Co-operative Banking in India - An Overview
Co-operative Banking in India -An Overview
CHAPTER-III
CO-OPERATIVE BANKING IN INDIA - AN OVERVIEW
In the previous chapter, we have reviewed the available
literature on cooperative banking. In continuation of that,
in this chapter, an attempt is made to review the developments
in co-operative banking in India in general and that of Kerala
in particular. This is considered essential for getting a
clear picture of the background in which the DCBs are working
and for their evaluation later.
3.1 Origin
The history of co-operative movement in India is about a
century old. The movement was started in India with a view to
encourage and promote thrift and mutual help for the
development of persons of small means such as agriculturists,
artisans and other segments of the society. It was also aimed
at concentrating the efforts in releasing the exploited
classes out of the clutches of the money lenders. Keeping
this as one of the objectives, credit societies were formed
under Co-operative Societies Act of 1904.
IThe 1904 Act was largely based on the Eng_ish Friendly
Societies Act, 1896 . Under this Act, only primary credit
I
45
societies were permitted to register and non-credit and
federal organisations of primary co-operative credit societies
were left out. This lacuna was bridged by the Co-operative
Societies Act, 1912. This Act paved the way for the
organisation of central co-operative banks throughout the
country. But the provisions of 1912 Act were inadequate to
meet the requirements of those states where co-operative
movement had made considerable progress. Bombay, the pioneers
in this regard passed a new Act, viz., the Bombay Co-operative
Societies Act, 1925 for serving the many sided development of
the state. Later on, Madras, Bihar and Bengal passed their
own Acts in 1932, 1935 and 1940 respectively.
3.2 Structure of Co-operative Banking in India
India's co-operative banking structure consists of two
main segments, viz., agricultural and non-agricultural credit.
There are two separate structures in the case of agricultural
credit - one for short and medium term credit and the other
for long term credit. The co-operative credit structure for
short and medium terms is a three tier one with primary
agricultural credit societies at the base level, the central
co-operative bank at the district level and state co-operative
bank at the apex level. Over and above these institutions,
grain banks are actively functioning as primary societies in
r
46
certain states. Though the organisation of central and state
co-operative banks was mainly for the benefit of the
agricultural credit sector, they serve non-agricultural
societies too.
3.3 Primary Agricultural Credit Societies
Primary Agricultural Credit Societies (PACS) are the
foundation of the co-operative credit structure and form the
largest number of co-operative institutions in India. Most of
these societies have been organised mainly to provide credit
facilities and to inculcate the habit of thrift and economy
among their members.
The share capital of a society is divided into units,
called shares, contributed by the members. The most important
source of finance of PACS is members' deposits. Borrowings
constitute the most important element of their working
capital. The criteria for borrowings differ from state.to
state according to their liability. Punctuality in the
repayment of loans has hardly been observed by the members
with the result that there has been a steep rise in the amount
of overdues all over the country.
47
3.4 Primary Agricultural Credit Societies in India
In India, PACS are passing through an era of crisis.
Increasing incidence of non-viability is one of the major set
backs. PACS have made little progress in attracting deposits.
In majority of the cases, the deposits were collected through
book adjustments by carving certain portion of loan amount.
The repaying capacity of the PACS has been dwindled
considerably, as a result mounted overdues in the loan
outstanding against members. Alongwith the increasing volume
of business the number of PACS running into loss and the
amount of loss have increased considerably over the years.
The important reasons for this situation are, existence of
non-viable and dormant societies, uneven growth of
agricultural credit movement, inadequacy of the quantum of
loan supplied by them, defective loan policies, delay in loan
disbursement, inadequate supervision and defective audit, no
linking of credit with marketing, high overdues, ineffective
management, neglect of small farmers and domination of vested
interests. Salient data of PACS in India from 1975-76 to
1990-91 is given in table 3.1.
48
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49
It is clear from table 3.1 that the number of societies
decreased from 1,34,838 (1975-76) to 88,921 (1990-91) due to
re-organisation and amalgamation of societies since 1975-76. But
membership and share capital considerably increased during the
period. Same is the case with borrowings and reserves also.
Deposits increased from Rs.113.51 crores in 1975-76 to Rs.1361.98
crores in 1990-91 while loans and advances issued increased from
Rs.1023.44 crores to Rs.4777.30 crores during this period.
The average membership per society has increased from 293 in
1975-76 to 954 in 1993-94. Deposits per society has increased
considerably during this period. It has increased from Rs.80000
in 1975-76 to Rs.1530000 in 1993-94 whereas loans issued has
increased from Rs.750000 to Rs.5370000. Even though per society
deposits has increased 19 times, loans issued has increased only
7 times during this period. It is inferred that these PACS were
not utilising the deposits mobilised efficiently.
3.5 Primary Agricultural Credit Societies in Kerala
The comparative performance of PACS in Kerala with respect to
their counterparts in the rest of the country is remarkable.
Kerala had the highest rank (1987-88) with regard to membership,
population coverage, borrowing members, loans and advances,
deposits mobilisation and share capital contribution (Suresh, K.A.
and Vinaikumar, E., 1993. p.43). The rank with regard to
percentage of overdue to demand was lowest during this period.
The progress of PACS in Kerala for the period 1970-71 to 1991-92
is explained in table 3.2.
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51
From Table 3.2, it is observed that the number of
Societies showed a declining trend while the membership kept
on increasing. The number of members increased from 16.59
lakh from 1970-71 to 92.05 lakh by the end of 1991-92.
Another notable feature is the significant decline in the
number of profit making societies. The number of profit
making societies stood at 1052 (55.72 per cent) in 1970-71. In
1993-94, only 764 societies (48.26 per cent) could make
profit, the average profit being Rs.3.39 lakh.
It is further noted that per society paid up share
capital of Kerala has increased from Rs.49730 in 1970-71 to
Rs.851420 by the end of 1993-94. There was considerable
increase in deposits and loans outstanding also. Deposits per
society has increased from Rs.49660 to Rs.1.19 crores and
loans and advances has increased from Rs.1.90 lakh to
Rs .116 .26 crores during this period. While profit per society
has increased from Rs.7320 to Rs.163610, loss increased from
Rs.5820 to Rs.321500.
3.6 District Co-operative Banks in India
District Co-operative Banks (DCBs) occupy the middle
level position in the three tier co-operative credit structure
of the country. In the beginning of the formation of PACSs,
52
they could not function effectively without gaining financial
support from an outside agency. Over and above this, they
were in need of technical guidance and administrative support.
At the same time, there were some societies which have gained
strength and posses surplus funds as well as talents. As a
precondition to get mutual help it became necessary that all
these primary societies form a federation for ensuring
rational use of their funds and provide a common place to meet
for exchange of ideas and co-operative experience. The
formation of DCBs was thus a felt need for mutual help.
The Co-operative Societies Act of 1912 permitted the
registration of DCBs. Even before the enactment of this Act,
some DCBs were established to cater to the needs of primary
societies. In 1906, forerunner of the first DCB was
established as a primary society in Uttar Pradesh. At Ajmer
in Rajasthan the first DCB was established in 1910. But the
first full fledged DCB as per the provisions of the Act of
1912 was started in Jabalpur District of the Central Province.
As recommended by Maclagan Committee (1915) DCBs in India
were classified into, (Nakkiran, S., 1980, p.162).
1. Banks whose membership is confined to individuals - These
are banks wherein membership consists entirely of
individuals or in which societies are admitted as
53
shareholders on exactly the same footings as individuals,
without any special provision for their adequate
representation on the board of management. The Maclagan
Committee was of the opinion that these type of banks
should not be given registration under the Co-operative
Societies Act. Hence, no such banks exist in our country
at present.
2. Banking Unions wherein only primary societies are
allowed to become members under this category. As the
shareholders, lenders and borrowers are the same, the
clash of interest between the shareholders and borrowing
societies can be eliminated.
3. Banks with individuals and societies as members, certain
portion of shares are assigned to societies and also
have separate representation in the board of
directors. This category is considered to be better as
it provides a combination of both rural and urban
population. Majority portion of the DCBs in India are of
this type.
The DCBs are formed mainly with the objective of meeting
the credit requirements of member societies. As an
institution for helping the societies in times of need, they
54
finance agricultural credit societies for production purposes,
marketing societies for marketing operations, industrial
societies for supply operations and other societies for
working expenses. In short, the major objectives of the DCBs
are to provide loans to affiliated societies, to act as a
balancing centre of finance for primary societies, to arrange
for the supervision and control of the affiliated societies,
to raise deposits from members and non-members, to convene
conferences of the member societies and also prescribe uniform
procedure for the working of primary societies, to open
branches of the bank at important places with the permission
of the Registrar of Co-operative Societies and to maintain and
utilise state partnership. Generally, the area of operation of
a DCB is limited to one district. Progress of DCBs in India is
exhibited in table 3.3.
55
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56
It is noted from Table 3.3 that the number of DCBs is
showing a declining trend which came down from 509 in 1970-71
to 357 in 1991-92. But the number of members showed a
different picture. It has increased from 2,31,318 during
1970-71 to 3,96,000 during 1976-77 and to 3,69,434 during
1991-92. Paid up capital and reserves also showed an
increasing trend which has boosted from Rs.49.08 crores to
Rs.829.73 crores and the latter from Rs.43.51 crores to
Rs.716.37 crores during the same period. Deposits and
borrowings also showed considerable increase. There was
increase in working capital too which has shown an increase of
Rs.16706.4 crores during this time span.
It is further pointed out that number of members per DCB
was 454 in 1970-71 and it increased to 1035 in 1991-92. There
was a sharp increase in paid-up capital and reserves also per
DCB. Deposits per DCB shot up from Rs.7.51 lakh in 1970-71 to
Rs.26.15 crores in 1990-91. Position of working capital per
DCB also boosted which increased from Rs.11.81 lakh to
Rs.46.95 crores in 1991-92. It is clear from the above table
that as a whole there were tremendous increase in all
components of funds.
3.7 District Co-operative Banks in Kerala
The DCBs in Kerala have a history of about 80 years.
They were organised separately in the erstwhile states -
57
Travancore and Cochin and in the Malabar district of the
Madras Presidency before the re-organisation of the states on
linguistic basis in 1956. There were separate Co-operative
Societies Act for these regions, viz., the Cochin Co-operative
Societies Act 1913, The Travancore Co-operative Societies Act
1914 and the Madras Co-operative Societies Act 1932
respectively. In 1949, The Travancore-Cochin State was formed
by amalgamating Travancore and Cochin States. For this new
state, The Travancore-Cochin Co-operative Societies Act was
passed in 1952. These legislations were in force in the
Kerala state till the enactment of the Kerala Co-operative
Societies Act 1969.
The Kerala Co-operative Societies Act, 1969 came into
force on 15.5.1969 and the preamble states it as an "Act to
consolidate, amend and unify the law relating to Co-operative
Societies in the State of Kerala" (Government of Kerala,
1969. p.1). The progress of DCBs in Kerala is exhibited in
table 3.4.
58
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ale u-) 0QN 000 o^m 0^(VQ e m co m N o m u-) o N N m O Qw w n N m Q Q m o N m mnot O en NQ NO Q O o m• wN e N m m N H of o H O r n wm en u N H N 01 H Q N u O N, N
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en N en Q m N O w H w N ^ Nm • o • m • H • N • Q
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0)01 Nm Qm mm ^Q ^NO m H h n N N N w N m
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r -
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59
In Kerala, at present there are 14 DCBs. The number of
branches made substantial progress during the period 1970-71
to 1993-94. For instance, the number of branches which stood
at just 82 in 1970-71 increased to 418 by the end of 1993-94.
Correspondingly membership also increased from 3771 to 7903,
during the same period. The deposits of the DCBs increased
from Rs. 15 .14 crore in 1970-71 to Rs.1073.58 crore in 1993-94.
Similarly, loans advanced increased from Rs.5.58 crore in
1970-71 to Rs.1064.37 crore in 1993-94. All these trends are
well reflected in the behaviour of profit also. In 1970-71,
the district Co-operatives Banks' profit was only Rs.14.91
lakh which increased to Rs.66.52 lakh in 1986-87 and Rs.3.75
crore in 1993-94, the situation improved marginally.
The table further reveals that the average membership per
DCB increased from 377 in 1970-71 to 565 in 1993-94. The
average deposit per DCB rised from Rs.1.51 crore to Rs.76.68
crore during the same period. Similarly average loans
advanced also increased considerably. The average loans
overdue increased from Rs.69.82 lakh in 1970-71 to Rs.7.90
crore in 1993-94. The average profit per DCB increased from
Rs.1.49 lakh in 1970-71 to Rs.26.78 lakh in 1993-94.
Eventhough there was slight increase in profit, it is not
satisfactory when compared to the increase in working capital.
60
3.8 State Co-operative Banks in India
The State Co-operative Banks (SCBs) or the apex banks
occupy a crucial position in the three tier co-operative
credit structure in India. These apex banks or State
Co-operative Banks are formed by federating DCBs in each
state. The apex banks assume a key-position in the
co-operative credit structure because the financial assistance
from RBI and the National Bank for Agriculture and Rural
Development are invariably routed through them. Table 3.5
presents the key statistics relating to SCBs in India for the
period 1975-76 to 1990-91.
61
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62
It is clear from Table 3.5 that the deposits and loans
and advances of SCBs recorded notable progress during 1975-76
to 1990-91. In absolute terms deposits increased from
Rs.723.68 crores in 1975-76 to Rs.6727.88 crores in 1990-91.
Correspondingly loans and advances increased from Rs.893.60
crores to Rs.5378.97 crores. Overdues, one of the important
yardsticks of performance of co-operative institutions
recorded a phenomenal growth from Rs.43.60 crores to Rs.987.31
crores during the reference period. This indicates the
declining efficiency of the SCBs in collecting the loans
disbursed in the appropriate time. As a consequence, the
percentage of overdue to demand which remained at 7 per cent
in 1975-76 increased to 18 per cent in 1990-91.
Average deposits per SCB in India in 1975-76 increased to
Rs.249.18 crore in 1990-91. There was considerable increase
in overdues per SCB during the same period. Overdues has
increased from Rs.1.67 crore to Rs.36.56 crore.
3.9 State Co-operative Bank in Kerala
The Kerala State Co-operative Bank (KSCB) was initially
registered as the Travancore Central Co-operative Bank on 23rd
November 1915. In 1954 the bank was transformed as the
Travancore Cochin State Co-operative Bank and on November 1st,
63
1956 the bank was reorganised as the Kerala State Co-operative
Bank Ltd. It is the first State Co-operative Bank to be
included in the second schedule of the Reserve Bank of India
Act, licenced to carry on the organised business in banking.
The bank has built a highly organised network consisting of 14
DCBs and 1581 PACSs functioning at the village level (on
31.3.92). This wide, network has enabled the District
Co-operative Banks to reach the weaker sections and the common
man in the rural areas in Kerala. Progress of KSCB for the
period 1970-71 to 1991-92 is displayed in Table 3.6.
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65
Table 3.6 shows that the number of members of KSCB is
showing an increasing trend. Membership has increased from
11 in 1970-71 to 15 in 1993-94. Paid up capital and reserves
also increased considerably during this period. There was
sharp increase in case of deposits which increased from
Rs.4.27 crore during 1970-71 to Rs.502.51 crore during
1993-94. Borrowings also showed similar trend. However,
compared to deposits, increase in borrowings was less.
Investments by the Bank increased from Rs.1.65 crore in
1970-71 to Rs.118.98 crore in 1993-94, the average annual
increase being 3.47 per cent. Compared to loans outstanding,
loans overdue have increased considerably. The loans overdue
increased from Rs.13.27 lakh in 1970-71 to Rs.9.95 crore in
1993-94. But the increase in profit was very low. It has
increased from Rs.22.38 lakh in 1970-71 to Rs.84.02 lakh in
1993-94, the average annual increase being 2.24 per cent.
This chapter has examined the origin, growth and trends
in co-operative banking in India and also in Kerala. The
chapter also presented a profile of the co-operative banks
from 1970-71 to 1993-94 which spelt out a clear picture about
the growth of number of members, share capital, reserves,
deposits, borrowings, loans outstanding, working capital and
profit earned or loss incurred by PACS, DCBs and SCBs in India
and also in Kerala.