CHAPTER III

SOURCES AND USES OF FUNDS IN COOPERATIVE BANKS

An important pre-requisite for sound operations of banking

institution majorly lies on how effective it is in mobilization of

resources. Puri is of the opinion that “the quality of services

rendered by the cooperative banks can be directly attributed to

their capacity in mobilization of resources through various means.

The adequacy of resources must be in terms of business operations

requirement and need.”1 An attempt is made on the sources of

funds with their composition in part-I and deployment of funds in

part-II of this chapter.

PART-I: SOURCES OF FUNDS

NICHE OF COOPERATIVE BANK

The role of cooperative bank is imperative in Indian financial system

with broad network in the arena of deploying credit to the

productive economic activities as well as employment-oriented

programmes. The cooperative banks have been rendering yeomen

services by adopting an effective funds management approach with

a built-in mechanism based on the principal of cooperation, self-

help and mutual-help. The role of cooperative credit institutions are

a strategic part in rural credit delivery system in the arena of Indian

60
financial system where they have been engaged in different

economic activities such as production, processing, marketing and

banking servicing including credit with vast network and enable

superstructure. The financial situation of cooperative banks has

made them to achieve a commendable progress through spread of

network geographically with functional reach. A sound financial

management of any institution always depends upon its well-

planned and well-developed provisions under the bye-law and

operative mechanism being adopted strategically. Procuring the

need resources under ever-changing competitive environment world

for optimum business operations with certain effectiveness as well

as efficiency of the cooperative banks is the most remarkable

pathway.

Considering the working situation of the cooperative banks with

facts as said above, a probing into the financial and operational

aspects of them becomes a more niche on the aspect of financial

prudency. An attempt is made on various issues relating to funds

of the cooperative banks in this chapter. It is well said that an

effective as well as an efficient funds management in the arena of

financial institution is akin to keep-up of blood with contents and

circulating it efficiently in the body of a man to keep him up healthy

both in brain and in body.

61
MEMBERSHIP

All the farmers residing in the territorial limits of loan operations

area of a primary cooperative society are eligible to become

members of it which in turn federate into the cooperative bank as

its member. This federation is one of the unique characteristics of

the cooperatives under their statute. Banner, A., is of the view that

“membership must be open to all whom it can be of service.”2

Equity is the best security of members in the cooperative. A

member can withdraw his membership after the loan amount is

repaid completely. Members of cooperatives are like the passengers

of a train using it when it becomes necessary but the running of

train is not their business. A cooperative bank which is a financial

entity is an association of members, who are the owners as well as

customers of it. The cooperative bank is often created by persons

belonging to the local or professional community who share a

common interest. In each and every organization whether it is

business or service, capital is a strategic input-factor. Any entity or

organization without capital will be in question like a man without

blood.

In order to maintain a resource flow regularly with steadiness, the

cooperative bank needs a sound and operative mechanism for

procuring adequate capital from the members consisting of

individuals and primaries and generating enough reserves by it on

62
account of better profit due to more business. The membership of

cooperative bank is of two types namely ‘A’ class members and ‘B’

class members which is as:

The primary agricultural cooperative societies, State

Government and other specialized agencies like DRDA are

eligible to become ‘A’ shareholders

The shares of ‘B’ class are given only to individuals as nominal

members who pay a nominal amount of $ 10 as share capital

with voting rights and participation in Board of Management.

The nominal member is eligible for the facility of overdraft,

generally, for borrowing credit towards the non-farm purposes

subject to the governing provisions under the bye-law of

cooperative bank. Apart from the State Government becoming as

shareholder, there are 233 primary agricultural cooperative

societies and 184 primary agricultural cooperative societies in case

of Anantapur and Kurnool cooperative banks in 2001-02 which

reduced to 119 primary agricultural cooperative societies and 99

primary agricultural cooperative societies in 2005-06 under

reorganization to strengthening them. The strengthening aspect has

continued up to 2011-12 in both the Anantapur and Kurnool

cooperative banks. This implies that nearly 50 per cent in Anantapur

cooperative bank and nearly 60 per cent in Kurnool cooperative

bank have brought under the norm of strengthening the primaries.

63
Healthy operations of the primaries aid in sound business

operations the institution in which the primary society federate in it.

The drastic reduction in the number of primary agricultural

cooperative societies (PACSs) during the year 2005-06 in both

cooperative banks was due to the implementation of the

recommendations of the Task Force Committee on Cooperatives

headed by Vaidyanathan which was constituted by Government of

India in 2004-05. The important recommendations of this

committee regarding the viability of primary agricultural cooperative

societies is to strengthen by means of reconstructing them and

abolishing weak primaries, if any, which are not possible for

reconstruction. This is the main cause for the number of primary

agricultural cooperative societies got decreased in both the districts

under the jurisdiction of cooperative banks. Data on individual-

membership of cooperative banks is presented in Table 3.1.

Table 3.1 shows that the membership of the Anantapur and Kurnool

cooperative banks. In case of Anantapur cooperative bank,

individual-membership is 78028 in 2001-02 which gradually

increased and touched to 111759 in 2011-12 with annual growth of

3.93 per cent. So far is concerning to the Kurnool cooperative

bank, the individual-membership stood at 59355 in 2001-02 and

115280 in 2011-12 with annual growth of 7.25 per cent. Such a

steady and steep rise in the membership of individuals is due to

64
awareness among people in the society on rendering the quality of

services of cooperative banks with timely which is not so by the

commercial banks; which is due to democratic management being

formed with grass-root level people. With this, it can be ascribed

that the cooperative bank is borrower-friend and the borrower is

cooperative bank-friend. This implies mutual interest and for their

reaping optimum results.

TABLE 3.1

INDIVIDUAL MEMBERSHIP

Year Anantapur Coop. Kurnool Coop. Bank

Bank

2001-02 78028 59355

2002-03 78342 60950

2003-04 78280 61539

2004-05 80080 61941

2005-06 80405 65040

2006-07 81259 70645

2007-08 84778 80200

2008-09 92151 88362

2009-10 97394 95890

2010-11 102123 105200

2011-12 111759 115280

Growth 3.93 7.25

Source: Annual Reports, Samples Cooperative Banks

65
SOURCES OF FUNDS

Mobilization of resources from internally as well as externally is a

pre-requisite on the part of cooperative banks to be said effective.

The former is essentially mobilized from individual members and

primary societies including from the State Government which

normally participates. The latter is provided by the external

agencies like NABARD, Apex bank and commercial banks. The

cooperative banks also mobilize deposits of various types from

varied individuals of myriad savings and member-cooperative

societies. In view of the former which renders services to the people

in their jurisdiction who become members, resources mobilization is

still greater significance. The quality of services to be rendered to

people who became members is attributed to the capacity of

cooperative banks to mobilize resources through various means.

The funds of cooperative banks are grouped into:

Owned funds

Borrowed funds

OWNED FUNDS

In cooperative bank, share capital, reserves and other reserves

form the owned funds while deposits and borrowings constitute the

borrowed funds of them. The share capital is subscribed by the

affiliating societies and individual-members. The affiliating societies

66
must subscribe towards the shares of cooperative banks in

proportion to their borrowings in the ratio of 1:10. The face value of

share varies from $ 50 to $100.

The origination of cooperative credit institutions in India has

completed 109 years with the passing of Cooperative Credit

Societies Act, 1904; the efforts started officially to eradicate the

problem of peasantry and also financing the credit-needs of

common public. The face and pace of cooperative credit institutions

has changed drastically in the society due to the ever increasing

competition from the commercial banks and undue political

interference. The success of financial system lies on the effective

operation of components in the system with cooperation among the

employees. The principles and practices of cooperative system are

guiding the spirit of management production and economic

resources. In the three-tier structure of single window system in

Andhra Pradesh, the cooperative banks operate in the

middle/district level by deploying credit to the primary cooperative

societies accepting of their deposits and other needy services of

banking. Mobilization of resources is a pre-requisite to conduct

business operations in an effective way for achieving the anticipated

results in the scenario of the banking arena.

The quality services of cooperative bank should be such that ensure

and enhance the capacity to mobilize resources strategically. “The

67
adequacy of resources must be in terms of their operating

requirements as well as their needs.”3 Mobilization of funds by the

cooperative banks is of two sources namely (i) internal and (ii)

external.

Internal source refers to share capital of members, reserves

and accumulated saving as profit

External source refers to the finance facility provided by

NABARD, State Cooperative Banks and commercial banks

The cooperative banks mobilize deposits of various types from

varied people individual-members, cooperative institutions and

other institutions including the Government Departments.

Operationally, the working funds of cooperative banks are broadly

grouped into owned funds and borrowed funds. Data on the share

capital of sample cooperative banks is presented in Table 3.2.

Table 3.2 shows the share capital of Anantapur cooperative bank is

123.13 per cent of $ 22.65 crore in 2001-02 which decreased to

94.32 per cent of $ 47.54 crore per cooperative bank in the State of

Andhra Pradesh and the corresponding figures in case of Kurnool

cooperative bank are 87.99 per cent and 87.40 per cent. During the

study period of 11 years from 2001-02 to 2011-12, the average

share capital of them works out at 101.89 per cent and 84.22 per

cent of $ 34.89 crore per cooperative bank in the State

68
 TABLE 3.2

SHARE CAPITAL

Anantapur Kurnool Coop.

Per Coop.
Year Coop. Bank Bank Share
Bank in A.P.
Share Capital Capital
($ in crore)
(1) ( % to col.4) ( % to col.4)
(4)
(2) (3)

2001-02 123.13 87.99 22.65

2002-03 123.73 84.55 23.05

2003-04 121.56 81.59 23.79

2004-05 90.94 83.11 34.11

2005-06 87.77 78.45 36.39

2006-07 94.60 82.17 35.95

2007-08 100.27 82.04 37.53

2008-09 103.93 84.60 38.70

2009-10 106.30 89.34 39.68

2010-11 98.85 85.21 44.36

2011-12 94.32 87.40 47.54

Mean 101.89 84.22 34.89

Source: Annual Reports, Sample Cooperative Banks

69
It is understood from the analysis that though the performance of

Anantapur cooperative bank shown numerically had less growth

compared to Kurnool cooperative bank; it is due to the fact that

initially the former had numerically sizable numerator compared to

the latter as well as per cooperative bank position in the State of

Andhra Pradesh.

Adequate capital is essential not only to maintain bank solvency but

also allow growth of it. Nevertheless, increase in the capital base of

cooperative banks is often necessary because their growth is

constrained if capital is limited. To raise resources either in the form

of deposits or borrowings would operationally require to the banking

as capital which consisting of equity and resources. Primarily, the

cooperative bank has driven by the principle of providing credit to

its members at reasonable cost; maximizing returns on equity

remains the secondary. Raising equity from its members creates

confidence. Normally as per statute, a member has to contribute

equity in proportion to the credit borrowed by him. This makes it

difficult for the cooperative banks to have a large amount of capital

base with size of members’ capital.

The capital adequacy is becoming a major issue in securing the

need capital as the members of the cooperative banks as well as

the cooperative banks are not undertaking commercial activities but

service-orientation as both the members and the cooperative banks

70
are under the governing rule of cooperation. Naturally, such

scenario leads in under-capital. Keeping this constraint in view, the

State Government has come forward to contribute towards the

equity capital of cooperative banks in order to strengthen their

capital base.

The efficient functioning of cooperative bank squarely depends upon

its strong owned capital internally. The owned capital of cooperative

bank reflects on the financial strength and stability of it. In other

words, the higher the amount of owned capital, the lesser is its

need to borrow funds from outside agencies. The adequacy of

share capital is judged on the basis of cooperative bank

requirements of share capital vis-a-vis lending programme for

different purposes of economic-orientation. The share capital and

owned funds of the cooperative bank is required not only for its

adequate borrowing-power but also for investments in certain fixed

assets such as buildings, furniture, fittings and also for absorbing

overdues also, so that it is not subjected to face problem in meeting

the commitments to the creditors.

It may not be possible for the cooperative bank to secure the

required amount of share capital by itself to meet the credit needs

of members. So, the State Government’s participation is essential to

strengthen and expand the credit operations. The Banking

Commission visualized that the capital contribution by the State

71
Government “is a powerful helping hand which may be held out to

prevent the cooperative banks against dangers and weakness

inherent in the function as a whole.”4 To quote Ferdinand Lessel

words as: “If I want to reach the top of the tower and if someone

assists me with rope and a ladder, nobody thereby would prevent

me from reaching the top of my own self-Help. In a way, the State

Government help can only promote self-help.”5

Cost of Share Capital: Share capital cost has great bearing on the

management of funds of cooperative banks. “Cost of share capital is

to be recognized as the topic is most difficult and disputed in the

theory of finance, but it should be noted as a concept of vital

importance in the financial decision-making.”6 The efficient working

of cooperative banks is mostly influenced by its strong internal

owned capital as it reflects the financial strength and stability. The

share capital composition of Anantapur cooperative bank and

Kurnool cooperative bank is presented in Table 3.3.

The individual, societies and Government share capital of Anantapur

cooperative bank in 2001-02 is accounted for 2.26 per cent, 89.85

per cent and 7.89 per cent of $ 27.89 crore in 2001-02 while the

corresponding figures in case of Kurnool cooperative bank are 1.50

per cent, 90.47 per cent and 8.03 per cent of $ 19.93 crore

respectively .

72
 TABLE 3.3

COMPOSITION OF SHARE CAPITAL

Year Anantapur Cooperative Bank Kurnool Cooperative Bank

Indivi- Socie- Govt. Total Indi- Socie- Govt. Total

duals ties (% to duals ties
(% to (% to col.4) ($ in (% to (% to (% to ($ in
col. 4) col.4) crore) col.9) col.9) col.9) crore)
(1) (2) (3) (4) (5) (6) (7) (8) (9)
2001-02 2.26 89.85 7.89 27.89 1.50 90.47 8.03 19.93`

2002-03 2.17 90.70 7.64 28.53 1.49 90.30 8.21 19.49

2003-04 2.18 90.70 7.12 28.92 1.44 90.31 8.25 19.41

2004-05 2.06 92.46 6.48 31.02 0.99 61.97 37.04 28.35

2005-06 2.00 91.70 6.29 31.94 0.98 64.88 34.14 29.56

2006-07 1.91 92.18 5.91 34.01 0.95 66.05 33.00 29.54

2007-08 1.75 92.90 5.35 37.62 0.91 67.42 31.67 30.79

2008-09 1.74 93.26 6.14 40.22 0.89 69.33 29.78 32.74

2009-10 1.75 93.48 4.77 42.18 0.90 71.60 27.50 35.46

2010-11 1.73 93.68 4.58 43.85 0.95 73.25 25.79 37.80

2011-12 1.81 93.71 4.48 44.83 1.37 75.16 23.47 41.54

Source: Annual Reports, Samples Cooperative Banks

Figures in column 2,3and 4 are % to col.5 and in column 6.7 and 8
are % to col. 9

In 2011-12 the percentage of individual, societies and Government

total is 1.81 per cent, 93.71 per cent and 4.48 per cent of $ 44.83

crore in Anantapur Cooperative Bank and the corresponding figures

in Kurnool Cooperative Bank are 1.37 per cent ,75.16 per cent

and23.47 per cent of $ 41.54 crore respectively.

73
RESERVE FUNDS AND OTHERS

The owned capital is share capital and reserves; the former being

the contribution of members and the latter is being contribution of

the cooperative bank. Reserve fund is prerequisite from the point of

confidence of members and creditors. The idea of creating reserve

fund is to (i) meet the unforeseen losses, (ii) give financial strength

and (iii) fortify outside confidence. Eleanor Hough, M., has rightly

remarked on creation of reserve fund like this: “More important

from the point of members’ security is an adequate reserve funds.”7

The cooperative bank maintain various reserves out of net profit

such as statutory reserve fund, agricultural credit stabilization fund,

non-performing assets fund, dividend equalization fund, interest

fluctuation fund, charity fund, building fund, vehicle fund, etc. This

reserve fund is created out of profit to meet unforeseen

contingencies and as a built in safety of funds by having financial

stability over a period of time.

The cooperative banks also create non-statutory reserves

depending upon the nature of transactions in the cooperative banks.

These include reserve for various objected items, reserve for

overdue interest and principle, reserve for provident fund and

bonus, reserve for audit fund, life insurance benefit fund, vehicle

redemption fund, department guarantee fund etc., reserves for

sundry debtors and furniture replacement fund. These reserves are

74
not made according to the Law but according to the requirements of

the bank to protect the funds position. The agricultural credit

stabilization fund is created for the specific purpose to meet the

share in conversion of short-term agricultural loans into medium-

term loans. The degree of self-reliance is identified based on the

position of owned funds. The more the owned funds, the less the

suffering from the risk of being called back or no interest payment.

Data on the position of owned funds and their components is

presented in Table 3.4. (Fig.3.1)

TABLE 3.4
OWNED FUNDS OF COOPERATIVE BANKS
Anantapur Coop. Per Coop. Bank
Kurnool Coop.
Year Bank Owned in
Bank owned Funds
Funds A P ($ in crore)
(% to col. 4)
(1) (% to ol.4)
(3)
(2) (4)
2001 – 02 189.83 78.60 45.76

2002 – 03 196.52 72.99 52.87

2003 – 04 195.11 76.82 58.11

2004 – 05 187.59 81.58 74.27

2005 – 06 173.25 76.25 101.18

2006 – 07 174.88 70.52 111.73

2007 – 08 179.78 82.69 118.72

2008 – 09 196.37 87.24 110.22

2009 – 10 194.55 65.43 112.54

2010 – 11 221.44 62.60 114.01

2011 – 12 198.47 61.51 114.60

Mean 191.62 74.20 92.18

Source: Annual Reports, Samples cooperative Banks

75
Fig 3.1

76
Table 3.4 shows total owned funds of Anantapur cooperative bank

and Kurnool cooperative bank and their relative position with per

cooperative banks average in Andhra Pradesh. The relative position

of the Anantapur and Kurnool cooperative banks accounted for

189.83 per cent and 78.60 per cent of $ 45.76 crore of per

cooperative bank average owned funds in Andhra Pradesh. In 2011-

12, their position with that of per cooperative bank average owned

funds in the State is worked out at 198.47 per cent and 61.51 per

cent of $114.60 crore respectively. The average position of owned

funds during the study periods of eleven years from 2001-02 to

2011-12 is accounted for 191.62 per cent and 74.20 per cent of $

92.18 crore per cooperative bank average owned funds in the

Andhra Pradesh State respectively.

The increase in relative terms to the per cooperative banks owned

funds position is accounted by 8.64 per cent in Anantapur

cooperative bank and a decrease by 17.09 per cent in case of

Kurnool cooperative bank to that of average position of per

cooperative bank in State of Andhra Pradesh. The progressive

increase in owned funds position of Anantapur cooperative bank is

more than its counterpart of Kurnool cooperative bank and also per

cooperative bank in the State of Andhra Pradesh. It is welcome sign

for better mobilization of share capital.

77
COMPOSITION OF OWNED FUNDS

The debtor’s ability, generally, to repay the loan amount depends

upon his own resources. In case of the cooperative bank, the apex

bank has to assess the financial strength of it before permitting the

credit limits and borrowings. The provision of credit will be liberal

when the institution is on sound footing. It guides in un-lopsided

business on smooth lines. Talwar, R.K, opined that “the generation

of self-reliance at the grass-root level will bring up entrepreneurship

which in turn will bring success to the business venture of

farming.”8 Self-reliance forms the basis to tap more and more

deposits from the public. The owned funds of cooperative bank form

the pre-requisite factor from the point of cost of fund and available

readily to the management to deploy them to the need purposes in

time. Such is the significance of owned funds of the sample

cooperative banks and data with composition is presented in Table

3.5.

Table 3.5 reveals the owned funds of Anantapur cooperative bank

with the composition of capital and reserves which accounted for

32.11 per cent and 67.89 per cent of total owned funds of $ 86.87

crore while the figures in case of Kurnool cooperative bank are

55.41 per cent and 44.59 per cent of total owned funds of $ 35.97

crore. The corresponding figures in 2011-12 are 19.71 per cent and

78
80.29 per cent of $ 227.45 crore; and 58.94 per cent and 41.06 per

cent of $ 70.49 crore respectively for the above cooperative banks.

TABLE 3.5
COMPOSITION OF OWNED FUNDS

Anantapur Cooperative Bank Kurnool Cooperative Bank

Year
Owned
Share Owned Share Reserve
Reserves Funds
Capital Funds Capital (% to
(% to (in $
(% to (in $ (% to col.7)
col.4) crore)
col. 4) crore) col. 7)
(1) (3) (7)
(2) (4) (5) (6)

2001 – 02 32.11 67.89 86.87 55.41 44.59 35.97

2002 – 03 27.46 72.54 103.90 50.51 49.49 38.59

2003 – 04 25.51 74.49 113.38 43.48 56.52 44.64

2004 – 05 22.27 77.73 139.32 46.79 53.21 60.59

2005 – 06 18.22 81.78 175.3 37.02 62.98 77.15

2006 – 07 17.67 82.33 195.39 37.49 62.51 78.79

2007 – 08 17.63 82.09 213.44 31.36 68.64 98.17

2008 – 09 18.58 81.42 216.44 34.05 65.95 96.16

2009 –10 19.26 80.74 218.95 48.15 51.85 73.64

2010 –11 19.71 80.29 222.46 52.96 47.06 71.37

2011 – 12 19.71 80.29 227.45 58.94 41.07 70.49

Mean 20.45 79.55 173.90 43.40 56.60 67.78

Source: Annual Reports, Sample Cooperative Banks

79
The mean of owned funds during the study period of 11 years from

2001-02 to 2011-12 is accounted for 20.45 per cent and 79.55 per

cent of $ 173.90 crore; and 43.40 per cent and 56.60 per cent of $

67.78 crore. In both cooperative banks, the position of share capital

remains almost unchanged but change occurred in reserve fund.

This implies that the cooperative banks had good business and as

result earned better profit effecting equitable contribution to reserve

funds.

DEPOSITS

The philosophy of cooperation emphasizes that the cooperative

institution should function only with the funds pooled from

members, but not to rely largely on external financial

accommodation. The All India Rural Credit Survey Committee

(1954), Mehta Committee (1960) and Banking Commission (1972)

have recommended that the cooperative banks should engage in

mobilization of deposits for improving their internal resources.

Contrary to this principle, the concessional finance available to them

from the Reserve Bank of India made them indifferent to the

function of mobilization of deposits. To mobilize deposits, the

Reserve Bank of India and State apex institution offer services such

as subsidy for branch expansion, State participation in share capital,

permitting the cooperative banks to offer half percent interest

80
higher than commercial banks and application of deposit insurance

scheme as well.

The cooperative banks since their inception have been enjoying the

facility of concessional finance from the Reserve Bank of India.

They merely acted as agents in purveying credit. However, they did

not realize their position as banking institution by making earnest

efforts to tap the savings as deposits from the public and smooth

functioning of them mainly depend on the ability to increase the

resources by means of mobilizing more deposits. Higher level of

deposits contributes to self-reliance as well as self-sufficient. The

reliance of cooperative banks on public deposits became even more

important in view of the emphasis by NABARD on their self-

sufficiency through effective deposits mobilization and linking of

borrowings with deposits mobilization introduced by the Reserve

Bank of India in the year 1973-74. Thus, deposits which are the

main stay of cooperative banks contribute to the self-reliance in the

areas of assets management of the cooperative banks.

Deposits and borrowings are two key components of external funds

of the cooperative banks; of which the former is more important

source as their strength depends upon it. The cooperative banks

have remained as agents of Reserve Bank of India in purveying

credit and did not realize their position as banking institutions by

making efforts to tap savings from the people. Their smooth

81
functioning depends upon the ability to increase the resources by

mobilizing deposits. Higher deposits contribute to self-reliance. Self-

reliance of cooperative banks through deposits becomes even more

important in view of the emphasis by NABARD on self-sufficiency

through effective deposit mobilization and linking borrowings with

deposits mobilization.9

Mobilization of deposits is major function of the cooperative banks.

As such, it is important source of working funds for the cooperative

banks and their financial resources by way of deposits mobilization.

Deposits mobilization is an indispensable factor to strengthen with

an increase in source of cooperative bank to provide satisfactory

service to any programme of agricultural production and industrial

manufacturing needs no emphasis. Several committees and

commissions have stressed that the cooperative banks must tap

more and more deposits from people so to that they may be able to

provide funds in large size of credit to the primary societies for farm

and non-farm development activities. This is the basis factor on

which the success and effectiveness of working of the cooperative

banks is greatly hinged on. Further, deposits are normally

considered as a cost effective source of working capital and

determine the rate of economic progress. Kumar and Dhakshina

Murthy who appropriately expressed on deposits thus: “The

proportion of income saved in the community ensures the effective

82
rate of economic growth.”10 Thus, deposit mobilization assumes a

significant role in:

Creating saving habit

Creating banking habit

Raising funds for the purpose of investment

As middle-tier in the cooperative structure, the cooperative banks

which are the backbone of cooperative finance must become self-

sufficient and self-reliant. Mobilization of deposits for a bank is

essential like oxygen to human being. Further, mobilization of

deposits is untainted sign for loaning operations and help further in

mobilizing resources. In brief, mobilization of deposits should form

an integral part of credit planning. With a view to enhance the

savings, the All India Rural Credit Committee has forcefully stressed

the fact that the cooperative banks must tap deposits from the

urban areas to finance adequately.

The mobilization of deposits can be monitored by the cooperative

banks through deposits-mix strategies. The College of Agricultural

Banking in its article on Managing District Cooperative Central

Banks pointed out this: “One of the most neglected areas in

cooperatives is that of deposits mobilization. Because of easy

availability of resources from higher-tier institution, the

cooperatives have not adequately paid attention to deposits. The

83
suggested criteria for attracting deposits by the cooperative banks

are (i) safety, (ii) profitability and (iii) liquidity.”11

To have more deposits for the cooperative banks, the All India Rural

Credit Survey Committee has expressed its view as: “The primary

agricultural cooperative societies should be encouraged to deposit

their funds with the cooperative banks.”12 The move of banking

industry for sound banking business operations depends on getting

more and more deposits. Credit merely follows it; and it is only

after deposits, the bank acquires the position of the strength. The

maxim is that “credits are children of deposits; and deposits are

children of credit”13 holds good.

An increased lending business of the cooperative bank depends

upon the increased deposits mobilization; deposit-credit-deposit

gets established a positive relation. Here realized is that it is

noteworthy to remember that every advance may not turn up into

deposit; it very much hinges on the efficient functioning and wider

coverage by the cooperative bank. Quoting here the remarks of

Patel, I.G., is worth. He said thus: “Bank creates money but does

not create savings… and, it is savings which makes the economy to

run.”14 A good customer service approaches is utmost and urgent is

required for savings channelization because of the present stiff

competition persist between the institutions and within them. For

the service of customer, the impact of service delivery by the

84
cooperative bank is more vital than the range of services offered.

“The secret of success, even in adverse circumstances and stiff

competition lies in the formation of winning team imbued with the

special feeling. With this winning team, we can be assured of a good

customer-service which is the most important factor in deposits

mobilization.”15

People desire that their savings should be safe for which, several

indicators such as reputation of bank, outlook of branch and

experience of customer with the bank, true financial health

parameters of an institution are the core. Apart from feeling, his

money is safe and secure, and the rate of interest offered is

competitive. To attract the deposits, the cooperative bank has to

advertise its deposit schemes in local newspapers, television and

display at the public places with hoardings using neon lamps. All

the registered primary cooperative societies will deposit all their

appropriations out of profits with the cooperative bank concerned as

statutory obligation. Therefore, any improvement in the deposits

from the primary societies does not reveal the real effectiveness of

the cooperative banks efforts towards deposits mobilization.

Individual as second source of deposits constitute to mobilization of

deposits.

The cooperative banks of Anantapur and Kurnool followed the

traditional scheme of current deposit, saving deposit and fixed

85
deposit. The prime motives, two decades ago, for savings of an

average man were security, safety, return and liquidity have now

changed to return, tax-benefit, liquidity and other benefits. For the

change of affair, the responsible factors are grouped into as:

Awareness and mechanism of financial market

Change in standard of living, life-style and value system

Risk-bearing capacity

Rapid industrialization

Monitoring policy

Incidence of tax and tax structure

Cost of Deposits: The cost of deposits consists of (i) interest cost

and (ii) servicing (manpower and material) cost, the former is

dominated. For every $ 100 of credit for short-term agricultural

operations lent by the cooperative banks, $ 40 must be met out of

deposits mobilized and remaining $ 60 can be refinanced at

concessional rate of interest and lent at lower rate of interest. The

cooperative banks mobilized deposits at higher rate of interest and

lent at lower rate of interest which lead to loss. Further, the liquidity

cost of deposit is also to be reckoned. Thus, the total cost of

deposits includes interest cost, liquidity cost and servicing cost. The

average cost of deposits can be known by taking into account the

actual amount of interest paid by the cooperative bank during the

year divided by total average deposits. The formula is as:

86
 Interest paid on deposits
Cost of deposit (per $100) = -------------------------------- x 100
Average deposits amount

Data on mobilization of deposits of Anantapur and Kurnool

cooperative banks per cooperative bank with average deposits in

the State of Andhra Pradesh is presented in Table 3.6 (Fig. 3.2).

TABLE 3.6

MOBILIZATION OF DEPOSITS

Year Anantapur Coop. Kurnool Coop. Per Coop. Bank

Bank Deposits Bank Deposits in AP
(% to col.4) (% to col.4) ($. in crore)
(1) (2) (3) (4)
2001-02 60.87 72.94 123.09

2002-03 60.69 73.13 119.29

2003-04 58.92 62.80 117.28

2004-05 56.06 8.47 112.36

2005-06 56.53 56.97 113.22

2006-07 62.06 55.16 118.85

2007-08 73.32 60.54 146.25

2008-09 71.35 69.13 191.18

2009-10 68.56 62.41 197.12

2010-11 75.85 67.67 199.21

2011-12 81.10 69.68 213.77

Growth 31.72 42.95 150.15

Source: Annual Reports, Sample Cooperative Banks

87
Fig 3.2

88
Table 3.6 discloses the Anantapur cooperative bank has deposits of

60.87 per cent of $ 123.09 crore per cooperative bank in 2001-02

which rose to 81.10 per cent of $ 213.77 crore per cooperative bank

in the State of Andhra Pradesh. In 2011-12; the corresponding

figures are 72.94 per cent and 69.68 per cent of $ 213.77 crore

respectively for the Kurnool cooperative bank. The deposits

mobilization in during eleven years period from 2001-02 to 2011-12

is accounted for 31.72 per cent and 42.95 per cent of $ 150.15

crore per cooperative bank average deposits in the State of Andhra

Pradesh.

The current deposits is one of the major deposit mobilization

scheme which generally operated by the business class. The savings

deposits are essentially habituate and accelerate banking motive

particularly among the small savers. Hence, its increasing share in

total deposits is desirable. The cooperative bank operates the

accounts of current, savings, fixed and other deposits.

Composition of Deposits: Data on the composition of deposits of

cooperative banks is presented in Table 3.7.

Table 3.7 shows the deposits of current, savings, fixed and other of

Anantapur cooperative bank in 2001-02 are 2.91 per cent, 19.23

per cent, 72.82 per cent and 5.04 per cent of $ 74.88 crore

respectively. The corresponding figures in case of Kurnool

cooperative banks in 2001-02 are 1.77 per cent, 9.99 per cent,

89
79.62 per cent and 8.62 per cent of $ 89.79 crore respectively. In

2011-12, the Anantapur cooperative banks is accounted for 6.40

per cent 15.04 per cent, 72.50 per cent and 6.06 per cent of $

173.36 crore and Kurnool cooperative banks, the figures are 2.12

per cent, 7.70 per cent, 70.04 per cent and 20.14 per cent of $

148.97 crore for the above types of deposits respectively.

The average deposits for the above types are 5.33 per cent, 20.69

per cent, 66.07 per cent and 7.91 per cent of $101.85 crore in

Anantapur cooperative banks while in case of Kurnool cooperative

banks are 4.66 per cent. 10.60 per cent, 68.68 per cent and 16.06

per cent of $ 97.67 crore respectively. The type of savings and fixed

deposits claim a lion’s share of 86.76 per cent and 75.08 per cent in

case of Anantapur cooperative bank and Kurnool cooperative banks

respectively. This position is laudable to their working status in the

society.

90
 TABLE 3.7
COMPOSTION OF DEPOSITS
Year Anantapur cooperative Bank Kurnool Cooperative Bank
Current Saving Fixed Other Total Current Saving Fixed Other Total
(% to (% to (% to (% to col.6) ($ in crore) (% to (% to (% to (% to ($ in crore)
col.6) col.6) col.6) (5) (6) col.11) col.11) col.11) col.11)
(1) (2) (3) (4) (7) (8) (9) (10) (11)

2001-02 2.91 19.23 72.82 5.04 74.88 1.77 9.99 79.62 8.62 89.79

2002-03 2.93 23.92 67.38 5.77 72.40 11.20 9.15 79.43 0.22 87.62

2003-04 2.75 26.60 63.92 6.73 69.10 2.61 11.08 74.53 11.77 73.65

2004-05 1.83 31.00 58.99 8.18 62.99 2.19 12.95 71.60 13.17 65.70

2005-06 2.41 32.65 51.41 13.53 64.01 6.70 16.11 64.34 12.85 64.50

2006-07 3.16 27.39 57.44 12.01 73.76 2.62 12.76 67.25 16.37 65.56

2007-08 5.85 19.10 66.45 8.60 107.23 8.63 13.05 60.55 17.77 88.54

2008-09 3.35 19.12 70.31 7.22 136.40 4.64 8.72 53.74 32.90 132.17

2009-10 12.40 17.54 62.78 7.28 135.15 6.63 10.22 70.12 13.13 123.03

2010-11 9.14 16.39 67.92 6.55 151.10 3.13 10.18 69.77 16.92 134.81

2011-12 6.40 15.04 72.50 6.06 173.36 2.12 7.70 70.04 20.14 148,97

Mean 5.33 20.69 66.07 7.91 101.85 4.66 10.60 68.68 16.06 97.67

Source: Annual Reports, Sample Cooperative banks

91
Source-wise Deposits: The source-wise deposits of Anantapur

cooperative bank and Kurnool cooperative bank is presented in

Table 3.8.

Table 3.8 shows the source-wise deposits of Anantapur and Kurnool

cooperative banks. In 2001-02, the deposits of individuals,

cooperatives and others are accounting to 78.29 per cent, 16.18 per

cent and 5.08 per cent of $ 74.88 crore deposits in Anantapur

cooperative bank while the corresponding figures in Kurnool

cooperative bank in 2001-02 are 71.64 per cent, 22.78 per cent and

5.58 per cent of $ 89.79 crore respectively. In 2011-12, the

corresponding figures are 61.16 per cent, 25.46 per cent and 13.38

per cent of $ 173.36 crore; and 71.18 per cent, 18.80 per cent and

4.33 per cent of $ 148.96 crore respectively. The mean value

figures are 63.16 per cent, 27.10 per cent, 9.74 per cent of $101.85

crore; and 73.57 per cent, 21.00 per cent and 5.43 per cent of $

97.67 crore respectively.

It is observed that the deposits of individuals and cooperatives, in

relative terms, to the total have decreased and increased

respectively in case of Anantapur cooperative bank while it is vice-

versa in case of Kurnool cooperative bank; but in absolute terms

maintained positive trend in both case of cooperative banks in

deposits of both individual and cooperatives.

92
 TABLE 3.8
SOURCE-WISE DEPOSITS

Anantapur Cooperative Bank Kurnool Cooperative Bank

Indivi- Coopera- Others Total Indivi- Coopera- Others Total
duals tives (4) ($ in duals tives (% to ($ in
(% to (% to crore) (% to % to col.9) crore)
col.5) col. 5) (5) col. 9) col.9)
Year (2) (3) (6) (7) (8) (9)
(1)

2001-02 78.29 16.18 5.08 74.88 71.64 22.78 5.58 89.79

2002-03 75.45 17.90 6.65 72.40 73.49 21.45 4.56 87.62

2003-04 76.34 17.80 5.86 69.10 79.71 16.00 4.29 73.65

2004-05 73.31 20.08 6.61 62.99 81.43 13.47 5.10 65.70

2005-06 68.41 22.14 9.45 64.01 76.37 17.21 6.42 64.50

2006-07 73.52 22.75 3.73 73.76 81.30 13.10 5.60 65.56

2007-08 60.54 15.65 23.81 107.23 70.29 22.67 7.04 88.54

2008-09 52.44 43.03 4.53 136,40 56.28 37.44 6.28 132.17

2009-10 62.67 34.98 2.35 135.15 74.64 19.60 5.76 123.03

2010-11 46.23 36.91 16.86 151.10 77.08 17.77 5.15 134.81

2011-12 61.16 25.46 13.38 173.36 71.18 18.80 4.33 148.96

Mean 63.16 27.10 9.74 101.85 73.57 21.00 5.43 97.67

Source: Annual Reports, Sample Cooperative Banks

The old practice of fixing target for the staff which is unscientific

way is replace with advertise the deposit schemes in mass media

like local news papers, television, and display in public places with

hoarders using neon lamps, etc., in addition to conduct of deposit

93
week at regular intervals, customer meet, declamatory competition

for the kids of customers.

BORROWINGS

The second source of resources the cooperative banks is borrowings

also called refinance from the higher-tier institution or the apex

bank at the State level and the NABARD. Usually such credit

facilities are provided for a specific purpose with a fixed tenor.

Hence, unlike deposits which in normal course would have a rising

trend, while deploying the borrowings it is essential to match the

tenor of credit given to that of borrowings so that by the time

borrowings become due for repayment, the credit has come back.

The cooperative banks get refinance from NABARD through apex

cooperative banks at the State level. The borrow of funds play a

significant role in the funds management of apart from asset

liquidation. Refinancing institutes also enable the cooperative banks

to compete for funds so as to expand their earning assets. Rather

than relying solely on deposits, all the cooperative banks borrow

funds from time to time or in one time or other to meet the

deficiencies resource.

The cooperative banks could not utilize their borrowings capacity

fully. According to Reserve Bank of India policy, every cooperative

bank can borrow six-times of its owned funds. It came into force in

1977-78 and previously it was only four-and-half times of the

94
owned funds. The cooperative bank which borrows funds from

Reserve Bank of India extent, the cooperative bank must

transferred mortgaged or charge properties and its other assets to

the State Cooperative bank.

Cost of Borrowings: The average cost of borrowings of

cooperative bank is calculated with formula given below as:

Int. paid on borrowings

Cost of Borrowing (per $ 100) = ------------------------------- x 100
Average borrowings

Data on borrowings of the sample cooperative banks is presented in

Table 3.9 (Fig.3.3).

Table 3.9 discloses total borrowings of the sample cooperative

banks from Andhra Pradesh State Cooperative Bank (APCOB), the

State level Cooperative bank in Andhra Pradesh; though the other

sources of borrowings are State Government and others; and of

these banks with that of per cooperative bank in the State of

Andhra Pradesh.

95
 TABLE 3.9

BORROWINGS

ATP Coop. Bank KRN Coop. Bank Per Coop. Bank

Year
(% to col. 4) (% to col.4) in AP
($ in crore)
(1)
(2) (3) (4)
148.52 90.67 184.21
2001-02

144.64 90.51 187.40

2002-03

149.09 95.22 183.86

2003-04

183.32 97.76 212.79

2004-05

172.68 98.12 230.71

2005-06

180.57 99.42 247.62

2006-07

171.37 95.93 248.94

2007-08

214.46 81.42 132.33

2008-09

170.03 73.34 171.38

2009-10

123.33 62.70 226.91

2010-11

89.07 63.96 293.93

2011-12

Mean 155.07 85.96 210.92

Source: Annual Reports, Sample Cooperative Banks

96
Fig 3.3

97
The cooperative banks heavily depend on the borrowings

particularly the higher-tier organizations. The borrowings of

Anantapur and Kurnool cooperative banks respectively is accounted

for 148.52 per cent and 90.07 per cent of $ 184.21 crore per

cooperative bank in the State of Andhra Pradesh in 2001-02 while

the corresponding figures in 2011-12 are 89.07 per cent and 63.96

per cent of $ 293.93 crore with mean borrowings during 2001-02 to

2011-12 of 155.07 per cent and 85.96 per cent of $210.92 crore

respectively. The reasons for decrease of borrowings of sample

cooperative banks to that of per cooperative banks in the State of

Andhra Pradesh is due to the fact that the sample borrowings

remain more or less the same but the position of the latter has

improved by 59.56 per cent in 2011-12 over 2001-02.

UTILIZATION OF BORROWING POWER

It is not adequate to draw visible view on borrowings of the

cooperative banks. A scientific inference which could draw regarding

borrowings can be judged on effective utilization of borrowing

power. In other words, mere description of borrowing limits can

reveal the status of an institution; but its real efficiency is being

determined on its capacity to borrow in order to meet the credit

demand for conducting the business operations. Further, utilization

of borrower power of the cooperative banks can also discloses the

way of implementing the effective decisions through means of

98
financing the viable programmes for socio-economic promotion of

the people. For the purpose of fixing borrowing capacity, six times

(as per norm of Reserve Bank of India) of owned funds consisting of

share capital and reserve fund is taken in account. The share of

borrowing capacity and actual borrowings of the cooperative banks

is presented in table 3.10 (Fig.3.4 & 3.5).

TABLE 3.10
UTILIZATION OF BORROWING POWER
($ in crore)
Year Anantapur Cooperative Bank Kurnool Cooperative Bank
Borrowing Borrowed % of Borrowing Borrowed % of
Power Amount 3 to 2 Power Amount 6 to 5
(1) (2) (3) (4) (5) (6) (7)

2001-02 521 274 52.59 216 167 77.31

2002-03 624 271 43.43 232 170 73.28

2003-04 681 274 40.23 268 175 65.30

2004-05 836 390 46.93 447 208 46.53

2005-06 1052 399 37.93 463 226 48.81

2006-07 1172 447 38.14 473 246 52.01

2007-08 1281 427 33.33 589 238 40.40

2008-09 1298 284 21.88 577 108 18.72

2009-10 1314 292 22.2 442 126 28.51

2010-11 1334 280 20.99 428 142 33.18

2011-12 1364 262 19.21 423 188 44.44

Mean 1043 327 31.35 414 182 43.96

Source: Annual Report, Sample Cooperative Banks

99
 Fig. 3.4: Anantapur Cooperative Bank Borrowing Power
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2001-02 2002-03 2003-04
2003 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
10 2010-11 2011-12

Barrowed Power Unbarrowed Power

Fig. 3.5: Kurnool Cooperative Bank Borrowing Power

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2001-02 2002-03 2003-04
2003 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
2009 2010-11 2011-12

Barrowed Power Unbarrowed Power

100
Table 3.10 discloses that the maximum borrowing power of the

Anantapur cooperative bank and Kurnool cooperative bank has

remained the same without much variation in absolute terms

during the study period from 2001-02 to 2011-12. In other words,

the both cooperative banks had $ 274 crore borrowed and $ 167

crore borrowed in 2001-02 respectively while the figures in 2011-12

are $ 262 crore and $ 188 crore. However, in relative terms of

borrowed amount to maximum borrowing capacity of the Anantapur

and Kurnool cooperative banks are accounting to 52.59 per cent

and 77.31 per cent respectively in 2001-02 whereas in 2011-12 the

figures are 19.21 per cent and 44.44 per cent respectively. In other

words, maximum borrowing capacity, actual amount borrowed are

increased more than four-fold and less than one-fold respectively in

2011-12 over in 2001-02 in Anantapur cooperative bank, and about

two-fold and more than one-fold in case Kurnool cooperative bank

respectively. The sample cooperative banks could not use

effectively the borrowing capacity to maximum in order to enhance

their resources in expanding their business operations of

deployment of credit managerially. This implicitly shows the sample

cooperative banks do not have shown much interest in optimum use

of borrowing power or no increasing demand for credit in the rural

sector.

101
 PART - II: DEPLOYMENT OF CREDIT

The cooperative banks deploy their funds for farm and non-farm

operations so as to improve the position of economy as they have

very much shifted from the former to latter. In the words of

Mujumdar, N., it is true that “the role of cooperative banks has

been widened to such an extent that it has transcended the

conventional concept of more financial intermediation.”15

The main business of cooperative banks is deploying credit to the

purposes of economic activities which being create employment

avenues and enhance production capacity of the projects. The

procedure to be adopted for deploying credit is formulated by the

cooperative bank under its bye-laws adhering to the norms laid

down by higher organizations namely Andhra Pradesh State

Cooperative Bank, National Bank for Agricultural and Rural

Development and Reserve Bank of India. The norm of deploying

credit always keeps into account the well-being and welfare of

borrowers specifically. The credit deploying procedure is an

important task to the cooperative bank as it contains effective use

of funds and recovery of them which involves an arduous task of

economic feasibility and commercial viability. It is right that the role

of cooperative banks has been widened to such an extent that they

have transcended the conventional concept of more financial

intermediation.

102
LOAN POLICY

Loan policy is guide line to action. The credit policy aims at the

quantitative flow of credit with quality contents to the productive

purposes use in both farming and non-farming sectors of economy.

Such type of flow of credit is close to acquiring the worthiness of

project credit of the borrower maximizing returns. Quality process

of lending helps in good recovery which in turn enables the

cooperative banks for conduct of repetitive or diversified business

addressing the socio-economic needs of the borrowers. A good

policy is niche to the phenomena of ensuring:

Scale of adequate and timely credit

Technical feasibility and economic viability on the support of

services resulting in an effective way of credit

Fixing the repayment capacity of loanee

Providing credit not only in cash but also in kind so that the

loanee has no scope for diversification or misuse of loan

The procedure of credit that followed by the cooperative banks is

not collateral-free. However, the cooperative banks insist on the

anticipated production of the project as security or demand

mortgage or hypothecation in some instances. This becomes more

particularly in development credit, and then the land becomes the

basis of security such credit. In the words of Laud “the foundation

of mortgaged lending is the value of mortgaged land.”16 Mortgaged

103
security is absolutely necessary in financing long-term credit. The

All India Rural Credit Review Committee states that, “the

significance of security of land is a guarantee that the borrower

continues to be in business in long-term. Therefore, the mortgage

security cannot be dispensed with.”17 The cooperative banks accept

the security while advancing credit is presented in table 3.11.

TABLE 3.11

SECURITY

Loan Type Security

SAO Hypothecation of crops

Execution of promissory note

Pledge of fixed deposit receipt

Collateral security in the form of guarantee by

one or two persons who registered mortgage

deed in favour of the cooperative bank

Term Mortgage of land having well irrigation, dry

land, garden land wet land with permanent

irrigation

Assets Purchase Hypothecation of the unit, mortgage of land

owned by loanee

LOAN PROCEDURE

The process adopted by the cooperative banks in granting loans is a

little but it is time consuming. Perhaps, this could made rural people

104
to approach money lenders who are handy for credit. The people

approach the moneylenders who need credit. Why? It is aptly

opined by Gadgil Committee as: “One of the chief defects of the

cooperative system is the delay in sanctioning loans”18

Timely release of loans helps in reaping optimum benefit leading to

better repayment. The Reserve Bank of India in its manual pointed

out as: “The cooperative banks advance loans for the purpose just

before the date of fair.”21 The norms of cooperative bank must be

fulfilled to secure credit. The cooperative bank entertains loan

application of its member which is properly documented with

authentication and necessary information. Then, the same is

forwarded to the Board of the cooperative bank for consideration.

The Board on examining the necessity of loan scrutinizes the

documents and information and if satisfied, sanctions the loan. In

sanctioning term credit, the Board will take extra care in

entertaining the application involving big amount. Computerization

of cooperative bank to a smaller extent has mitigated the travails of

the farmer as the process is made speedy.

TYPES OF CREDIT

Grant of credit on the basis of time is of three types – short-term,

medium-term and long-term credit. The short-term also called

seasonal agricultural operations credit is extended for raising crops

through primary agricultural credit societies. The manager of the

105
cooperative bank disburses the funds to the primary agricultural

cooperative societies at an interest rate of 5.25 per cent which in

turn release the credit amount to the borrower as directed. In order

to reduce the inordinate delay in sanction of loans and reduce the

cumbersome documentation work every year, NABARD introduced a

scheme called Kisan Credit Card which is an innovative through

brought about changes in the banking system to make short-term

credit to farmers at easy, convenient and flexible. The features of

Kisan Credit card are:

One time documentation

Single limit for whole year’s requirement

Consider consumption credit

Unlimited withdrawals but permitted repayments

Automatic renewal if the account is regular

Provide personal accident insurance at a small fee in

collaboration with insurance company

Data on deployment of credit by the cooperative banks with that of

per cooperative bank in the State of Andhra Pradesh is presented in

Table 3.12 (Fig.3.6).

Table 3.12 shows deployment of credit by the Anantapur and

Kurnool Cooperative Banks which account for 57.26 per cent and

53.93 per cent of $ 132.75 crore deployed by per cooperative bank

in the State of Andhra Pradesh in 2001-02. The corresponding

106
 figures are 138.45 per cent and 94.50 per cent of $ 384.63 crore in

2011-12 respectively with average during the study period of 2001-

02 to 2011-12 at 154.37 per cent and 68.34 per cent of $ 220.14

crore respectively. It is observed that in case of Anantapur and

Kurnool cooperative banks credit deployment numerically have

increased in 2011-12 over 2001-02. Also it is observed a fluctuating

trend in the study period in both cooperative banks.

TABLE 3.12
CREDIT DEPLOYMENT
Year Anantapur Coop. Kurnool Coop. Per Coop. Bank in
Bank Credit Bank Credit AP
(1) (% to col.4) (% to col.4) ($ in crore)
(2) (3) (4)
57.26 53.93 132.75
2001-02

119.92 52.58 134.61

2002-03

62.16 27.75 252.06

2003-04

301.90 93.74 171.68

2004-05

213.42 91.07 190.80

2005-06

146.48 55.17 187.37

2006-07

179.80 51.32 167.44

2007-08

228.35 66.33 154.58

2008-09

192.68 77.11 245.93

2009-10

120.91 65.78 399.76

2010-11

138.45 94.50 384.63

2010-12

Mean 154.37 68.34 220.14

Source: Annual Reports, Sample Cooperative Banks

107
Fig 3.6

108
PRIORITY SECTOR

Indian Economy is intertwined with the fortunes of various sectors

economic development. The economic conditions of the majority of

rural population who are generally depend for their livelihood on

agriculture, small and cottage industry, rural crafts and alike. The

economic status of them needs to bring about a change through the

uplift of schemes of economic significance as felt need of the

Government too. The services of financial institutions with the need

services including credit is of utmost necessity on preferential terms

to the priority sector.

As powerful instrument in achieving the socio-economic objective,

the cooperative bank plays an instrumental role in alleviation of

poverty and promotion of living standard of people towards the

economic development on equity. Since then, the cooperative banks

are treated on par with the commercial banks under the guidance

and control of Banking Regulations Act of 1949. Under this

approach, a rational in credit distribution on preferential terms with

quality of services to people is the main thrust. Among them,

financing of the priority sector in order to improve its economic

progress is one.

Poverty constitutes as root-cause for all the economic-ills disturbing

a nation’s economic prosperity. Aid of finance squarely needs to

uplift the peasant community in terms of socially and economically

109
which is embedded in the ‘20 Point Economic Programme.’ The

term priority sector means that sector having a considerable

potential importance economically but sluggish due to inadequate

credit and other services. This priority sector is required to be

supported with the concessional terms and conditions including rate

of interest. The concept, priority sector which was formulated for

the first time in 1972 by the Working Group.22 According to it, the

priority sector consists of:

Agriculture

Small scale industry

Industrial estates

Road and transport

Retail trade and small business

Self-employment

Education

Housing loans to weaker sections

Pure consumption

Micro-credit

Agro and food processing units

Venture capital

However, at any point of time a particular sector may become

significant than other(s) from the point of view of realization of

national aims such as (i) increasing production, (ii) generating

110
employment opportunities and (iii) boosting up of economy. Then,

such sector is included in the concept of priority sector. Therefore,

the definition of priority sector is no longer exhaustive. The

underlying objective of the priority sector lending is, thus, related to

ensure flow of financial assistance together with needy services by

the banking sector.

The provision of regulation and direction is essentially being routed

by the Reserve Bank of India as a premier institute safeguarding

the economy of the country. In order to mitigate the ill-effects in

terms of low-profit margin which is admittedly a confronting risk,

the National Bank for Agricultural and Rural Development (NABARD)

made it mandatory to provide ‘refinance’ facility to the cooperative

banks. Data on the priority and non-priority sectors finances are

presented in Table 3.13

Table 3.13 discloses credit deployment to the priority and non-

priority sectors by the Anantapur and Kurnool cooperative banks.

The Anantapur cooperative bank deployment of credit to the priority

and non-priority sectors is accounted for 74.28 per cent and 25.72

per cent of $ 76.01 crore in 2001-02 while the figures in case of

Kurnool cooperative bank are 70.36 per cent and 29.64 per cent of

$ 71.59 crore respectively. In 2011-12, the figures are 73.51 per

cent and 26.49 per cent of $ 532.53 crore; and 79.41 per cent and

20.59 per cent of $ 363.47 crore respectively for the above banks.

111
 TABLE 3.13

PRIORITY AND NON-PRIORITY SECTORS CREDIT

Anantapur Cooperative Bank Kurnool Cooperative Bank

Year Priority Non- Priority Non-
Total
Sector priority Sector priority Total
Credit Sector Credit Sector ($ in
($ in
(% to Credit (% (% to Credit crore)
crore)
col.4) to col.4) col.4) (% to col.
(1) 4) (7)
(4) (6)
(2) (3) (5)

2001-02 74.28 25.72 76.01 70.36 29.64 71.59

2002-03 64.25 35.75 161.42 74.15 25.85 70.78

2003-04 63.40 36.6o 156.70 63.56 36.44 69.95

2004-05 85.74 14.26 518.31 89.85 10.15 160.95

2005-06 79.09 20.91 407.22 92.16 7.84 173.76

2006-07 68.97 31.03 274.46 88.52 11.48 103.37

2007-08 64.26 35.74 301.39 76.07 23.93 85.93

2008-09 74.81 25.19 352.98 78.87 21.13 102.53

2009-10 80.80 19.20 473.87 88.82 11.18 189.64

2010-11 81.54 18.46 483.36 82.96 17.04 262.95

2010-12
73.51 26.49 532.53 79.41 20.59 363.47

Mean 76.01 23.99 339.84 82.48 17.52 150.45

Source: Annual Reports, Sample Cooperative Banks

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The average credit deployment to the priority and non-priority

sectors are 76.01 per cent and 23.99 per cent of $ 339.84 crore;

and 82.48 per cent and 17.52 per cent of $ 150.45 crore

respectively in case of Anantapur and Kurnool cooperative banks.

WORKING CAPITAL

The study of working capital and its components of cooperative

banks is more relevant as it indicates the overall position. The

functional meaning of working capital of the cooperative banks

consists of (i) share capital, (ii) reserves, (iii) deposits and (iv)

borrowings. The components of working capital, percentage of

share of each of the components in the total working capital during

2001-12 is presented in Table 3.14.

Table 3.14 discloses the working capital has gone up from $ 435.33

crore in 2001-02, $ 456.60 crore in 2003-04, $ 637.71 crore in

2005-06, $ 746.78 crore in 2007-08, $ 645.51 crore in 2009-10

and $ 662.61 crore in 2011-12 in case of Anantapur cooperative

bank which the figures in Kurnool cooperative bank are $ 292.78

crore, $ 293.37 crore, $ 368.02 crore, $ 425.00 crore, $ 322.36

crore and $ 408.26 crore for the above period respectively. Only in

2009-10, in both the Anantapur and Kurnool cooperative banks’ the

working capital position is less compared to 2007-08.

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 TABLE 3.14
WORKING CAPITAL AND ITS COMPONENTS
($ in crore)

Particulars 01-02 03-04 05-06 07-08 09-10 11-12

Anantapur Cooperative Bank
Share capital 27.89 28.92 31.94 37.72 42.18 44.83
(6.41) (6.33) (5.00) (5.05) (6.53) (6.77)
Reserve 58.98 84.46 143.36 175.22 176.78 182.62
(13.55) (18.50) (22.48) (23.46) (27.39) (26.56)
74.88 69.10 64.01 107.23 135.15 173.36
Deposits (17.20) (15.13) (10.04) (14.36) (20.94) (26.16)
Borrowings 273.58 274.12 398.40 426.61 291.40 261.80
(62.84) (60.04) (62.48) (57.13) (45.14) (40.51)
Total 435.33 456.80. 637.71 746.78 645.51 662.61
Working (100) (100) (100) (100) (100) (100)
capital
Kurnool Cooperative Bank
Share capital 19.93 19.41 28.56 30.79 35.46 41.54
(6.80) (6.62) (7.76) (7.24) (11.00) (10.17)
Reserves 16.04 25.23 48.59 67.38 38.18 28.95
(5.48) (8.60) (13.20) (15.85) (11.84) (7.09)
Deposits 89.79 73.65 64.50 88.54 123.03 148.97
(30.67) (25.10) (17.53) (20.83) (38.17) (36.49)
Borrowings 167.02 175.08 226.37 238.29 125.69 188.80
57.05) (59.68) (61.51) (56.08) (38.99) (46.25)
Total Working 292.78 293.37 368.02 425.00 322.36 408.26
Capital (100) (100) (!00) (100) (100) (100)
Source: Annual Report, Sample Cooperative Banks

The component-wise analysis of share capital, reserves, deposits

and borrowings, in relative terms to total working capital, is

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accounted for 6.41 per cent, 13.55 per cent, 17.20 per cent and

62.84 per cent of $ 435.33 crore in 2001-02

The corresponding figures are 6.33 per cent, 18.50 per cent, 15.13

per cent and 60.04 per cent of $ 465.60 crore in 2003-04; 5.00 per

cent, 22.48 per cent, 10.04 per cent and 62.48 per cent of $ 637.71

crore in 2005-06; 5.05 per cent, 23.46 per cent, 14.36 per cent and

57.13 per cent of $ 746.78 crore in 2007-08; 6.53 per cent, 27.39

per cent, 20.94 per cent and 45.14 per cent of $ 645.51 crore in

2009-10 and 6.77 per cent, 26.56 per cent, 26.16 per cent and

40.51 per cent of $ 662.61 crore in 2011-12 respectively.

In case of Kurnool cooperative bank, the position of capital,

reserves, deposits and borrowings are worked out at 6.80 per cent,

5.48 per cent,30.67 per cent and 57.05 per cent of $ 292.78 crore

in 2001-02; 6.62 per cent, 8.60 per cent, 25.10 per cent and 59.68

per cent of $ 293.37 crore in 2003-04; 7.76 per cent,13.20 per

cent, 17.53 per cent and 61.51 per cent of $ 368.02 crore in 2005-

06; 7.24 per cent, 15.85 per cent, 20.83 per cent and 56.08 per

cent of $ 425.00 crore in 2007-08; 11.00 per cent, 11.84 per cent,

38.17 per cent and 38.99 per cent of $ 322.26 crore in 2009-10 and

10.17 per cent, 7.09 per cent, 36.49 per cent and 46.25 per cent of

$ 408.26 crore in 2011-12 respectively. The component-wise

borrowings has higher rate of increase in the total working capital

115
followed by deposits compared to that of other components in both

the sample cooperative banks.

MAGNITUDE OF COVERAGE

The coverage of members and reducing rural credit gap are the

foremost issues to be tackled by the cooperative banks which are

the key agencies at the level of districts. The regional balance

development is the core issue in policy frame of cooperative

banking as the financial institution considering it under the

homogeneity conditions in district as a unit of policy for fillip up of

the district economy. As such the cooperative banking is a tool for

balanced development. Towards this, it is not only mere

participation of people as forming an association through

membership but still more required is their involvement in the

economic generating activities on availing the services including

credit of the cooperative bank is must. In view of this, members

involvement in the programmes of the cooperative bank is a

condition of sine-quo- none for the successful regional development

in relation to socio-economic development. The Cooperative

Planning Committee was constituted in 1945 under the

Chairmanship of Saraiya which suggested this: “An attention of

cooperative is that it should be made to bring 50 per cent of the

rural villages and 30 per cent of rural population within the orbit of

the recognized primary agricultural credit societies within a period

116
of one decade.”19 The magnitude of coverage of the Anantapur and

Kurnool cooperative banks is presented in Table 3.15.

Table 3.15 shows that the cooperative banks of Anantapur and

Kurnool have covered hundred per cent in respects of villages and

45 per cent and 44 per cent of rural population. Of the farmers who

are in receipt of credit, only 28 per cent and 27 per cent belongs to

small farmers and weaker sections while they constitute around 65

per cent of farming community.

TABLE 3.15
COOPERATIVE COVERAGE

Particulars Anantapur Kurnool Coop.

Coop. Bank Bank
No. of villages in the district 896 928

No. of villages covered (%) 100 100

No. of farmers covered (%) 45 44

Small & weaker section population (%) 28 27

Cash outlay ($ in crore) 205 183

Credit provided 31-03-2013 150 140

Credit gap ($ in crore) 55 43

Source: Annual reports, sample Cooperative Banks

However, only 25 per cent of farmers enjoyed the credit to the tune

of 80 per cent. Truly speaking the cooperative bank has not

provided enough shelter in terms of credit to the rural masses.

Capital is a pivotal factor in the business of enterprise including

117
farm sector for the economy. How far it could be succeeded is

pertinently related to financial institutions’ provision of credit.

118
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Delhi: National Cooperative Union of India, 1979, p.149.

2. Quoted in, Mathur, B.S., Cooperation in India, Agra: Sahitya

Bhavan, 1973, p.24

3. Government of India, Report of the Banking Commission, New

Delhi: 1972, p.212.

4. Interantional Cooperative Alliance, State and Cooperative

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5. Hough, E.M., The Cooperative Movement in India, London:

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6. Pandey, I.M., Financial Management, 1993, p.411.

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119
12. Reserve Bank of India, All India Rural Credit Survey

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19. Reserve Bank of India, Report of the All India Rural Credit

Review Committee, Mumbai: 1969, p.780

20. Govt of India, Banking Commission, New Delhi, 1972

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of Loaning for Agriculture, Mumbai: 1977, p.99.

120
22. Government of India, Cooperative Planning Committee, New

Delhi; 1946, pp.18-19

23. Agyekumhene, J.K., “President Address in Seminar on

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September, 1973

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Review Committee, Mumbai: 1972, p.792

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Journal of Cooperation, Vol.72, No.11, May 1981, p.651

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