R Gandhi: Rural cooperatives - repositioning
Keynote address by Mr R Gandhi, Deputy Governor of the Reserve Bank of India, at the
"National Conference of Cooperative Banks - Regaining Leadership in Agricultural Finance",
held at the Bankers Institute of Rural Development (BIRD), Lucknow, 9 February 2016.
* * *
Assistance provided by Shri Ajaya Gopal Ray is gratefully acknowledged.
1. I am glad to be addressing you all at this National Conference on Cooperative Banks -
Regaining Leadership in this historic city of Lucknow. It is a very contemporary issue. Actually,
it is an ever-green issue for the past over a century or so. You only need to recall the famous
saying by the All India Rural Credit Survey of 1951 "Cooperation has failed. But, cooperation
must succeed". That showed that cooperation had a chequered history in India, with several
ebbs and flows. That is why we are talking about "Regaining Leadership" as the organisers of
this Conference have chosen to put it and "repositioning" as I have preferred to reflect upon.
Part I - Rural cooperatives: current status
2. Rural credit cooperatives came into existence essentially as an institutional mechanism to
provide credit to farmers at affordable cost and address the twin issues of rural indebtedness
and poverty. With its phenomenal growth in outreach and volume of business, rural credit
cooperatives have a unique position in the rural credit delivery system. Through the short and
long-term structures, they continue to play a crucial role in dispensation of credit for increasing
productivity, providing food security, generating employment opportunities in rural areas and
ensuring social and economic justice to the poor and vulnerable. Several committees, from the
All India Rural Credit Survey Committee to the Vaidyanathan Committee have stressed the
relevance and importance of cooperative credit societies to the development of agriculture and
rural economy.
3. Today, short term cooperative credit structure has 32 state cooperative banks and
371 district central cooperative banks operating through 14907 branches. There were
92,996 Primary Agricultural Credit Societies (PACS) as on March 31, 2014 at the grass root
level catering to the credit requirements of the members but also providing several
nonfinancial services like input supply, storage and marketing of produce, supply of consumer
goods, etc.
4. The journey has not been smooth for the cooperative banking structure. There were legal,
structural and organisational rigidities which created conflicts and challenges in the functioning
of cooperatives.
5. Reserve Bank of India as regulator of banks is mandated to maintain a sound and stable
banking system. Since banks are highly leveraged entities and accept unrestricted amount of
uncollateralised public deposits, it is important to ensure that banks operate on sound lines,
are well regulated and supervised and public faith in these institutions are sustained.
6. Economic and financial reforms initiated in early 1990's were focussed mainly on
commercial banks which have pan-India and international operations. Cooperative banks were
kept outside the reforms since these banks had limited area of operations, simple banking
products, low volume of business and insignificant share in the total assets and liabilities of the
Indian banking system. The regulatory regime continued to be less rigorous for the cooperative
banks. Capital adequacy and other prudential norms were not applied to cooperative banks.
However, as commercial banks continued to make significant strides in expansion of business,
product diversification and technology adoption, weaknesses in the cooperative system
became more and more conspicuous and posed a threat to their survival. Particularly, the
relevance and existence of cooperative banks came into question since a large number of
state and central cooperative banks were operating without banking license even after 40 years
from the date of bringing them in the ambit of Banking Regulation Act.
7. A major initiative for reforming the short term cooperative credit system (STCCS) came from
the Government of India when it constituted a Task Force in August 2004 to suggest an action
plan for reviving rural cooperative credit institutions and legal measures necessary for
facilitating this process. The Task Force, chaired by Prof. A. Vaidyanathan has recommended
that any financial restructuring without addressing the root causes of the weaknesses of the
system would not result in its sustained revival. The Task Force made several suggestions
including a financial package for cleaning up the balance sheets of STCCS, legal and
institutional reforms necessary for cooperatives to function as democratic institutions. One of
the major recommendations was on capital adequacy norms for the three tiers of STCCS.
Regulatory initiatives
8. The Committee on Financial Sector Assessment recommended that all banks should obtain
a license before March 31, 2012 and those who failed to obtain a license should be phased
out of a cooperative space in a non-disruptive manner. 25 State Governments signed the MoU
for the financial assistance under the Government of India Revival Package for STCCS
announced as per the recommendations of the Task Force. Reserve Bank, as a major policy
measure, relaxed the licensing norms for state and central cooperative banks. The twin
initiatives resulted in licensing of a large number of banks starting from 2008.
9. The position of CRAR in respect of state and central cooperative banks as on March 31,
2013 revealed that 23 out of 31 state cooperative banks (StCBs) and 278 out of 371 central
cooperative banks (CCBs) had CRAR above 7%. Six StCBs and 48 CCBs had CRAR between
4% and 7%. We felt that the time was appropriate to introduce Basel I capital adequacy
framework to these banks. Hence, the banks were placed under phased implementation of
Basel I norms with a target of 7% CRAR by March 31, 2015 and 9% CRAR by March 31, 2017.
The banks were allowed to raise the additional capital resources through Long Term
(Subordinated) Deposits and Innovative Perpetual Debt Instruments. As on March 31, 2015,
30 StCBs and 301 CCBs had CRAR of 7% or above.
10. Pursuant to the Banking Laws (Amendment) Act 2012, CRR to be maintained by
nonscheduled StCBs and CCBs and SLR to be maintained by all StCBs and DCCBs were brought
on par with commercial banks from the fortnight beginning July 12, 2014. Eligible assets for
SLR were also brought on par. With a view to enabling the banks to meet the revised
requirements, a roadmap was provided to phase out the existing SLR term deposits by March
31, 2017.
11. Regulatory functions related to urban and rural cooperative banks have been brought under
a single department within RBI with effect from October 1, 2014. Erstwhile Urban Banks
Department was bifurcated and rechristened as Department of Cooperative Bank Regulation
(DCBR) and Department of Cooperative Bank Supervision (DCBS). While supervision of UCBs
is vested with DCBS, supervisory functions in respect of StCBs and CCBs remain with
NABARD. The new arrangement is aimed at achieving synergy and harmonization in
regulation of cooperative banks without losing sight of the structural differences in rural and
urban cooperative credit systems.
12. Some of the recent policies aimed at harmonisation of regulation of cooperative banks are
related to increase in gold loan bullet repayment limit from ₹ One lakh to ₹ Two lakh, guidelines
on opening of branches / extension counters by state cooperative banks, issue of ATM / Debit
cards, guidelines on setting up mobile / off-site ATMs and internet banking and permission to
StCBs / DCCBs for investment in Market Infrastructure Companies like NPCI, CCIL, etc. With
a view to speeding up approvals, we have delegated powers to our Regional Offices in most
of these areas.
Financial performance of state and central cooperative banks
13. Today the StCBs and DCCBs display a reasonable financial strength. Their combined
capital and reserves stood at ₹ 20.1 thousand crores for the StCBs and ₹ 51.04 thousand
crores for the DCCBs as on March 31, 2015. The combined balance sheet, as on March 31,
2015, of all state cooperative banks stood at ₹ 1.98 lakh crore and that of the district central
cooperative banks at ₹ 4.06 lakh crore. Their Gross NPA stood at 4.8% and 9.1% respectively
as on March 31, 2015. Their combined Net Profits were ₹ 1,005 crore and ₹ 793 crore
respectively.

14. Asset quality of StCBs / DCCBs have improved over the last three years as may be seen
from the fall in the percentage of NPAs between 2013 and 2015. However, the percentage of
recovery to demand is a concern since it is showing a declining trend. There are wide variations
region-wise too. In 2014, NPAs of StCBs varied between 1.93% in northern region and 17.12%
in north-eastern region. In respect of CCBs, it was 5.27% in northern region and 10.98% in
eastern region. During the same year, percentage of recovery to demand was 97.9 in northern
region and 49.10 in north-eastern region for StCBs. Recovery to demand was 83.16% in
northern region and 67.23% in eastern region in respect of CCBs.
Issues and challenges
15. Some of the major issues to be addressed by the cooperative banking sector relate to
governance, management, sound capital base, technology, risk management and frauds. We
have prescribed fit and proper criteria for Chief Executive Officers of StCBs and CCBs. The
Constitution (97th Amendment) Act mandates appointment of at least two professional
directors in the Boards of cooperative banks. The Act has also covered other issues aimed at
improving governance and autonomous functioning of cooperative societies such as
engagement of professionally qualified auditors, tenure of Board, conditions for supersession
of Board, active participation of members in annual general meetings, etc. Implementation of
these directions in their true spirit is critical for ensuring good governance and management
practices.
16. The Constitution (97th Amendment) Act requires that audit of a cooperative society to be
conducted by qualified auditors or auditing firm to be appointed from the panel prepared by the
State Government. NABARD has requested RCS of all states to provide chartered accountants
for conducting statutory audit of StCBs / DCCBs. We come across large divergence between
audited financial parameters and that assessed by NABARD, particularly in respect of
reporting of NPAs and provisioning. Since audited financial statements are relied upon for
granting various regulatory approvals and assessing compliance standards, quality of statutory
audit needs to be improved. For achieving this, we have planned to conduct workshops /
seminars for statutory auditors to familiarise them with our instructions. We will be taking the
help of Institute of Chartered Accountants for preparing a standard audit report format for
cooperative banks.
17. Cooperative banks should improve their bottom line through internal accruals without
relying on frequent bouts of capital infusion by the government. They should review their pricing
policies on deposits and loans, appraisal systems, recovery procedures, major expenditure
items and devise suitable action plan to plug leakages and augment income. Implementation
of effective loan appraisal policies at the approval stage will ease the pressure on recoveries
at a later date and help to curtail expenditure on litigations. Continuous monitoring of loan
accounts with give signals on creeping sickness and delinquencies and effective steps aimed
at recovery at an early stage will prevent deterioration of asset quality. Further, higher
provisioning towards NPAs severely erodes profitability. Banks should look for more fee-based
activities to supplement their earnings.
18. Another area of persistent and serious concern to us and NABARD is that cooperative
banks are unable to prevent frauds. Most of the times, the frauds have been perpetrated by or
in collusion with the banks' own staff. As on March 31, 2015, state and central cooperative
banks have 2589 cases of frauds with outstanding amount of ₹ 877.7 crore. If the banks are
unsuccessful in recovering the amount, the losses have to be absorbed by them. Cooperative
banks need to think whether frauds are really non-preventable.
19. Technology adoption is an imperative in today's banking. Implementation of CBS in StCBs
and DCCBs which was started in 2012 has been completed in all 32 StCBs and 347 licensed
DCCBs. These banks can now offer RTGS and NEFT facilities to their customers through
direct or sub-membership route and also participate in Direct Benefit Transfer Scheme. RBI
has already circulated the criteria for offering mobile and internet banking facilities by these
banks. Since the technology brings its own risks, cooperative banks should have proper risk
assessment and risk mitigation policies in place. Sound internal control system is critical to
prevent frauds, data integrity and leakage of customer information. Banks should develop
wherewithal to handle the liabilities that would devolve on them due to failures in internal
controls. Any lapses on this count will not only impose cost in terms of money but also loss of
customers' faith.
20. Rural cooperatives have enormous potential to deliver financial inclusion to remote
locations leveraging technology. NABARD extends support to cooperative banks in
implementing the technology assisted banking platform and setting up Financial Literacy
Centres and Common Service Centres with ICT-enabled kiosks to create awareness and
demand for products and services. Financial assistance is provided from Financial Inclusion
Fund for implementation of CBS in cooperative banks, data migration from PACS to DCCBs,
issue of RuPay and KCC cards and meeting expenditure towards micro-ATMs and POS
terminals. Cooperative banks should join hands with NABARD to reach financial products and
services to the unserved.
21. Implementation of mobile and internet banking will facilitate anywhere banking without any
necessity for the customers to visit banks' premises. Since physical interactions with
customers will be limited or nil, banks should pay attention to adequate KYC checks. Proper
care should be taken at the time of engaging the services of third party service providers for
managing the IT systems and outsourcing database management activities.
22. With the adoption of technology and liberalisation of regulatory policies, cooperative banks
are foraying into new business activities where they have no familiarity. Training and capacity
building assumes importance in the present context. Adequate training should be imparted to
people at all levels including employees, Board of Directors and auditors to improve
productivity, efficiency and professionalism. Cooperative banks should make use of financial
assistance for capacity building provided by NABARD from Cooperative Development Fund
and under Scheme of Financial Assistance for Training of Cooperative Banks Personnel
(SOFTCOB). Cooperative banks may avail of training facilities available in the training
establishments of RBI, NABARD and various cooperative training institutions.
23. Today's customers have more awareness about their rights and demand transparency in
our banking system. Leveraging the technology, every cooperative bank should provide on its
website where customer can access information about products, procedures, forms, fees /
charges, annual reports, etc. Customers should have the facility to communicate to the bank
through e-mails. Transparency will improve confidence of customers, bank's image and reduce
complaints.
24. Cooperative banks are now functioning in a highly competitive environment. Entry of more
players in the banking arena and technology have increased options to customers and banks
have both opportunities to grow and challenges for survival. Cooperative banks with their
intimate knowledge of customers and familiarity with the area of operation can attract new
customers and retain the existing clientele with their unique selling proposition. However, this
can be achieved only with suitable changes in outlook, processes, business model and
strategy.
Part II Rural cooperatives: re-positioning
Exalted status
25. Co-operatives are an exalted position in India. How and why do I say so? There are very
many types of economic entities like a proprietary firm, partnership firm, society, trust,
company, body corporate, beside the cooperative. Of these, which one has got mentioned in
the Constitution of India? It is cooperatives. That too, not just a passing mention; but, a full
section on how cooperatives have to be formed, governed and operated has been incorporated
as a part of our Constitution, thanks to 93rd Amendment.
26. Not only that, you look at the very many Five Year Plan documents - they are replete with
strong references to the contribution of cooperatives, the role and expectations from
cooperatives. To quote a few of them - The Second Five-Year Plan (1956-1961), emphasized
"building up a cooperative sector as part of a scheme of planned development" as being
one of the central aims of National Policy. The Third Five Year Plan (1961-1969) stressed
that "Cooperation should become, progressively, the principal basis of organization in
branches of economic life, notably agriculture, minor irrigation, small industries and
processing, marketing, distribution, rural electrification, housing and construction and provision
of essential amenities for local communities. Even the medium and large industries and in
transport an increasing range of activities can be undertaken on cooperative lines". The Eighth
Five Year Plan (1992-1997) laid emphasis on building up the cooperative movement as a
selfmanaged, self-regulated and self-reliant institutional set-up, by giving it more autonomy
and democratizing the movement.
27. Pandit Jawaharlal Nehru, who had a strong faith in the cooperative movement, while
opening an international seminar on cooperative leadership in South-East Asia, had said "But
my outlook at present is not the outlook of spreading the cooperative movement gradually,
progressively, as it has done. My outlook is to convulse India with the Cooperative Movement
or rather with cooperation to make it, broadly speaking, the basic activity of India, in
every village as well as elsewhere; and finally, indeed, to make the cooperative approach the
common thinking of India....Therefore, the whole future of India really depends on the
success of this approach of ours to these vast numbers, hundreds of millions of people".
28. Why this kind of attention, belief and expectations on cooperation? Is it because, it is more
than 100 years old? Or is it because of the innate features that go to define a cooperative? Or
is it because of the socio-economic Utopia of tranquility, mutual understanding, bonding and
support and thereby growth that it promises for its members? Let us explore more.
Some historical perspectives
29. Cooperatives came on the scene in India, in a big way, around the turn of 19th century into
20th century. In the first 50 years of its history, it is reported to have reached as high a number
of more than two lakh cooperatives registered by mid 20th century. They had permeated
across all spectrums of economic activity chain. Be it credit, mortgage, production, marketing,
storage, sales, distribution, consumption, wholesale, retail, services, advisory, research, etc.
etc. - you name it, the cooperatives were everywhere. Be it agriculture, allied services, rural
industries, manufacturing - small, medium and large, services, you name any segment of
economic activity, they were there. Such a wide swathe of the presence of cooperatives could
not have happened without the magnitude and depth of the contribution of cooperatives. Or
was it so? Or was it because of its status as socio-political unit and its grand belief of rendering
marvelous Utopia? Let us probe a bit further.
30. We are from the financial sector and hence most of my comments will be with reference to
the financial sector, more specifically to the banking sector. Credit cooperatives were the first
to come within regulation. The proposal for agricultural banks was first mooted as long back
as in 1858. Several Committees had been recommending constitution of Agricultural banks. In
1901 the Famine Commission recommended the establishment of Rural Agricultural Banks
through the establishment of Mutual Credit Associations, and such steps as were taken by the
Government of North Western provinces and Oudh. The underlying idea of a number of
persons combining together was the voluntary creation of a new and valuable security. A
strong association competent to offer guarantees and advantages of lending to groups instead
of individuals were major advantages. The Commission also suggested the principles
underlying agricultural banks and land banks. Based on the recommendations of the Edward
Law Committee, the Cooperative Credit Societies Act was passed in 1904. As its name
suggests, the Cooperative Credit Societies Act was restricted to credit cooperatives. It was
only subsequently, a more comprehensive legislation called the Cooperative Societies Act was
enacted. This Act, inter alia, provided for the creation of the post of registrar of cooperative
societies and registration of cooperative societies for various purposes and their audit.
31. "The underlying idea of all Mutual Credit Associations, such as we recommend, is that a
number of persons, by combining together, create a new and valuable security, which none of
them previously possessed as individuals. Co-operation substitutes for isolated and helpless
agricultural units a strong association competent to offer guarantees and capable of inspiring
confidence. The advantages of lending to groups instead of to individuals need no
demonstration. It is simpler for a creditor to deal with a group of fifty or a hundred associated
cultivators than with the same number singly; it is simpler for him to obtain repayment from the
group than from each of the members composing it; it is simpler for the group to make its own
arrangements with each member than for the lender to try to do so".
32. What I just now read is from the Report of the Famine Commission 1901. Doesn't ring
several bells? Our modern day Self Help Groups (SHG), Joint Liability Groups (JLG), Micro
Finance Institutions (MFI) were all in the thought process some full hundred years before.
Perhaps, they were the ideas well ahead of their times.
Cooperatives in the first half of 20th century
33. The first half of the 20th century saw phenomenal growth of cooperatives in general and
the number of credit cooperatives in particular had reached more than two lakh. But what was
their contribution? The All India Rural Credit Survey, in their Report in 1954, brought forth the
stark reality that cooperatives, despite all the widespread presence in villages, and the
attention and encouragement received, did achieve pretty little. They just contributed to 3.1%
of the credit needs of the villagers, as can be seen from Table 1 below:
34. This led them to conclude, with the famous saying, "Cooperation has failed; but it must
succeed".
Cooperatives in second half of 20th century
35. The next half century received quite a lot of rhetoric. I had quoted them before viz., about
making the cooperative approach the common thinking of India, dependence of the whole
future of India on the success of cooperative movement, building cooperative movement being
the central aim of National Policy as a part of planned development, cooperatives to be the
principal basis of organising economic activity, etc.
36. What has been the effect? Of course, there was impact. Cooperatives did deliver. As can
be seen from Table 1, their contribution to rural credit increased gradually from the 3.1% in
1951 to an impressive 27.3% in 2002. And, as I mentioned in Part I, today, the short term
cooperative credit structure has 32 state cooperative banks and 371 district central cooperative
banks operating through 14907 branches and there were 92,996 Primary Agricultural Credit
Societies (PACS) as on March 31, 2014 at the grass root level. The combined balance sheet,
as on March 31, 2015, of all state cooperative banks stood at ₹ 1.98 lakh crore and that of the
district central cooperative banks at ₹ 4.06 lakh crore. Their Gross NPA stood at 4.8% and
9.1% respectively as on March 31, 2015. Their combined Net Profits were ₹ 1,005 crore and
₹ 793 crore respectively.
37. Are we satisfied with this? Of course not. Why? First of all, these numbers hide wide
variation among the 32 StCBs and the 371 DCCBs, whether in terms of financial strength,
profitability, efficiency or asset quality. Secondly, there are variations among regions as well,
be it in terms of the number, growth, strength, performance and asset quality. Thirdly, as on
March 31, 2015, there were as many as 13 StCBs and 163 DCCBs with Capital to Risk Assets
Ratio (CRAR) below the prescribed 9%. Their governance position has added to the worry.
Cooperatives, which are to be fundamentally socio-economic entities, are being operated as
socio-political entities.
Opportunities lost
38. These weaknesses of the cooperatives have caused certain serious opportunities slip by
the cooperative system. What do I mean by this? Please recall the recommendations of the
Famine Commission 1901 which I quoted earlier. They had recommended that micro finance,
self-help groups, joint liability groups, etc. as a part and parcel of cooperative banks. Where
are they today? Not with the cooperatives. They are with the Micro Finance Institutions (MFI).
We are trying to bring them within the commercial banking segment.
39. Rightfully, the MF, SHG, JLG etc. concepts should have been gainfully employed by the
cooperatives. Just visualise - if only we had leveraged the 95000 physical infrastructure of the
primary agricultural cooperative societies, with the financial backing of the DCCBs and StCBs!
Will we be still talking about how to reduce financial exclusion? Could we have not shown the
world how to achieve financial inclusion?
40. We have to introspect about why are we discussing about organising SHGs, Village level
SHG federations, district level SHG federation and state level SHG federations, when a time
tested PACS-DCCB-StCB model, not just model, a functioning infrastructure is available.
Questions for introspection
41. In my opinion, the reasons are the perceptions about the cooperatives as being financially
weak, being a socio-political structure and being reluctant to change. Added to these
perceptions are the inabilities and indifference to capture the imagination and acceptance of
the minds of the Gen-Next.
42. I would urge, you all, the veterans of the cooperative movement and the other stakeholders
on the subject, to seriously reflect on the following questions, in order to re-position rural
cooperatives to sub-serve, shall I say, the original function for which it was thought of viz., the
micro finance:
a. How to re-position Cooperatives as Socio-Economic entities?
b. How to adopt SHG movement within cooperative movement?
c. How to leverage the physical infrastructure available in PACS?
d. How to sub-serve financial inclusion by becoming a Business Correspondent (BC) for
banks?
e. How to capture the minds of Gen-Next?
43. It is in your hands whether we should say "Cooperation has failed".