K C Chakrabarty: Strengthening co-operative credit institutions in India
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Review Meet on Implementation of Revival Package for Short Term Rural Cooperative
Credit Structure, organised by the National Federation of State Co-operative Banks
(NAFSCOB), New Delhi, 29 April 2010.
* * *
Assistance provided by Shri R C Sarangi and Shri K Bhattacharya in preparation of this address is gratefully
acknowledged.
Dr. Chandrapal Singh Yadav, President, NCUI & Chairman, KRIBHCO, Dr Bijender Singh,
Chairman, NAFSCOB, Shri B. Subrahmanyam, MD, NAFSCOB, Smt Roshan R. Warjri,
ViceChairperson, NAFSCOB, Shri P. K. Basu, Union Agriculture and Cooperation Secretary,
distinguished speakers and panelists, distinguished guests, ladies and gentlemen.
Introduction
1. At the outset, I congratulate the National Federation of State Co-operative Banks for
organizing this review meet on implementation of revival package for short term co-operative
credit institutions under the Vaidyanathan Task Force and I deem it a privilege to be present
amidst this august gathering. I am sure, in these two days, you must have taken stock of the
progress made in this regard and deliberated on the benefits accruing to the co-operative
institutions from the package. I am also sure that the few States which are yet to enter the
MoU with the Government of India and NABARD and avail the benefits of the package are
convinced about the advantages of joining the mainstream in the interest of the co-operative
institutions in their States.
2. The co-operative movement started in our country more than 100 years ago. The
co-operatives are the oldest rural credit institutions in India with widest network covering
every State and Union territory of the country and the first institutional arrangement for
financial inclusion. These were virtually the only institution for rural credit in most of the areas
until the nationalization of 14 banks in 1969. Although Regional Rural Banks came into
existence in 1976, and commercial banks and RRBs have opened large number of branches
in rural areas, their reach in the countryside, both in terms of the number of clients and
accessibility to the small and marginal farmers and the poorer sections, is far less than that
of co-operatives. Co-operatives continue to be the single most important institutions, which
touch the life of villagers and rural farmers, most. While there are around 15400 branches of
RRBs, there are about 95000 Primary Agricultural Credit Societies (PACS). Besides
delivering credit to farmers, PACS also serve as outlets for distribution of agriculture inputs
and food and other essential items to the villagers. Thus, PACS are in a far better position to
further financial inclusion agenda than any other institution. There is, therefore, a compelling
need to find ways for strengthening the cooperative movement and making it a well-managed
and vibrant medium to serve the credit needs of rural India.
3. When first conceived, PACS were expected to be rural thrift and credit cooperatives,
dependent primarily on member savings for meeting the agricultural credit needs of their
members. However, subsequently, members stopped seeing these cooperatives as their
own, and saw them as channels through which to access credit. They stopped saving with
PACS. On their part, barring a few States like Kerala, PACS did not make effort to mobilize
deposits but act as channel for disbursement of loans by availing refinance.
Prof. Vaidyanathan Task Force
4. Despite serving the people for decades, co-operative credit institutions remained
financially weak and operationally inefficient and ineffective. Their operations have been
reviewed by various Committees in the past and recommendations were made for
strengthening them. Various measures were taken from time to time for improving the
operations of the co-operative institutions. However, the recommendations of the
Prof. Vaidyanathan Task Force and rolling out of revival package by the Government of India
on the basis of the recommendations are likely to be part of the most important chapter in the
history of co-operative credit institutions in the country. Implementation of the package
including the reforms measures in letter and spirit is the biggest challenge before all
stakeholders and same has to be met effectively.
5. As you all are aware, the revival package seeks to:
a. provide financial assistance to bring the system to an acceptable level of health;
b. introduce legal and institutional reforms necessary for its democratic, self reliant and
efficient functioning; and
c. take measures to improve the quality of management.
6. It is a matter of satisfaction that 25 States have signed the MoU and progressed
towards implementation of reform agenda. Although the time period prescribed by the
Government for entering into MoU has lapsed, the remaining States may approach the
Government in this regard, if they so like, and complete the process. The package was rolled
out in January 2006 and it was envisaged that all regulatory actions including compliance to
Section 11(1) of the Banking Regulation Act, 1949 (as applicable to Co-operatives) should be
kept in abeyance for three years. Three years have already passed. However, only 14 States
out of 25, which have signed MoU have been able to amend the Co-operative Societies Act.
This has resulted in slow implementation of the package. As the financial assistance under
the package has to be released only on the implementation of legal and institutional reforms,
as against total estimated financial assistance of Rs.13,596 crore envisaged in the revival
package, NABARD has, so far (by the end February 2010), released an amount of
Rs.7,561.39 crore towards Government of India's share for recapitalisation of 41,295 PACS
in twelve States, while the State Governments have released Rs.688.82 crore as their share.
It is imperative for all the States that have executed the MoU for implementation of the
package to carry out necessary amendments to the respective State Cooperative Societies
Acts without any further delay. Any delay only delays capitalization and make the system
further weaker.
7. Further, after amendment to the Co-operative Societies Act, all States should follow
the spirit behind the amendment whole-heartedly so that the rural co-operative credit
structure can operate in a healthy way. Legal and institutional reforms have been
recommended under the package to bring about improvement in credit discipline and
financial management of the cooperative credit structure. They are expected to enable and
induce rejuvenation of the structure by promoting voluntary, democratic, member-centric,
self-governing mutual thrift and credit institutions. The State Government's role in this
scenario is expected to be not one of intrusive patronage, but one of promoting good and
skilled management. This process may be slower than one would wish, but it would certainly
result in a stronger and healthier structure to serve the needs of the rural people.
8. As you are aware, a large number of State Co-operative Banks and Central
Cooperative Banks were functioning without a banking license for decades. The Committee on
Financial Sector Assessment recommended that no unlicensed co-operative banks should
be allowed to function beyond 2012. Reserve Bank took a decision to license those
cooperative banks which have Capital to Risk Weighted Assets Ratio (CARA) of 4% and
above. The revival package also helped in this regard. I am happy to share with you that
within a period of last five months, we have issued license to 8 StCBs and 105 CCBs.
However, 9 State Co-operative Banks and 191 Central Co-operative Banks still remain
unlicensed. With recapitalization of these institutions, many of them would be eligible for a
license. All co-operative banks should endeavour to become eligible to get a license before
March 2012.
Financial inclusion and co-operatives
9. The Financial inclusion agenda being pursued vigorously by the Government of
India and Reserve Bank of India cannot be accomplished without the involvement of rural
cooperative institutions. Rather, they have the biggest role to play in this regard. Leveraging
Information technology is a must for achieving financial inclusion and delivering efficient
service to the people. Full computerization of all tiers of the co-operative institutions along
with use of information and communication technology and issue of biometric cards to
members has to be achieved to enable to serve the people.
Way forward
10. You all are aware that all conceivable reform measures have been embedded in the
proposed amendments to the Co-operative Societies Acts. However, I want to highlight
certain issues, which need to be addressed with urgency.
i. PACS are at the base of the entire short-term co-operative credit structure and their
health affects the higher tiers. Efforts to be made to make them efficient and
profitable.
ii. We have to go back to good old days of making PACS thrift oriented institutions.
PACS generally do not make an effort to mobilize deposits but act as a channel for
disbursement of loans by availing refinance. They should make efforts to mobilize
deposits from members in order to become self-sustaining. This would also promote
savings habit among members. Increasing member stake through savings in PACS
will result in better involvement of members and a much more alert membership and
much better performance of PACS including higher loan recovery.
iii. Co-operatives should function in the true spirit of co-operation and managed by duly
elected members. Elections should be held regularly. In order to improve the quality
of management, Directors and CEOs should be appointed on the basis of
professional competence, integrity and merit. Administrative interference in
day-today management should be stopped.
iv. The reform package envisages freedom to all tiers of the structure to avail loan from
any of the RBI regulated entities at competitive rates of interest. I am not sure, if any
effort has been made in this regard. This must be tried to derive the cost benefit and
profitability. Freedom should be given for pricing in a fair and transparent manner.
v. Audits should be done timely and Audited Statements should be presented to the
General body at the AGM.
vi. Full computerization of all the institutions under the three tier structure should be
achieved quickly. This will improve the efficiency, internal control system and
Management Information System.
vii. Training and capacity building of the personnel should be a focus area. NABARD
and College of Agricultural Banking have to revamp the training system to prepare
the co-operative personnel to meet new challenges and take forward financial
inclusion agenda.
11. It is an accepted fact that the rural co-operative credit institutions with vast network
of PACS have a great potential to increase flow of credit to agriculture especially to small and
marginal farmers. Total financial inclusion is not possible without the involvement of
cooperatives. In the past, they failed to deliver due to various weaknesses. It is the opportune
time now make them vibrant medium to serve credit needs of rural India and at the same
time mobilize deposits from rural people to become self-reliant. These institutions should run
like banks with professional management and governance. RBI has already prescribed fit
and proper criteria for the Directors and Chief Executive Officers, which need to be followed.
Over a period of time, all co-operative banks would be at par with commercial banks as far
as regulatory norms are concerned and all prudential norms would be made applicable to
them. A beginning has already been made in this regard by way of issuing licenses only
those State and Central Co-operative Banks, which have Capital to Risk Weighted Assets
Ratio (CRAR) of 4% and above. I hope, a new chapter will begin for the rural co-operatives
and they will serve the people in the true spirit of co-operation.
Thank you.