Chapter II THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES IN RURAL CREDIT The rural co-operative credit structure in India consists of two parts, one provides short-term and medium-term loans and the other provides long- term loans. The short-term co-operative credit structure is a three tier system consisting of the primary co-operative credit societies at village level, central co-operative banks at district level and state co-operative banks as apex banks at state level. On the other hand, the long-term credit structure at the moment is two-tier comprising primary co-operative agriculture and rural development banks at block and district level and state co-operative agriculture and rural development banks at top level. The organizational structure of rural co-operative credit institutions in India is given in chart 2.1. Chart 2.1. Structure of rural co-operative credit institutions in India Rural Co-operative Credit Structure in India Short-term and Medium-term [Three Tier System] State Co-operative Banks [Apex Level] Central Co-operative Banks [District Level] Primary Agricultural Credit Societies [Village Level] Long-term [Two Tier System] State Co-operative Agriculture and Rural Development Banks [At Top Level] Primary Co-operative Agriculture and Rural Development Banks [At District and Block Level]
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Chapter II
THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES
IN RURAL CREDIT
The rural co-operative credit structure in India consists of two parts,
one provides short-term and medium-term loans and the other provides long-
term loans. The short-term co-operative credit structure is a three tier system
consisting of the primary co-operative credit societies at village level, central
co-operative banks at district level and state co-operative banks as apex banks
at state level. On the other hand, the long-term credit structure at the moment
is two-tier comprising primary co-operative agriculture and rural development
banks at block and district level and state co-operative agriculture and rural
development banks at top level.
The organizational structure of rural co-operative credit institutions in
India is given in chart 2.1.
Chart 2.1. Structure of rural co-operative credit institutions in India
Table 2.2 reveals that the total number of PACSs stood at 1.12 lakhs by
the end of March 2003 when compared to 1960-61 as 2.12 lakhs. There was a
net fall of 1,00,000 PACSs within the period of 1960-61 to 2003. The number
of PACSs were decreased during the period due to the implementation of
reorganization programme of strengthening and the future development of
co-operative structure. The memberships of PACSs increased from 170.41 2 A. Seilan, “Primary agricultural credit societies – the bank of the rural masses”, Tamil
Nadu Journal of Cooperation, Vol.7, no.1 (2006), p.26.
35
lakhs in 1960-61 to 1,236 lakhs in March 2003. The deposits in PACSs stood
at Rs.14.59 crores in 1960-61 and Rs.19120 crores at the end of March 2003.
It is evident from the data that PACSs have increasing trends in mobilizing the
deposits. Loans advanced increased from Rs.202.75 crores in 1960-61 to
Rs.577.88 crores in 1970-71 and further it was increased from Rs.8,487.40
crores in 1994 to Rs.33,996 crores in 2003. Besides as on 31st March 2003,
out of 1,12,309 PACSs 58,683 PACSs earned profit of Rs.404 crores and
53,626 PACSs incurred loss of Rs.1,862 crores.
Table 2.3 shows the select indicators of primary agricultural credit
societies in India (Statewise) on 2006-07.
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Table 2.3 Select indicators of Primary Agricultural Credit Societies in India - Statewise (2006-07)
5. Other liabilities 3,739 (15.2) 4,138 (17.0) 6.0 10.7
Total liabilities/assets 24,604 (100) 24,336 (100) 1.4 -1.1
Assets
1. Cash and Bank balance 365 (1.5) 279 (1.1) 1.4 -23.6
2. Investments 1,885 (7.6) 1,916 (7.9) 1.0 1.6
3. Loans and advances 17,713 (72.0) 18,644 (76.6) 1.8 5.3
4. Other assets 4,641 (18.9) 3,497 (14.4) 0.0 -24.6
Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total.
As shown in table 2.13, the assets and liabilities of the SCARDBs
declined (1.1%) during 2006-07. Borrowings, the main source of funds,
as well as deposits declined between 2.4 and 4.9 per cent. Net owned funds
also witnessed a decline. On the asset side, loans and advances grew
58
by 5.3 per cent, while investments recorded a moderate growth of 1.6 per cent.
Cash and bank balances and other assets, however, witnessed a sharp decline.
Primary Agricultural Credit Societies in Tamil Nadu
The first agricultural credit society in Tamil Nadu was started in Tirur
in 1904 immediately after the passing of the Co-operative Credit Societies Act
1904. As on 30.06.1915, there were 1446 agricultural credit societies. Until
1918 about 300 societies came into existence every year. In 1918-1919 the
number of societies increased by more than 800 and till 1927-28 there was an
addition of primary agricultural credit societies between 750 and 1000. As on
30.06.1921, the number of societies was 5,199 and the membership was
2,74,808. The average membership per society works out to 53. The financial
particulars of the primary agricultural credit societies as on 30.6.1921 are
given below.
(Rs. in lakhs)
Borrowings 156.23
Loans outstanding against members 159.65
Reserve fund and other funds 9.58
Working capital 183.86
Profit 1.93
Loss 2.84
About thirty years later, the number of agricultural credit societies rose
to 10,887 with a membership of 6.66 lakhs and a paid up share capital of
59
Rs.59.22 lakhs as on 30.06.1950.7 The other financial particulars of these
societies are given in the following statement.
(Rs. in lakhs)
Borrowings 652.36
Loans outstanding against members 831.62
Reserve fund and other funds 149.86
Working Capital 999.73
Profit 14.33
Loss 10.91
The average membership per society in 1949-50 was 61. There was,
thus, an increase of only eight members in the average membership during the
period from 1920-21 to 1949-50. This can be termed as poor progress. There
is however, an increase under borrowings, loans outstanding against members,
reserve fund and other funds and working capital as on 30.06.1950 when
compared to the corresponding figures as on 30.06.1921.8
Introduction of a scheme for expansion of rural credit in 1949-50
A scheme for the expansion of rural credit co-operatives
was introduced in February 1949 to cover at least 50 per cent of the villages
and 30 per cent of the population. In 1949-50, agricultural credit
co-operatives covered 41.40 per cent of the villages. During this year, 6,444
rural credit societies undertook some multi-purpose activity like distribution
7 K. Keshav Kini, “Primary Agricultural Credit Societies in Tamil Nadu” Tamil Nadu
Journal of Cooperation, Vol.1, no.1 (2000), p.34. 8 Ibid., pp.34-35.
60
of seeds, manures, agricultural implements and controlled commodities like
rice, sugar, kerosene, etc.9
Co-operative Agricultural Banks
Following the recommendations of the Rural Credit Survey Committee,
twelve large sized societies known as co-operative agricultural banks whose
liability was limited to a multiple of the share capital subscribed by the
members were organized in 1955-56. More banks were organized
subsequently and as on 30th
June 1961, 329 co-operative agricultural banks
were functioning in the state. In November 1958, the National Development
Council enunciated the principle that agricultural credit co-operatives should
be organized on the basis of village community as a primary unit and that they
should not only disburse credit, but also undertake supply of agricultural
requisites to the members. The state government accepted the
recommendation and directed the Registrar of Co-operative Societies not to
organize agricultural banks any more.10
Intensive Agricultural District Programme
The intensive agricultural district programme popularly known as the
package scheme was introduced in Thanjavur district on 13th
April 1960 in 23
community development blocks. A compact group of villages (317) was
selected to cover 1/5 of the cultivated lands (about 2.23 lakh acres). In these
blocks one hundred and eighty-two rural credit co-operatives were to issue
credit and agricultural inputs to their members on the basis of farm production
9 K. Keshav Kini, Op.cit., p.35. 10 Ibid., p.36.
61
plans which were prepared for them by the community development blocks.
The objective of the scheme was to maximize agricultural production by
providing timely credit with cash and kind components, consisting of mainly
chemical fertilizers, pesticides and seeds. The programmes were extended to
other areas on the subsequent years.11
Introduction of the crop loan scheme
In 1966-67, a rationalization of short-term lending policies was effected
by the introduction of the crop loan system. Under this system, the issue of
loans coincided with the commencement of agricultural operations and the
dates of the recoveries of the loans were fixed, a month or two after the
harvest. There were the cash and the kind components to a loan. The cash
portion was given for wages of labour, hire charges of plough bulls etc. The
kind portion consisted of chemical fertilizers, seeds and pesticides etc. Scales
of finance were fixed for each crop per acre. Landless tenants were also to be
issued loans under this scheme. The linking of credit with marketing was an
important plan of the crop loan system.
The following statement gives particulars of the issue of loans by
agricultural credit societies during the years 1978-79, 79-80 and 1980-81.
Year
Issue of Loans
(Rs. in crores)
1978-79 122.48
1979-80 68.61
1980-81 45.51
11 K. Keshav Kini, Op.cit., p.36.
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There was a decline in the issue of loans from 1978-79 onwards. The
decline in the issue of loan was mainly due to heavy overdues. As on
30.06.1962, the percentage of overdues to demand was 9.2 and as on
30.06.1981, it was 43.8 indicating that the collection drive was not particularly
effective.12
While as on 30.06.1951, the average membership and the paid up
share capital per society were 83 and Rs.1,033, as on 30.06.1981, the average
membership and the paid up share capital were 1,055 and Rs.88,635
respectively. It may be seen that the increase in membership and the paid up
share capital over the years has been quite satisfactory. The results were
achieved either by weeding out uneconomic units or amalgamating them with
viable and potentially viable societies.13
Primary Agricultural Co-operative Banks
The primary agricultural credit societies have been designated as
primary agricultural co-operative banks in Tamil Nadu. As on 30.06.1987,
there were 4,655 primary agricultural co-operative banks in the state. On that
date, the membership of these banks was 60.13 lakhs and the paid up share
capital was Rs.6,068.90 lakhs. As on 30.06.1981 the membership per society
was 1,055 while as on 30.06.1987 it went upto 1,292. The progress can be
termed as satisfactory.
12 K. Keshav Kini, “Primary Agricultural Credit Societies in Tamil Nadu”, Tamil Nadu
Journal of Cooperation, Vol.1, no.1 (2000), pp.41-42. 13 Ibid., p.42.
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As on 30.06.1981, the deposits per society worked out to Rs.36,485
whereas as on 30.06.1987, the deposits were Rs.1,19,795 per bank. Good
progress was registered by these banks in mobilizing deposits. Loan issues
also registered an increase in 1986-87 as compared with 1980-81. In 1986-87,
the loans issued were Rs.30,416.77 lakhs while in 1980-81 the loan issues
were Rs.4,550.65 lakhs.
Action plan for strengthening the primary co-operative agricultural
structure was launched on 1999. A memorandum of understanding was
entered into by the Tamil Nadu State Apex Co-operative Bank with
NABARD. The objective was making all the primary agricultural co-operative
banks viable. In each Regional Joint Registrar’s region, a task force was set
up under the chairmanship of the Regional Joint Registrar and 118 banks were
identified under the scheme. The scheme envisages that either the banks
amalgamate themselves with other banks or go into liquidation.
The details of the number of banks in which the state participated in the
share capital from 1994-95 to 1998-99 are given below.
Year No. of PACBs
1994-95 705
1995-96 1640
1996-97 851
1997-98 922
1998-99 973
In 1992, a deposit guarantee scheme was introduced to help the banks
to strengthen their deposit base. Under the scheme, the central co-operative
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banks guarantee the deposits of the primary banks. While as on 31.03.1993,
the banks had deposits of Rs.357 crores, on 31.03.1999 they increased to
Rs.2045.40 crores. The progress recorded was indeed spectacular.14
A fact that cannot escape our notice is that as on 31.03.1997, out of
4,957 primary agricultural co-operative banks, as many as 3,778 banks were
working on loss, the loss being Rs.6,814.13 lakhs. As on 30.06.1993 out of
the loans outstanding of Rs.1,435.79 crores, the overdues were Rs.398.71
crores. As on 30.06.1998 the overdues constituted 32.4 per cent of the loans
outstanding.15
The primary agricultural co-operative banks in the villages meet the
short-term agricultural credit requirements of the farmer members towards
their cultivation operations. The period of repayment of short-term loan
ranges between 12 and 15 months. The banks issue medium-term loan also to
the members for undertaking subsidiary occupation allied to agricultural
activities like purchase of milch animals, sheep rearing, poultry farming, etc.
The time of repayment of these loans is 3 to 5 years. These banks provide
loans for cultivation on personal surety basis as per the scales of finance
which are fixed by a state level committee.
As on 2003-04, there were 4,555 primary agricultural co-operative
banks in the state.16
During 2003-04, the Government has sanctioned
Rs.56.60 lakhs as share capital to 115 primary agricultural co-operative banks
14 K. Keshav Kini, “Primary Agricultural Co-operative Banks”, Tamil Nadu Journal of
Cooperation, Vol.1, no.1 (2000), pp.43-44. 15 Ibid., p.44. 16 Government of Tamil Nadu, Co-operation Department Policy Note, 2004-05.
65
coming under the purview of Salem, Tiruchirapalli, Kumbakonam and
Sivagangai District Central Co-operative Banks for availing loan from
National Bank for Agriculture and Rural Development from its National
Rural Credit [LTO] Fund. A sum of Rs.500 is provided as interest free loan
to women members of primary agricultural co-operative banks to increase
their share capital for obtaining enhanced loan amount. In 2003-04, an
amount of Rs.10 lakhs has been sanctioned under this scheme benefitting 2000
women members.17
Rural co-operative banking sector in post economic reform period
The role of rural co-operative banking sector is inevitable in the
development of agriculture in India. Indian agriculture has been going through
a serious crisis during the post-reform period. Besides domestic concerns,
such as decline in productivity, high input-cost, declining public sector
investment, inadequate availability of institutional credit and raising
agricultural imports. Indian agriculture has also been facing external
challenges under the WTO regime.18
Now farmers have to face the challenge
of increased production with less production cost, so that their produce stands
competitively in global market, where prices will be the dictating factor.19
In
the wake of WTO Agreement on Agriculture and with the removal of
quantitative restrictions on imports of various agricultural commodities with
effect from 1st April, 2001, the co-operative marketing organizations have
been taking steps to improve their competitive edge in terms of cost-
17 Government of Tamil Nadu, Co-operation Department Policy Note, 2004-05. 18 S.P. Singh and M.R. Behera, “Indian Agriculture and WTO”, Yojana, Vol.50,
(September, 2006), p.24. 19 Prasoon Verma, “Agriculture as an Industry”, Yojana, Vol.50 (September, 2006), p.20.
66
effectiveness, improvement in quality standards and control on management
and operational costs.20
The agriculture sector is the mainstay of Indian economy as it supports
more than half a billion people, by providing employment to nearly
52 per cent of the workforce in our country. However, the agriculture sector
faces many challenges which affect its growth. Recognizing the importance of
agricultural sector in the overall growth of the country, the Ministry of
Agriculture has initiated several policies and programmes to increase crop
production in the country and improve farm incomes. Fulfilling its
commitment towards farmers welfare, the government announced a Rs.71,680
crores agricultural debt waiver and debt relief scheme, which is the first of its
kind since independence for farmers covering direct agricultural loans.21
This is an age of co-operative reforms. Several reforms have already
made their way into the functioning of the co-operative banks of the nation.
However, a lot remains to be done. We cannot run away from the fact that the
co-operative banks have not realized their full potential. However, this does
not mean that the very model of co-operative behaviour is outdated. An
impartial assessment of the performance of the banks will lead to the
formulation of appropriate policy reforms.22
In order to face the challenges of
globalization and liberalization, which affect all major sectors of the economy,
the co-operative banking sector has to necessarily reinvent itself, by
20 G.H. Amin, “Development of Agriculture Co-operatives in India”, The Cooperator,
Vol.45, no.5 (2007), p.183. 21 Sharad Pawar, “Agriculture sector: some issues”, The Cooperator, Vol.46, no.8 (2009),
p.343. 22 Sharad Pawar, “Co-operative banks: some issues”, The Cooperator, Vol.45, no.4 (2007),
p.127.
67
improving its operations, strengthening corporate governance, introducing
high level of technology and improving human resource quality.23
The main focus of the recommendations of the Task Force on Revival
of Rural Co-operative Credit Institutions headed by Prof. A. Vaidyanathan
was to restore the autonomy of the credit co-operatives by scaling down the
control and interference by the state governments through amendments to the
State Co-operative Societies Acts. Amendment to the Banking Regulation
Act, 1949 was also recommended. Further the recommendations of the Task
Force included provision of financial assistance for recapitalization to fund the
accumulated losses of the short-term co-operative credit structure, evolving
a common accounting system, management information system (MIS) and
computerization and HRD initiatives. The proposed financial assistance was
made contingent upon the introduction of institutional, legal and regulatory
reforms.
In January 2006, the central government announced a revival package
with an estimated outlay of Rs.13,596 crores, based on the recommendations
of the Task Force. Release of financial assistance was made conditional to
certain legal and institutional reforms, viz. amendments to Co-operative
Societies Acts, introduction of professionals on boards of co-operatives,
introduction of common accounting system (CAS) and management
information system (MIS).
23 Oscar Fernandes, “Co-operative banks: some issues”, The Cooperator, Vol.45, no.4
(2007), p.131.
68
As on March 31, 2008, a special audit was completed in
59,294 PACSs affiliated to 279 DCCBs. State-level task forces were
constituted in the implementing states to review regulatory issues relating to
co-operative banks. By end-September 2008, Governments of nine states
passed bills to amend their Co-operative Societies Act. NABARD has
developed and circulated CAS and MIS to PACSs for adoption. These were to
be operationalised in all implementing states with effect from April 1, 2008. In
a move towards recapitalizing eligible PACSs, NABARD released Rs.3,980
crores as the Government of India’s share in recapitalization.24
In the revival of co-operative banking sector, the Government of
Tamilnadu is playing an important role. The decision of the Government to
waive all agricultural loans and interest thereon outstanding as on 31.3.2006
amounting to Rs.6,866 crores25
has given a new lease of life to the entire
co-operative sector. While the scheme has broken the shackles of indebtedness
among the farming community, it has greatly improved the cash flow within
the co-operative credit sector, facilitated greater provision of credit and other
inputs for agricultural production and improved their operational viability.
Tamilnadu Government has signed a Memorandum of Understanding
with Government of India and NABARD for implementation of the scheme of
revival of short-term co-operative credit structure based on the
recommendations of Prof. A. Vaidyanathan Committee. A special scheme was
launched by the government to rejuvenate about 1192 weak primary
agricultural co-operative banks with the help of primary co-operative
24 RBI, Report on Trend and Progress of Banking in India, 2007-08, pp.194-195. 25 Government of Tamil Nadu, Co-operation Department Policy Note: 2006-07.
69
development fund. Most of the societies in the above category had fallen
dormant because of the lack of resources and had stopped lending and other
operations. To help them to restart lending, a special cash credit at the rate of
Rs.20 lakhs per society is being provided by DCCBs at a concessional rate of
interest. The government is taking all efforts to inculcate the habit of financial
discipline among the farmers. As a special measure, government has reduced
the interest rate from 9 to 7 per cent for the crop loans on 2006-07 and further
reduced to 5 per cent for all crop loans being repaid promptly by the farmers.
This has been further reduced to 4 per cent in 2008-09.26
Having examined the role of co-operative credit societies in rural
credit, the financial performance of the sample PACBs has been analysed in
the next chapter.
26 Government of Tamil Nadu, Co-operation Department Policy Note: 2008-09.