower rate
as compared with the previous year. Investments, however, increased sharply, a
trend which was observed in respect of other financial intermediaries as well. The
structure of liabilities and assets of CCBs remained broadly unchanged

Primary Agricultral Credit Societies (PACS)

Primary agricultural credit societies (PACS) is the foundation of the co-operative

credit system on which the superstructure of the short –term co-operative credit
system rests. It is the PACS which directly interface with individual farmers, provide
short-term and medium-term credit, supply agriculture inputs, distribute consumer
articles and arrange for making of produce of its members through a co-operative
marketing society.

ANNEXURE MAJOR POLICY DEVELOPMENT OF COMMERCIAL BANKS AND CO-

OPERATIVE BANKS

Announcement
Date Measures
2005 COMMERCIAL BANKS
March 11
Ø Parameters on pilot implementation of Cheque Truncation Image Standards
issued to banks .
Ø Drafts guidelines on implementation of the New Capital Adequacy Framework
issued for comments on managements of risk.
March 29
Ø Banks advised to exercise caution in outsourcing of their systems and ensure that
risks in this regard are minimized.
March 30
Ø Banks advised to implement some recommendation of the Vyas Committee.
These included:
1. Constitution of local advisory committee for all rural branches:
2. Setting up of micro-finance cells at banks, central offices:
3. Encouraging SHGs to use local book writers in association with concerned
agencies promoting these SHGs for maintaining the quality of books of accounts.

CO-OPERATIVE BANKS
April 15
Ø Comprehensive guidelines issued for investment in non- SLR securities by Urban
Co-operative Banks.
April 21
Ø All States Co-operative Banks and Central Co-operative Banks advised that the
interest rate on NRE Deposits for one to three years maturity, contracted effective
close of business in India on April 17, 2004 , shall not exceed the LIBOR/SWAP rate
for dollar of corresponding maturity. Further, the interest rate on NRE savings
deposits has also been linked to LIBOR/SWAP rates with effect from close of
business in India on April 17, 2004. the interest rates on NRE savings deposits
should not exceed the LIBOR/SWAP rate for six months maturity on US dollar
deposits and may be fixed quarterly on the basis of the LIBOR/SWAP rate of US
dollar on the last working day of the preceding quarter.