Anand Sinha: Perspectives on co-operation
Valedictory address by Mr Anand Sinha, Deputy Governor of the Reserve Bank of India, at
the International Conference on Cooperatives, organised by College for Agriculture Banking,
Pune 16-17 November 2012.
* * *
Assistance provided by Mr. Negi, Mr. Gopal, Mr. Ajit Kumar, Ms. Scenta Joy and Mr. Yarasi Jayakumar is
gratefully acknowledged.
Ms. Meena Hemchandra, Principal, Mr. R L Sharma, Vice-Principal, College for Agricultural
Banking (CAB), Mr. Karuppasamy, the Executive Director, Mr. A. Vaidyanthan, a luminary in
the field of development economics, distinguished participants from both India and abroad,
my colleagues from Reserve Bank and the print and electronic media.
It is both a pleasure as well as a privilege for me to address this august gathering today. The
International Conference on Co-operatives, organized by the CAB, is a part of international
initiatives celebrating the spirit of co-operation in the year 2012, declared by the United
Nations as the International Year of Co-operatives. The theme of the International Year of
Co-operatives, "Cooperative enterprises build a better world", represents, quite aptly, the
very important role played by co-operatives in poverty reduction, employment generation and
social integration, eventually leading to a better world. The role of co-operation in social
development and empowerment is well acknowledged and its role is only going to be more
vital in future.
The theme "Leveraging Co-operative Advantage" chosen for this conference is very
contextual, especially in the backdrop of a much weakened global economy. I am very happy
to note that the distinguished co-operators, scholars and academicians present here had
very intense discussion and fruitful deliberation on different facets of co-operative movement
during the last one and half days.
Before I delve into the core of my address today, let me touch upon a few aspects of
co-operation, its evolution and, most importantly, its relevance in current turbulent times.
Concept of co-operation
Co-operation is a basic and innate quality which prompts us to work together, live together
and help one another in times of crisis for mutual welfare and betterment. Co-operation is as
old as the human society and, I must say, is the bedrock of any civilization. Co-operation
enables people to leverage on their collective strengths and overcome individual
weaknesses. I am reminded of a quote "If you want to be incrementally better, be
competitive; but if you want to be exponentially better, be cooperative". While competition is
good, excessive competition can lead to a downward spiral or a race to the bottom as seen
in the unfolding of the current crisis. Excessive competition leads to perverse incentive
structures and reckless innovation which needs to be managed through a self-regulatory
mechanism with the regulatory framework providing a backstop. It is evident that the
selfregulatory mechanism is actually a co-operation framework. And it is to the benefit of all.
Social and economic progress would have not been possible without co-operation amongst
people.
The concept of co-operation is not just restricted to human beings. The flock formation of
birds is attributed to co-operative food hunting, information exchange and protection from
predators. The formations adopted by birds while flying together are aerodynamically very
efficient taking advantage of the changing wind patterns and the current created by the birds'
wings. Further, birds that have discovered good feeding sites are found to lead other birds by
forming flocks. It is also observed that information exchange is quite developed in species
such as honey bees. Thus, co-operative principles are universal and all pervasive.
Evolution of co-operative movement in India
Co-operative movement as an economic concept is more than 100 year old in India. The
cooperative movement in India emerged as a Government policy to address the distress and
discontent in the agricultural sector in the latter part of the nineteenth century due to famine
conditions and the absence of institutional arrangements to provide finance to farmers. The
Co-operative Credit Societies Act, 1904 envisaged formation of agricultural co-operatives.
The subsequent legislations provided for the formation of co-operatives in other activities and
ensured strengthening and further development of co-operative sector. The impetus provided
by the Government was evident in the emphasis placed on co-operation in the five year
plans. The first five year plan underscored the adoption of the co-operative method of
organization to cover all aspects of community development. The second plan emphasised
"building up a cooperative sector as part of a scheme of planned development" as being one
of the central aims of National Policies and aimed at enabling co-operatives to increasingly
become the principal basis for organization of economic activity.1
Co-operation is not necessarily restricted to financial activities, though we bankers tend to
think of co-operatives more as credit co-operatives. Co-operation embraces non-economic
activities such as production, processing, marketing distribution, transport, irrigation, labour,
etc., and what better example than the Warana Bazaar story that was very beautifully
narrated to us this morning.
Co-operative credit structure in India
The co-operative credit structure in India can broadly be divided into two segments viz. rural
and urban. The Urban co-operative structure comprises of Urban (Primary) Co-operative
Banks numbering 1618 with 8235 branches spread over 328 districts in the country as at the
end March 2012. The rural co-operative structure in India, on the other hand, comprises
about 94531 co-operatives categorized into short term and long term. The short-term rural
co-operative credit structure (STCCS) comprises State Co-operative Bank at the apex
(State) level, Central Co-operative Banks at the intermediate (district) level and Primary
Agricultural Credit Societies at the ground (village) level. The long term co-operative credit
structure (LTCCS) comprises State Co-operative Agriculture and Rural Development Banks
(SCARDBs) and Primary Co-operative Agriculture and Rural Development Banks
(PCARDBs). The latter structure does not come under the regulatory jurisdiction of Reserve
Bank as it is not covered under the Banking Regulation Act, 1949 (AACS).
Recognising the deep-rooted integration of the co-operative structure in the Indian
socioeconomic system, policy makers have accorded great significance to its development and
strengthening. A Task Force on Revival of Short-Term Rural Co-operative Credit Institutions
was constituted by the Government of India under the chairmanship of Professor A.
Vaidyanathan in August 2004 to formulate a practical and implementable plan of action to
rejuvenate short term rural co-operative credit structure. Based on the recommendations of
the Task Force and in consultation with the State Governments, the Government of India has
approved a package for revival of the short-term rural co-operative credit structure. The
package seeks to
•
provide financial assistance to bring the system to an acceptable level of health;
•
introduce legal and institutional reforms necessary for its democratic, self-reliant and
efficient functioning; and
•
take measures to improve the quality of management.
As regards development of long term credit co-operatives, the work was entrusted to the
Task Force under the Chairmanship of Prof. A .Vaidyanathan to suggest, inter alia, a
comprehensive strategy for institutional financing of long term agriculture and the role the
Co-operative structure can play in implementing that strategy consistent with prudent
financial management. Subsequently, another Task Force (Chairman: Shri G C Chaturvedi)
was constituted to look into various aspects of the long-term co-operative credit structure, the
report of which is under the consideration of Government of India.
Let me now turn to Urban Co-operative banks, the regulation of which is my direct
responsibility.
Growth of urban co-operative banks
In the earlier phase, the Banking Companies Act, 1949 had specifically excluded
co-operative banks from its purview as they are not banking companies. When the Banking
Regulation Act was made applicable to UCBs in 1966, there were about 1100 UCBs with
deposits and advances of ₹.1.67 billion and ₹.1.53 billion respectively. Since then there has
been phenomenal growth in terms of their numbers, size and scale of operations. As at the
end of 1996, the number of UCBs increased to 1501 and their deposits and advances rose
significantly to ₹.241.61 billion and ₹.179.27 billion. The UCBs continued to grow at a fast
pace till 2003, when their number increased to 1941 and their deposits and advances to
₹.1015.46 billion and ₹.648.80 billion respectively. Subsequently, the number of UCBs
declined in 2006 to 1853 due to the consolidation efforts we have undertaken to address the
weaknesses in the UCB sector. Resultantly the sector is in a much better shape than before.
As on March 2012 there were 1618 UCBs with total deposits of ₹.2385 billion and advances
of ₹.1580 billion.
Salient features of the UCB sector - heterogeneity
The UCB sector is unique in that there is a significant degree of heterogeneity among the
banks in this sector in terms of size, geographical distribution, performance and financial
strength. There is also diversity among the urban co-operative banks in the levels of
professionalism, standards of corporate governance and adoption of technology.
While on the one hand, there are a number of small neighbourhood banks functioning for
mutual interest of their members, on the other, there are several large UCBs with a wide
network of branches, large number of depositors and borrowers, many of whom are
medium/large corporates. In the latter kind of UCBs, the co-operative structure remains only
as an organizational arrangement and their business model and goals are more akin to
commercial banks. Let me quote a few aspects of heterogeneity as examples.
Size-wise distribution
The UCBs are disparate in their size as measured by the size of their deposits and
advances. 2.4% of the UCBs have a deposit base of above ₹.10 billion and account for
45.35% of the total deposits of UCB sector, while 15.9% of the UCBs have a deposit base of
less than ₹.100 million and account for only 0.7% of deposits of the sector. Further, 1.2% of
the UCBs have advances of more than ₹.10 billion and account for 36.5% of the total
advances of the sector while 28.4% of the UCBs have advance of less than ₹.100 million and
account for only 1.8% of the aggregate advances of the sector.
Geographical distribution
The geographical distribution of urban co-operative banks across the country is also skewed,
with significant concentration in southern and western regions. Out of 28 states in India 78%
of the branches of UCBs are concentrated in only 5 states. There are eighteen states which
have less than twenty UCBs operating.
Licensing of new UCBs: setting up of expert committee (Malegam Committee)
An Expert Committee on licensing of new Urban Co-operative Banks (Malegam Committee)
was constituted in December 2010 by the Reserve Bank with a view to increasing the
coverage of banking services amongst local communities and for studying the advisability of
granting new urban co-operative banking licenses. The terms of reference of the Committee
also included reviewing the role and performance of UCBs over the last decade, reviewing
the need for organization of new UCBs in the context of the existing legal framework for
UCBs, a thrust on financial inclusion in the economic policy and proposed entry of new
commercial banks into the banking space. The recommendations of the Committee are being
examined by the Reserve Bank.
Let me now touch upon a few issues related to co-operative institutions in general and UCBs
in particular.
Relevance of co-operative structures in the globalised world
Often one hears the argument that co-operative structures are more suited for small and
developing economies and that they may not have great relevance in the globalised world.
But I feel co-operatives do have their role to play, and will continue to remain relevant, even
in a globalised world. With globalization, many new avenues are created which co-operatives
could use to make their presence felt. The Report of the High Powered Committee on
Co-operatives (May 2009) has highlighted that globalization creates additional opportunities
in newer areas which are very important for people and communities but are not regarded as
commercially viable. The report suggested that traditional areas of social sector such as
education, health, transportation, water supply, forest management, electricity are some of
solutions could be superior to either public or private
the areas where "cooperative
approaches to utility management". There is ample scope for co-operatives to emerge as
independent and self-reliant institutions for self-help and collective good.
Co-operatives in post-crisis world
The world economy is yet to recover from the crisis which struck the financial sector. Barring
certain growth pockets, general slowdown in economy continues unabated. Earlier, there
was a very strong belief that the emerging and developing economies (EDEs) were
decoupled from the developed countries and that the shocks arising from these developed
economies will not adversely impact the EDEs. The global financial crisis has proved these
assumptions wrong. Even while not having the features which led to the crisis, the EDEs did
experience slow down due to the transmission of crisis through trade, finance and confidence
channels.
While the slowdown has hit all segments of the society hard, its effect is particularly severe
on the weaker segments. In the ensuing recession, the global economy has lost more than
USD 4 billion in output and almost 28 million jobs. This has sharpened the focus on inclusive
growth and equitable development. The world is wiser with the realization that growth and
development, bereft of equity and inclusiveness, may not fetch to the mankind sustainable
peace and happiness, the ultimate goals of all human endeavours. This is so because in the
absence of financial inclusion, it would be hard to maintain financial stability because, it is no
secret that exclusion breeds unrest and social turmoil leading to instability.
Financial institutions' role is to serve the real economy and not to become the master of it. It
is true that financial engineering does help in creating a vibrant financial market but unlike
material science where innovations lead us to definite products and services, the innovations
in financial markets, at times, give us complex products with uncertain results and benefit the
employees rather than the shareholders and the society. Co-operative institutions built on the
principles of self-help and mutual co-operation inasmuch as they enable inclusive growth by
involving even less privileged, engage in basic banking and that is where they should stay.
They clearly have a greater role to play in the post crisis world.
In fact, the lessons from the global financial crisis veer us towards keeping the basic banking
separate from the investment banking or casino banking as it is more popularly being called
of late. While casino banking has its own place, the criticality of basic banking and the
importance of keeping it separate from more risky investment banking has been emphatically
argued in the aftermath of the crisis. The regulatory framework as suggested by Volker rule
in the US and the Vickers' report in the UK recommend this separation. In India, however,
the regulations and the organisational structure of banks have ensured that the risky
activities of investment banking segment are contained and do not impact the basic banking
segment adversely.
Contribution of co-operative institutions
The contribution of Co-operative Banks and other credit co-operatives has generally been
evaluated in economic terms. These institutions have often been lauded and, at times,
criticized in the context of their usefulness (or lack of it) in the economic upliftment of people
of smaller means. But the point which has often been missed out is their very profound
contribution to the democratization of social behaviour in general and the democratization of
economic behaviour in particular. In a society, where joint family system is disintegrating fast,
co-operatives may also be looked upon as an alternative social support mechanism.
Democracy vs efficiency
Many of the practitioners and thinkers of co-operative structure are facing the dilemma of
finding a delicate balance between democracy and efficiency as the two are often considered
mutually exclusive of each other. But in order to restore the credibility of co-operatives in the
eyes of the public, it is essential to get our priorities right. A co-operative institution
essentially is "...an association of persons who have voluntarily joined together to achieve a
common end through the formation of a democratically controlled organization, making
equitable contributions to the capital required and accepting a fair share of the risks and
benefits of the undertaking in which the members actively participate." Any attempt to infuse
efficiency by sacrificing democracy, appears to me, a non co-operative solution to a
co-operative problem.
The success of co-operative institutions depends on active member involvement and
economic participation. It has, however, been observed that member participation is very low
in the election process of credit co-operatives. A recent study conducted by College of
Agricultural Banking, Pune on UCBs also corroborates this fact where it reveals that voting
percentage is as low as 5 to 10% of total membership in many of the Co-operative banks.
This puts a question mark on the true democratic character of the co-operative organization.
One can hardly dispute that it is democracy and member control which are the hallmark of
co-operatives which distinguish Co-operative banking from commercial banking.
Selfgoverning bodies like NAFCUB and state federations may involve themselves more
proactively in ensuring higher member participation.
Participation of depositors
While borrowers are required to become members of the UCB and have voting rights,
depositors are not required to become members. Resultantly, the depositors who are major
stakeholders of the UCBs are made to become nominal or associate members without voting
rights, and are left out of the decision making. As observed by the Expert Committee on
Licensing of new UCBs (Malegam Committee), this practice has led to limited member
participation in UCBs , even while having a large number of members as most of them do not
have voting rights. The Committee observed that the control of UCBs should shift from
borrowers to depositors and that 50 per cent in value of deposits to be held by voting
members.
Size and cooperativeness conundrum
Despite the professed philosophy of co-operative banking to grow organically with a focus on
community service, there is a dilemma between size and cooperativeness. The co-operative
group is strongest when it is small, while the co-operative enterprise also needs a certain
size to be economically viable. But economization often turns into commercialization and
resultantly the members of co-operatives are reduced to the status of mere customers or
mere shareholders without any opportunity or interest to participate actively in the goal
setting and control of the organisation.
The membership in large co-operative societies is composed of heterogeneous sub-groups,
residing in different areas belonging to different social-economic strata and having different
economic profiles. In such co-operatives the social cohesion of members, their feeling of
group solidarity and their interest in active participation could be a casualty.
Multiplicity of credit delivery channels
Thanks to the combined efforts of all stakeholders, commercial banks and regional rural
banks in this country have started playing an important role in financial inclusion and financial
literacy. Their outreach has also increased through banking correspondents (BCs). In such a
scenario, some may argue against the multiplicity of formal credit delivery channels in
general and existence of Co-operative banks in particular. But keeping in view the vast
unbanked and heterogonous population of this country, there are stronger arguments in
favour of giving people a menu of choices. The co-operative banking channel, being
essentially a community based banking model, is more suited to design customized products
and services to cater to the specific needs of different ethnic and social groups that exist in
this country. The existence of different forms of non-formal credit channels and chit funds,
particularly in the north eastern provinces, clearly underscores the need for customized
banking products and services for different population groups. The commercial banks have
had to undertake this responsibility in the absence of adequate efforts by the co-operative
banking systems. I underscore the huge business opportunity for the co-operative banking in
this segment.
Accessibility and availability of financial services
Although the issues of accessibility and availability of financial services in rural vis-a-vis
urban areas are hugely different, unfortunately, the scenario of financial exclusion, more or
less, remains the same. While in remote areas, banking services are neither adequately
available nor accessible; in urban areas, however, they are available in good measure but
are not accessible by the poor. People living in urban slums are as financially excluded as
their counterparts living in unbanked villages. This brings into focus the demand side issues
of financial inclusion. I believe credit co-operatives, being member driven organisations, are
more suited to handle the demand side issues like financial literacy and skill development. In
fact, education, training and information is one of the internationally accepted principles of
co-operation and addressing the demand side issues would go a long way in achieving our
goal of financial inclusion.
Co-operatives for people of small means
Indian co-operative banks are characterised by huge asymmetry of size ranging from
balance sheet size of a few lakhs of rupees to thousands of crores. However, whether big or
small, co-operative institutions are by default meant for people of small means. The market
segments commercial banks are catering to, as part of their priority sector obligations, credit
co-operatives are supposed to have them as their niche markets. If this noble cause is
served by smaller entities among co-operatives, one may be tempted to say "small is
beautiful".
I have mentioned earlier that Co-operative banks essentially engage in basic banking and
they remain in that space. However, co-operative banks, particularly the bigger ones, like
commercial banks, often get allured to high value loans and bulk deposits to achieve
"economies of scale". In a country like India, where there is a large chunk of unbanked
population, the co-operative banks need to also keep serving the marginal participants as
one of their primary objectives and should not be carried away in the race to grow big.
Governance and regulation of co-operative banks
I find from the programme schedule that the conference started with deliberations on "Policy,
laws, governance & enabling environment". Reserve Bank, as a regulator of banking sector
is involved with the regulation and supervision of Co-operative banks. I would, therefore,
prefer to deal with governance and regulatory issues in a greater detail.
Corporate governance and principles of co-operation
Corporate Governance relates to a system in which the interests of the whole gamut of
stakeholders are recognized and conflicts among them are sought to be reconciled. The
concept of corporate governance is not much different than the internationally accepted
principles of co-operation. One of the cardinal principles of co-operation as accepted by
International Co-operative Alliance (IAC) is "member economic participation" indicating
contributing equitably to, and controlling democratically, the capital of co-operative by the
members. Equitable appropriation of surplus is one such fine balancing act of reconciling
conflicting interest of various stakeholders. Unlike commercial entities, profit making is not
the goal or end in itself for co-operatives, but it is just a means to achieve the noble
objectives of equitable economic development of the society.
If a shareholder of a Co-operative Bank is looking for higher and higher return on equity
(RoE) it may imply that although he is a shareholder of a co-operative institution, his
behaviour is more of a shareholder of a commercial entity. On the other hand, if a
shareholder of commercial entity has belief in Corporate Governance and Corporate Social
Responsibility (CSR) he may technically be a shareholder of a commercial entity; his
behaviour would be more akin to a co-operator. What I intend to say is that the word
"co-operation" is, perhaps, more of a state of mind than something structural and material.
Professionalism in governance structure
There can hardly be a debate on the desirability of a higher degree of professionalism in the
governance structure of co-operative institutions. Dual control of State Government (under
State Co-operative Societies Act) and the RBI has been identified by many as one of the ills
of Co-operative Banks. The institutional mechanism of Task Force for Urban Co-operative
Bank (TAFCUB), to resolve the dual control issues, has worked satisfactorily and helped in
phasing out the weak players in a non-disruptive manner. The RBI has directed Co-operative
Banks to ensure election/ co-option of at least two Professional Directors on their Boards.
The Expert Committee on Licensing of New Urban Co-operative Banks has recommended
creation of a professional Board of Management structure in between the Board of Directors
and the CEO as a pre-condition for licensing of new urban co-operative banks. A final
roadmap will be prepared after issues relating to governance arrangements are resolved with
the Government.
Criticality of management quality
Robust co-operative laws are a necessary precondition for co-operative success. I am,
however, reminded of Aristotle who said "It is better for a city to be governed by a good man
than good laws". In the context of co-operative management, I believe that more than good
laws, we need good implementation of laws and a robust governance systems. Credit
co-operatives need to build strong governance systems and actively associate the members
in the decision making process.
Basel II and urban co-operative banks
Internationally, Basel II norms are applicable for Co-operative banks in many of the
advanced countries. Reserve Bank of India has adopted a calibrated and gradual approach
towards application of Basel standards for various regulated entities keeping in view their
systemic importance and availability of skill sets. As of now, UCBs have been subjected to
Basel I requirements for computation of capital. Certain elements of market risk management
contained in the amendment to Basel I Accord and largely carried forward to Basel II, have
been made applicable for bigger UCBs conducting forex transactions. Keeping in view the
heterogeneity in size and sophistication of Indian UCBs, RBI would take a considered view in
due course in regard to application of Basel II norms on the sector. At present there is no
empirical study to suggest the likely impact of Basel II on Indian UCBs.
However, the quantitative impact study done in certain European countries suggest that in
view of the high incidence of retail exposures and residential mortgage loans of co-operative
institutions, the new regulations should bring about positive effects in terms of lower
requirement regulatory capital. These results are confirmed by a study of wide range of
Italian co-operative banks. The study, however, reveals that an improvement in terms of
capital requirements vis-a-vis credit risk might be eroded by the introduction of a
150 per cent risk weight on loans that are overdue for more than 90 days.2 Incidentally, as
per the latest figures, the gross NPA of Indian UCBs is still pegged at a high of 7.0% of total
advances. Although the exposure of the Indian co-operative banks to real estate sector is
limited, the other exposures are risky and may require higher capital. In the context of
applying Basel II standards in India, it is worthwhile to mention that, unlike the credit unions
elsewhere in the world, the Indian co-operative banks would find it difficult to raise capital.
Though, through policy initiatives, co-operative banks have been permitted to raise capital
through some innovative instruments, not many banks have been successful in augmenting
capital by using these instruments.
A counterview in regard to the impact of Basel II framework on co-operative banks is that
with a view to reducing regulatory costs, the standardised approach would spur credit off
take of co-operative banks to higher-rated enterprises. Most of the customers of co-operative
banking system, however, fall within the category of small, unrated enterprises, for which the
risk weight is 100 per cent.
Regardless of the approach under the Pillar I, adoption of pillar II of Basel II appears
desirable for systemically important UCBs from risk management perspective. The Accord's
second pillar lays stress on the importance of bank's own assessment of the degree of
exposure to risk, the determination of capital adequacy to face risk, and in the provision of an
effective risk-management and control system. Although not mandated by the regulator,
bigger UCBs may, for better risk management and improved internal governance, voluntarily,
consider adopting the Internal Capital Adequacy Assessment Process (ICAAP) as envisaged
under Pillar II of Basel II which helps them in the self-evaluation of their resilience to stress.
The disclosure requirements under Pillar III of Basel II are desirable for any public entity,
more so in an organisation which is member driven and the customers in general are
shareholders as well. Relevant information could be disclosed voluntarily as soon as it is
available. However, in the case of small-size banks characterised by steady risk profiles,
such information disclosure could be yearly.
Adoption of technology - financial inclusion
I mentioned earlier that the co-operative institutions by virtue of their business model are
better equipped to further financial inclusion initiatives. The organizational structure (member
driven), the largely local clientele, easy access and the reputation as a friendly
neighbourhood bank are the strengths of UCBs which enable them in widening and
deepening financial inclusion. A number of measures have been taken to facilitate financial
inclusion by UCBs: The measures include (i) introduction of No-frills account with nil or low
minimum balance, (ii) relaxation of Know Your Customer (KYC) requirements for small
accounts, (iii) Constitution of an expert committee for studying the advisability of granting
licences to new urban co-operative banks, (iv) Exempting UCBs maintaining minimum CRAR
of 12% on continuous basis from the mandatory share linking norms, (v) Revising the
permitted credit limits for individual housing loans, (vi) Extension of area of operations by
UCBs, (vii) Liberalising norms for opening of new branches by UCBs, (viii) Permitting well
managed banks to set up off-site ATMs, (ix) permitting use of Business Correspondents
(BCs) and Business Facilitators (BFs) by UCBs, (x) permitting lending to Self Help Groups
(SHGs) and Joint Lending Groups (JLGs) etc.
Technology forms a critical component of financial inclusion initiatives as use of IT reduces
the cost of financial transactions, improves the allocation of financial resources and
increases the competitiveness and efficiency of the financial institutions. In India we have
adopted a bank led model for financial inclusion which seeks to leverage on technology. The
commercial banks and Regional Rural Banks were advised to adopt Core Banking Solutions
for all their branches by September 2011 for the purpose. The multi-channel approach
adopted for financial inclusion in the country envisages financial inclusion through Multiple