COMPARATIVE STUDY OF COMMERCIAL BANKS - January 29th, 2007

COMPARATIVE STUDY OF COMMERCIAL BANKS

AND CO-OPERATIVE BANKS

Introduction

The robust macroeconomic environment continued to underpin the financial performance of Indian banks
during 2004-05, with major bank groups successfully weathering the impact of an upturn in interest
cycle. The demand for credit was broad-based during 2004-05 with agriculture and industry joining the
housing and retail sectors to drive up the demand for credit. A sharp increase in net interest income
mitigated to a large extent the impact of a sharp decline in non-interest income mainly on account of
decline in trading profits. Banks continued to earn sizeable profits albeit somewhat lower than last year.
Asset quality of scheduled commercial banks improved further during 2004-05. Capital base of banks
kept pace with the sharp increase in risk-weighted assets.
ORIGIN AND EVOLUTION OF INDIAN BANKING
Opinions differ as to the origin of the work "Banking". The word "Bank" is said to be of Germanic origin,
cognate with the French word "Banque" and the Italian word "Banca", both meaning "bench". It is
surmised that the word would have drawn its meaning from the practice of the Jewish money-changers
of Lombardy, a district in North Italy, who in the middle ages used to do their business sitting on a
bench in the market place. Again, the etymological origin of the word gains further relevance from the
derivation of the word "Bankrupt" from the French word "Banque route" and the Italian word "Banca-
rotta" meaning "Broken bench" due probably to the then prevalent practice of breaking the bench of the
money-changer, when he failed.
Banking is different from money-lending but two terms have in practice been taken to convey the same
meaning. Banking has two important functions to perform, one of accepting deposits and other of
lending monies and/or investment of funds. It follows from the above that the rates of interest allowed
on deposits and charged on advances must be known and reasonable. The money-lender advances
money out of his own private wealth, hardly accepts deposits and usually charges high rates of interest.
More often, the rates of interest relate to the needs of the borrower. Money-lending was practised in all
countries including India, much earlier than the recent type of Banking came on scene.
DEFINATION AS PER BANKING REGULATION ACT 1949
A Bank borrow by accepting deposits of money from the public, the deposits are to be repaid on demand
or after fixed period. They can be withdrawn by the depositors by means of cheque, draft, order or any
other way. A Bank accepts deposits (i.e. borrows) for the purposes of lending mainly to traders,
industrialists and manufacturers and the like as also, for the purposes of investing in government
securities to fulfill statutory obligations. Thus, Banking Regulations Act, 1949 defines Banking as
accepting for the purposes of lending or investment of deposits of money from the public repayable on
demand or otherwise and withdrawable by cheque, draft , order or otherwise.
By and large, this definition can be satisfactory. As per the provision of the Banking Regulation Act,
every company willing to do banking business must obtain license from the Reserve Bank for carrying on
banking business in India. Besides, all companies carrying on banking business must use the word bank,
banker or banking as per of their names. It may be noted that money-lenders are not bankers.
Basic Concepts of Banking
Banking is different from money lending, but the two terms, usually carry the same significance to the
general public. The money lender, advances money out of his own private wealth, hardly accepts
deposits from general public and usually charges high rate of interest. More often, the rates of interest
relate to the needs of the borrower and at times the rates may be exorbitant. On the other hand the
banking is defined in section 5(b) of the Banking Regulation Act, 1949, as the acceptance of deposits of
money from the public for the purpose of lending or investment. Such deposits of money from the public
are used for the purpose of lending or investment. Such deposits may be repayable on demand or
otherwise and with drawable by cheque, draft order or otherwise. Thus a bank must perform two basic
and essential functions:
(i) acceptance of deposits and
(ii) lending or investment of such deposits.
The deposits may be repayable on demand or a for a period of time as agreed by the banker and the
Customer. In terms of the definition, the banker can accept deposits of money and Not Anything Further
accepting deposits form frolic unapplied that a banker accepts deposits form anyone who offers money
for such purpose Accepting of deposits for lending and investments have been the original functions of
banking but gradually there functions were extended and others were added from time to time and
presently banks perform a number of economic activities which may affect all walks of economic life.

Significance of Banks

The importance of a bank to modern economy, so as to enable them to develop, can be stated as
follow:

(i) The banks collect the savings of those people who can save and allocate them to those who need it.
These savings would have remained idle due to ignorance of the people and due to the fact that they
were in scattered and oddly small quantities. But banks collect them and divide them in the portions as
required by the different investors.

(ii) Banks preserve the financial resources of the country and it is expected of them that they allocate
them appropriately in the suitable and desirable manner.

(iii) They make available the means for sending funds from one place to another and do this in cheap,
safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and uncrossed, which is the
easiest and most convenient, Besides they also care for making such payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious possessions intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for financing the
developmental process, is governed by banks.

(vii) It makes the monetary system elastic. Such elasticity is greatly desired in the present economy,
where the phase of economy goes on changing and with such changes, demand for money is required. It
is quite proper and convenient for the government and R.B.I. to change its currency and credit policy
frequently, This is done by RBI, by changing the supply of money with the changing the supply of money
with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and lending, the banks have
now spread their wings far and wide into many allied and even unrelated activities.

Banking as an Ancestral Service

For the history of modern banking in India, a reference to the English Agency Houses in the days of East
India Company is necessary. Those agency houses, with no capital of their own and depending entirely
on deposits, were in fact trading firms carrying on banking as a part of their business and vanished form
the scene in the crises of 1829-32. In the first half of the 19th century, the East India company
established 3 banks The Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in
1843.
The Bank of Bengal was given Charter with a capital of Rs.50 Lakhs. This bank was given powers in
different years as to:

(i) Rate of interest was limited to 12%.

(iii) Power to issue currency notes was given in 1824.

(iii) Power to open new branches given in 1839.

(iv) Power to deal in inland exchange was given in 1839.


These 3 banks were also known as Presidency Banks. The currency notes issued by presidency banks
were not popular, those were replaced by Government Paper Money in 1862. In 1860, the principle of
limited liability was introduced in India in Joint Stock banks, to avoid mushroom growth of banks, which
failed mostly due to speculation, mismanagement and fraud. During the .crises in between 1862-75,
numerous banks failed, including

Bank of Bombay. The Bank of Bombay was later restarted in the same year; with the same name. Due
to failure of banks, during 1862-75 only only one bank was established in 1865 i.e. the Allahabad Bank
Ltd. Indian banks were restarted functioning in the year 1894, when the Indian mints were closed to the
free coinage of silver. The only important bank registered after the closure of the mints was the Punjab
National Bank Ltd. with its head office at Lahore in 1895.

In the Swadeshi movement, number of banks were opened by Indians during 1906-13. Those new
banks were:
Peoples Bank of India Ltd.
Bank of India Ltd.
Central Bank of India Ltd.
Indian Bank Ltd.
Bank of Baroda Ltd.

This boom of opening new banks was overturned by the most severe crises of 1913-17. Therefore the
period of amalgamation started. All the three presidency banks were amalgamated on 27th. Jan. 1921
and the Imperial Bank of India was established This bank was allowed to hold Government balances and
to manage the public debt and clearing houses till the establishment of the RBI in 1935. With the
passing of the State Bank of India Act, 1955, the undertaking of Imperial bank of India, was taken over
by the newly constituted SBI. It had the largest number branches, which gave it the privilege of
conversion into Government business institution of the country
Pursuant to the provisions of the State Bank of India (Subsidiary Bank) Act, 1959,


The following banks were constituted as subsidiary of SBI :

State Bank of Bikaner & Jaipur
State Bank of Indore
State Bank of Travancore
State Bank of Hydrabad
State Bank of Patiala
State Bank of Saurashtra
State Bank of Mysore

In 1960, the Palai Central Bank in Kerala failed and that gave suspicion to the depositors. As such
Deposit Insurance of Credit Guarantee Corporation (DIGGC) was established to guarantee repayment of
deposits up to Rs. 10,000 to each depositor in case of failure of banks. On 19th July, 1969, 14 Joint
Stock banks were nationalized which were having minimum depositors of Rs.50 crores and above. This
brought into its fold 50% of banks' operations Again in April, 1980, 6 more banks were brought under
area of nationalised banks, to total business of 95% in its fold. These 6 banks were giving tough
competition to nationalized bankers and were indulged into irregularities causing concern to depositors.
Business Position of scheduled banks as on 29/4/05

Deposits Rs. 17,81,580 Crore

Credits Rs. 11,27,433 Crore

Bank Rate 6% (even in Oct 2005)

Prime Lending Rate (PLR) in between 10.5% -11.50%

CRR 4.50%

SLR 25%

Presently, as a part of deregulation many new generation private sector banks have been permitted viz.
ICICI 1 (IDBI) HDFC and the nationalized banks are being privatized to the extent of 49%.

INTRODUCTION OF COMMERCIAL BANK

Commercial banks are the oldest, biggest, and fastest growing intermediaries in India. they are also the
most important depositories of public saving and the most important disburses of finance. commercial
banking in India is a unique systems, the like of which exist nowhere in the world. the truth of this
statement becomes clear as one studies the philosophy and approaches that have contributed to the
evolution of the banking policy, programmes and operation in India.

The banking systems in India works under the constraints that go with social control and public
ownership. the public ownership of banks has been achieved in three stages:1955,July1969, and April
1980. Not only the private sector and foreign banks are required to meet targets in respect of sectoral
development of credit, regional distribution of branches, and regional credit- deposits ratios. the
operations of banks have been determined by Lead Bank Scheme, Differential Rate of Interest Scheme,
Credit Authorisation Scheme, inventory norms and lending systems prescribed by the authorities, the
formulation of the credit plans, and Service Area Approach.

Balancing Profitability with Liquidity Management

Commercial banks ordinarily are simple business or commercial concerns which provide various types of
financial services to 'customers in return for payments in one form or another, such as interest,
discounts, fees, commission, and so on. Their objective is to make profits. However; what distinguishes
them from other business concerns (financial as well as manufacturing) is the degree to which they have
to balance the principle of profit maximization with certain other principles.

In India especially, banks are required to mod their performance in profit-making if that clashes with
their obligations in such areas as 'social welfare, social justice, and promotion of regional balance in
development. In any case, compared to other business concerns, banks in general have to pay much
more attention to balancing profitability with liquidity/It is true that all business concerns face liquidity
constraint in various areas of their decision-making and, therefore, they have to devote considerable
attention to liquidity management. But with banks, the need for maintenance of liquidity is much greater
because of the nature of their liabilities. Banks deal in other people's money, a substantial part of which
is repayable on demand.- That is why for banks, unlike other business concerns, liquidity management is
as important as profitability management
This is reflected in the management and control of reserves of commercial banks.


MANAGEMENT OF RESERVES

The banks are expected to hold voluntarily a part of their deposits in the form of ready cash which is
known as cash reserves; and the ratio of cash reserves to deposits is known as the (cash) reserve ratio.
As banks are likely to be tempted not to hold adequate amounts of reserves if they are left to guide
themselves on this point, and since the temptation may have extremely destabilising effect on the
economy in general, the Central Bank in every country is empowered to prescribe the reserve ratio that
all banks must maintain. The Central Bank also undertakes, as the lender of last resort, to supply
reserves to banks in times of genuine difficulties. It should be clear that the function of the legal reserve
requirements is two-fold:
(a) to make deposits safe and liquid, and
(b) to enable the Central Bank to control the amount of checking deposits or
bank money which the banks can create.

Since the banks are required to maintain a fraction of their deposit liabilities as reserves, the modern
banking system is also known as the fractional reserve banking.

CREATION OF CREDIT

Another distinguishing feature of banks is that while they can create as well as transfer money (funds),
other financial institutions can only transfer funds. In other words, unlike other financial institutions,
banks are not merely financial intermediaries. This aspect of bank operations has been variously
expressed. Banks are said to create deposits or credit or money, or it can be said that every loan given
by banks creates a deposit. This has given rise to the important concept of deposit multiplier or credit
multiplier or money multiplier.


The import of this is that banks add to the money supply in the economy, and since money supply is an
important determinant of prices, nominal national income, and other macro-economic variables, banks
become responsible in a major way for changes in economic activity. Further, as indicated in Chapter
One, since banks can create credit, they can encourage investment for some time without prior increase
in saving.


BASIS AND PROCESS OF CREDIT CREATION

Creation of money by banks. In modern economies, almost all exchanges are effected by money. Money
is said to be a medium of exchange, a store of value, a unit of account. There is much controversy as to
what, in practice in a given year, is the measure of supply of money in any economy. We do not need to
go into that controversy here. Suffice it to say that everyone agrees that currency and demand deposits
with banks are definitely to be included in any measure of money supply. Thus, apart from the currency
issued by the government and the Central Bank, the demand or current or checkable deposits with
banks are accepted by the public as money. Therefore, since the loan operations of banks lead to the
creation of checkable deposits, they add to the supply of money in the economy. To recapitulate, the
money-creating power of banks stems from the fact that modern banking is a fractional reserve banking,
and that certain liabilities of banks are accepted (used) by the public as money.

Credit Ratio
Non-food credit grew at a high rate during 2004-05.Normally, the rate of credit is higher than the rate of
growth of deposits due to the base effect- the outstanding deposits is much higher than the outstanding
credit. For instance, while the outstanding deposits at end-March 2005 were Rs,18,19,900 crore, the
outstanding credit was Rs, 11,04,913 crore. Also, in any given year, the accretion to credit has generally
remained lower than the accretion to deposits. During 2004-05, however, incremental credit and
deposits were more or less of the same magnitude, while incremental investments in relation to deposits
during the year were much lower than in the previous year. This resulted in some unusual behaviour of
the credit-deposit (C-D) ratio and investment-deposit (I-D) ratio Among bank-groups, the new private
sector banks had the highest C-D ratio, followed by foreign banks, old private sector and public sector
banks
Bank Credit

Volume of Credit Commercial banks are a major source of finance to industry and commerce.
Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19,124 crore in 1978,
to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90, Rs 2,82,702 crore in 1997, and to Rs
6,09,053 crore in 2002. Banks have introduced many innovative schemes for the disbursement of credit.
Among such schemes are village adoption, agricultural development branches and equity fund for small
units. Recently, most of the banks have introduced attractive educational loan schemes for pursuing
studies at home or abroad. They have moved in the direction of bridging certain defects or gaps in their
policies, such as giving too much credit to large scale industrial units and commerce, and giving too little
credit to agriculture, small industries, and so on.

Types of Credit Banks in India provide mainly short-term credit for financing working capital needs
although, as will be seen subsequently, their term loans have increased over the years. The various
types of advances provided by them are:

(a) loans, (b) cash credit, (c) overdrafts (0D), (d) demand loans, (e) purchase and discounting of
commercial bills, and (h) installment or hire-purchase credit.

Cash Credit and Overdraft

Cash credits and overdrafts are said to be running accounts, from which the borrower can withdraw
funds as and when needed up to the credit limit sanctioned by his banker. Usually, while cash credit is
given against the security of commodity stocks, overdrafts are allowed on personal or joint current
accounts. Interest is charged on the outstanding amount borrowed and not on the credit limit
sanctioned. In order to curb the misuse of this facility, banks used to levy a commitment charge on
unutilised portion of the credit limit sanctioned. However, this practice has now been discontinued.
Although these advances are mostly secured and of a self-liquidating character, banks are known to
provide them on 'clean basis' in certain cases. Technically, these advances are repayable on demand,
and are of a short-term nature. Actually, the widespread prevalent practice is to roll over these
advances from time to time.
As a result, cash credits actually become long-term advances in many cases. Although, technically these
advances are highly liquid, it has been pointed out that it is a myth to regard them so because even the
most profitable borrower would hardly be in a position to repay them on demand.

Purchasing and Discounting of Bills

Purchasing and discounting of bills-internal and foreign-is another method of advancing credit by banks.
It is adopted mainly to finance trade transactions and movement of goods. Bill finance is either
repayable on demand or after a period not exceeding 90 days. It has been observed that bills traded in
India are often fake bills created out of book debts of industrial and business units. Bill financing has
certain favourable features. Banks can raise funds in the secondary markets by rediscounting bills with
the RBI and financial institutions like IDBI and Discount and Finance House of India (DFHI).

They can also earn some money if the rediscount rate is lower than the discount rate. Further, the
buying and selling of bills expand the banks' business more quickly by the faster recycling of funds.
Among these different systems of bank credit, cash credit/overdraft system remains the most important
one. The shift away from it has been slow. Of the total bank credits, the outstanding cash credit and
overdrafts accounted for about 66 per cent in 1935, 69 per cent in 1949, 57 per cent in 1973, 52 per
cent in 1976, 45 per cent in 1986 and 48 per cent in 1994, and 36 per cent in 2002.

MONETARY AND CREDIT POLICY

The policy Statements of the Reserve Bank provide a frame work for the monetary, structural and
prudential measures that are initiated from time to time consistent with the overall objectives of growth,
price stability and financial stability.



























































SPECIAL ROLE OF BANKS

As said earlier, commercial banks have a special role in India. In fact, many financial experts even
abroad have, of late, been emphasising the special place that banks hold in their countries also. The
"privileged role" of the banks is the result of their unique features. For example, the liabilities of banks
are money, and, therefore, they are an important part of the payments mechanism of any country; they
also have access to the discount window of the RBI, call money market (as both borrowers and lenders),
and the deposit insurance. It would be difficult to eliminate such distinctive features of banks in the near
future. There is also an important question as to whether they should be wiped out, and, if it is done,
whether it would not have adverse consequences on the financial system.

For a financial system to mobilise and allocate savings of the country successfully and productively, and
to facilitate day-to-day transactions, there must be a class of financial institutions that the public views
as safe and convenient outlets for its savings. In virtually all countries, the single dominant class of
institutions that has emerged to play this crucial role as both the repository of a large fraction of the
society's liquid savings and the entity through which payments are made is the commercial banks. The
structure and working of the banking system are integral to a country's financial stability and economic
growth.

Bank lending is specially important for companies. The theory of financial contracting under asymmetric
information holds that information-intensive and information-problematic firms submit to the tight and
detailed loan covenants so as to reduce agency costs. They delegate the tasks of monitoring and
renegotiating debt contracts to financial intermediaries because these tasks are costly and the
intermediaries are in a better position to reduce the costs. Intermediaries are more efficient in
monitoring debt contracts because they are unlikely to free-ride on information-production by others as
they have a larger stake, and they can renegotiate contracts more cheaply than the dispersed debenture
holders. The public bond covenants tend to set their conditions on events that are relatively easy to
verify, viz., a major change in capital structure or a downgrading of credit rating. In contrast, the
intermediary loan contracts are conditioned by performance measures such as working capital and net
worth which are less easily controlled by the managers.
Further, the violation of a financial covenant often triggers financial distress. When this happens, banks
can restructure the terms of contracts, viz., wave covenants, extend maturity, extend more loans, and
require more collateral. Such a flexibility reduces the cost of financial distress. Information asymmetries
and free-riding by bond-holders, on the other hand, may force the financially distressed firms into
inefficient spending cutbacks, and even bankruptcy. It has been found in the US that the firms' stock
prices rise after an announcement that they have received bank loans, while they fall in response to
announcement of a public bond offering.

Similarly, there are reasons why loans from even other financial institutions may not be a perfect
substitute for bank loans. The economies of scope between deposit taking and lending give banks an
information advantage over finance companies and other financial institutions. The deposit history of
firms may inform banks about the credit risk involved in lending to these firms. Information on deposits
activity may also make it easier for banks to monitor working capital covenants. The phenomenon of
"compensating balances" can mostly exist only in the case of banks, and not other institutions. The
lending and deposit-taking activities of banks are complementary, and, go to build up banking
relationship which increases the availability of funds to the firms, which, in turn, enables them to
partially avoid taking more expensive trade credit. Personal relationships are far less important in
borrowing from other financial institutions than from banks. Moreover, significant differences in collateral
requirements exist between banks and other financial institutions. All such differences effectively
segment the market for business lending, and make bank loans highly unsubstitutable.

The Indian banking system has a very wide reach and deep presence in metropolises, cities, semi-urban
areas, and the remotest corners of the rural areas with its vast number of branches. It is one of the
largest banking systems in the world. It has been rightly claimed in certain circles that the diversification
and development of the Indian economy are in no small measure due to the active role banks have
played in financing economic activities of different sectors They have been playing an important role in
developing mutual funds, merchant banks, Primary Dealers, asset management companies, and debt
markets. They operate as issuers, investors, underwriters, guarantors in financial-markets. By their
participation, banks influence the growth and liquidity of debt markets.
They would help in securitisation of debt market. They hold about 60 per cent of debt stock of
government securities, and they account for more than 50 per cent of the issuance of bonds through
public issues and private placements.

Because of such considerations, the important position which banks have historically come to occupy in
India should not be unwittingly destroyed or undermine in the name of promoting equity culture.
Otherwise, monetary authorities would find it more and more difficult to achieve the goal of stability of
the financial system and of the prices. The banking reforms, therefore, must aim not only at profitable
banking but also at a viable, sound, safe, and social banking.




























GROWTH OF COMMERCIAL BANKS IN INDIA
INDIAN BANKING SYSTEM

RESERVE BANK OF INDIA

















































AGGREGATE DEPOSITS OF SCHEDULED COMMERCIAL BANKS

Aggregate deposits of SCBs increased at a lower rate during 2004-05 as compared with the previous
year during 2004-05 on account of slowdown in demand deposits and savings deposits. Decline in
demand deposits was due mainly to the base effect as demand deposits had witnessed an unusually
high growth last year. Reversing the trend of the previous year, bank credit registered a robust growth
during the year. Although banks investment in government securities during the year 2004-05 slowed
down significantly, the banking sector at end March 2005 held about 38.4% of its net demand and time
liabilities in SLR securities, much in excess of the statutory minimum requirement of 25%. The non SLR
investments of SCBs continued to decline during 2004-05, reflecting the portfolio adjustments by banks
subsequent to guidelines on non-SLR securities issued by the Reserve Bank in November and December
2003

PRUDENTIAL REGULATION

A key element of the ongoing financial sector reforms has been the strengthening of the prudential
framework by developing sound risk management systems and encouraging transparency and
accountability. With a paradigm shift from micro-regulations to macro-management, prudential norms
have assumed an added significance. The focus of prudential regulation in recent years has been on
ownership and governance of Banks Basel II.

OWNERSHIP AND GOVERNANCE OF BANKS

Banks are special for several reasons. They accept and deploy large amount of collateralized public funds
and leverage such funds through credit creation. Banks also administer the payment mechanism.
Accordingly, ownership and governance of banks assume special significance. Legal prescription relating
to ownership and governance laid down in the Banking Regulation Act, 1949 have, therefore, been
supplemented by regulatory prescriptions issued by the Reserve Bank from time to time.



The existing legal framework and significant current practices cover the following aspects:

i) composition of Boards of Directors:
ii) guidelines for acknowledgement of transfer/allotment of shares in private sector banks issued as on
February 3, 2004:
iii) guidelines and corporate governance
iv) foreign Investment in the banking sector, which is governed by he Press Note of March 5, 2004
issued by the Ministry of Commerce and Industry, Government of India.

The Reserve Bank in consultation with government of India, laid down a comprehensive policy frame
work on February 28, 2005.

The broad principles underlying the framework ensure that

i) ultimate ownership and control is well diversified

ii) important shareholders are fit and proper

iii) directors and CEO are fit and proper and observe sound corporate governance principles.

iv) Private sector banks maintain minimum capital (initially Rs 200 crore, with a commitment to increase
to Rs 300 crore within three years )/net worth (Rs. 300 crore at all times) for optimal operations and for
systematic stability:

v) Policy and process are transparent and fair.

IMPLEMENTATION OF THE NEW CAPITAL ADEQUACY FRAMEWORK (BASEL II NORMS)

Given the financial innovations and growing complexity of financial transactions, the Basel Committee on
Banking Supervision released the New Capital Adequacy Framework on June 26, 2004 which is based on
three pillars of minimum capital requirements, supervisory review and market discipline. The revised
framework has been designed to provide options to banks and banking systems, for determining the
capital requirements for credit risk, market risk and operational risk and enables banks/supervisors to
select approaches that are most appropriate for their operations and financial markets. The revised
framework is expected to promote adoption of stronger risk management practices in banks. Under
Basel II, banks capital requirements will be more closely aligned with the underlying risks in
banksbalance sheets. One of the important features of the revised framework is the emphasis on
operational risk.

NPA Management by Banks

The Reserve Bank and the Central Government have initiated several institutional measures to contain
the levels of NPAs. These include Debt Recovery Tribunals (DRTs), Lok Adalats (people's courts), Asset
Reconstruction Companies (ARCs) and Corporate Debt Restructuring (CDR) mechanism. Settlement
Advisory Committees have also been formed at regional and head office levels of commercial banks.
Furthermore, banks can also issue notices under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 for enforcement of security interest
without intervention of courts. Thus. banks have a menu of options to resolve their NPA problem. With a
view to providing an additional option and developing a healthy secondary market for NPAs, guidelines
on sale/purchase of nonperforming assets were issued in July 2005 where securitisation companies and
reconstruction companies are not involved.

The guidelines include several specific provisions:

i) A nonperforming asset in the books of a bank shall be eligible for sale to other banks only if it has
remained a non-performing asset for at least two years in the books of the selling bank and such selling
should be only on a cash basis;

ii) A nonperforming financial asset should be held by the purchasing bank in its books at least for a
period of 15 months before it is sold to other banks;

iii) A bank may purchase/sell non-performing financial assets from/to other banks only on a 'without
recourse' basis;

iv) Banks should ensure that subsequent to sale of the non-performing financial assets to other banks,
they do not have any involvement with reference to assets sold and do not assume operational, legal or
any other type of risks relating to the financial assets sold:

v) A non-assume operational, legal or any other type of risks relating to the financial assets sold;
performing financial asset may be classified as 'standard' in the books of the purchasing bank for a
period of 90 days from the date of purchase. Thereafter. the asset classification status of the account
shall be determined by the record of recovery in the books of the purchasing bank with reference to cash
flows estimated while purchasing the asset. The asset shall attract provisioning requirement appropriate
to its assets classification status in the books of the purchasing bank;

vi) Any recovery in respect of a non- performing asset purchased from other banks should first be
adjusted against its acquisition cost. Recoveries in excess of the acquisition cost can be recognized as
profit;

vii) The asset classification status of an existing exposure to the same obligor in the books of the
purchasing bank will continue to be governed by the record of recovery of that exposure and hence may
be different;
viii) For the purpose of capital adequacy, banks should assign 100 per cent Risk weights to the non-
performing financial assets purchased from other banks;

ix) In the case the non- performing asset purchased is an investment, then it would attract capital
charge for market risk also; and

x) The purchasing bank should ensure compliance with the prudential credit exposure ceilings (both
single and group) after reckoning the exposures to the obligors arising on account of the purchase.




DEBT RECOVERY TRIBUNALS

Debt Recovery Tribunals (DRTs) were set up under the Recovery of Debts Due to Bank and financial
Institutions Act, 1993 for expeditious adjudication and recovery of debts due to banks and financial
institutions.On the recommendation of the Reserve Bank, the Government of India set up a Working
Group in July 2004 to improve the functioning of DRTs. The Working Group is expected to examine
issues and recommend appropriate measures regarding:

(a) The need to extend the provisions of the Recovery of Debts Due to
Banks And Financial Institutions Act to cases for less than Rs.10 lakh;

(b) Redistribution of jurisdiction of the various DRTs;

(c) Modification in the existing strength of the DRTs/Debt Recovery
Appellate Tribunals (DRATs); and

(d) Legal and institutional provisions.

Progress in Implementation of Risk Based Supervision
Several initiatives have been taken for a gradual roll out of the risk based supervision (RBS) process
since the announcement made in the Monetary and Credit Policy of April 2000. There were two rounds of
pilot run of RBS covering 23 banks in public sector, private sector (old and new) and foreign banks
categories during 2003-2005. Evaluation of the findings of first pilot run revealed that the bank level
preparedness for RBS/Risk Based Internal Audit (RBIA) process was very slow. There were certain
overlaps under both the business and control risks. Several steps were, therefore, taken to streamline
the RBS process.
First, pending amendment to risk profile templates, changes were made in the structure of inspection
report to capture and report business risk and control risk in one place.
Second, a work book together with a sample of on-site inspection report was designed to help the
inspecting officers to undertake the RBS.
Third, natural resource group with officers from different departments of the Reserve Bank and the
Executive Director Chairperson is in existence to analyse risk models employed by banks in India.
Fourth internal group was formed to revisit the Profile Templates (RPTs).The revised RPTs,
methodology for risk assessment and also guidelines for arriving at the supervisory rating of the bank
were discussed in Conference of Regional Offices of the Reserve Bank held on July 22 and 23, 2005.

Monitoring of Frauds

With a view to reducing the incidence of frauds, the Reserve Bank advised banks in October 2002 to look
into the existing mechanism for vigilance management in their institutions and remove the loopholes, if
any, with regard to fixing of staff accountability and completion of staff side action in all fraud cases
within the prescribed time limit, which would act as a deterrent. Banks were also urged to bring to the
notice of the Special Committee of the Board constituted to monitor large value frauds and the actions
initiated in this regard.

A Technical Paper on Bank Frauds covering various aspects such as nature of frauds, present
arrangement for follow-up of frauds, international legal framework relating to frauds, possible further
measures with regard to legal and organisational perspectives was prepared and placed in the BFS
meeting held on April 8, 2004.
The Technical Paper recommended the constitution of a separate Cell to monitor frauds not only in
commercial banks but also in financial institutions, Local Area Banks, urban co-operative banks and non-
banking finance companies. As the proposal was accepted by the BFS, a separate Fraud Monitoring Cell
(FrMC) was constituted on June I, 2004 under the overall administrative control of the Department of
Banking Supervision. The FrMC is expected to adopt an integrated approach and pay focused attention
on the frauds reported by financial entities mentioned above.



A Master Circular dated October 18, 2002 on "Frauds - Classification and Reporting" was revised on
August 7, 2004 and was placed on Reserve Bank's website. The formats in the Master Circular have
been revised according to requirements of Fraud Reporting and Monitoring System (FRMS) package.

With a view to having integrated approach and ensure uniformity in reporting requirements for all the
institutions under the ambit of Fraud Monitoring Cell, the Master Circular was made applicable to FIs
local area banks (LABs) as well.

Modification in Format of Declaration Indebtedness from Statutory Auditors

Statutory auditors of banks were required to provide a declaration to banks in which are undertaking
audit to the effect that no Credit facility (including guaranteeing any facilities availed of by third party)
was availed of by the proprietor/any of the partners of the audit firm/ members of his/their families or
by the firm/ company in which he/they are partners/ or Director/s from any other bank/financial
institution.

Banks were also advised that while appointing their statutory central/branch auditors, they should obtain
a declaration from concerned audit firms duly signed by their main partner/proprietor to the effect that
credit facilities, if any, availed of from other banks/FIs by them/their partners/members of
family/company in which they are partners/ Directors or the credit facilities from such institutions
guaranteed by them on behalf of third parties had not turned non-performing in terms of the prudential
norms of the Reserve Bank.

The format of declaration of indebtedness to be obtained from the partners/proprietors of audit firms to
be appointed as statutory auditors of banks was modified in January 2005 to include that neither the
proprietor/main partner nor of the partners/members of their families or the firm/company in which they
are partners/directors has been declared as a willful defaulter by any bank/financial institution.

Payment and Settlement Systems

The payment and settlement systems are at the core of financial system infrastructure in a country. A
well-functioning payment and settlement system is crucial for the successful implementation of
monetary policy and maintaining the financial stability. Central banks have therefore, always maintained
a keen interest in the development of a payment and settlement system as part of their responsibilities
for monetary and financial stability .In India, the development of a safe, secure and sound payment and
settlement system has been the key policy objective. In this direction, the Reserve Bank, apart from
performing the regulatory and supervisory functions, has also been making efforts to promote
functionality and modernization of the payment and settlement systems on an on-going basis, In order
to provide focused attention to the payment and settlement systems, the Reserve Bank constituted the
Board for regulation and supervision of Payment and Settlement Systems (BPSS) as a Committee of its
Central Board.

The Reserve Bank of India (Board for regulation and supervision of Payment and Settlement Systems)
Regulations, 2005 were notified in the Gazette of India on February 18, 2005. The BPSS is headed by
the Governor of the Reserve Bank with the Deputy Governor in-charge of Payment and Settlement
Systems as the Vice-Chairman and the other Deputy Governors and two members of the Central Board
of the Reserve Bank as members. The Executive Directors in-Charge of the Department of Payments and
Settlement Systems (DPSS) and Financial Market Committee and Legal Adviser-in-Charge are
permanent invitees. The Board also has an external expert as a permanent invitee.

Functions and powers of the BPSS include formulating policies relating to the regulation and supervision
of all types of payment and settlement systems, setting standards for existing and future systems,
authorising the payment and settlement systems and determining criteria for membership. The National
Payments Council, which was set up in 1999, has been designated as a Technical Advisory Committee of
the BPSS. To assist the BPSS in performing its functions, a new department, the Department of
Payments and Settlement Systems (DPSS), was set up in Reserve Bank in March 2005.
The BPSS has met three times since constitution in March 2005.

The Board at its meetings, inter alia, has emphasised that

(i) Payment system services in India should taken to a level comparable with the best in world;

(ii) Appropriate legal infrastructure may be created as early as possible;

(iii) A plan drawn up to "leapfrog" from cash to electronic modes of payment, Wherever possible; cheque
clearing system would have to be made more efficient through cheque truncation system; and

(iv) Usage of the Real Time Gross Settlements (RTGS) System be increased both in terms of opening
additional branch outlets and more number of transactions being put through.

For modernising the payment and settlement systems in India, a three-pronged approach has been
adopted with due emphasis on consolidation, development and integration. The consolidation of the
existing payment systems involves the strengthening of computerized cheque clearing and expanding
the reach of Electro Clearing Services (ECS) and Electronic Fund Transfer (EFT).
.
Legal Reforms in the Banking Sector

An efficient financial system requires a regulatory framework with well-defined objectives, adequate and
clear legal framework and transparent supervisory procedure. This, in turn, requires comprehensive
legislations to enable the regulatory authorities to discharge their responsibilities effectively. The
Reserve Bank has, therefore, been making constant efforts to upgrade and strengthen the legal
framework in tune with the changing environment.
The Enforcement of Security Interest, Recovery Debts Laws (Amendment) Act, 2004 (Act NO.30 of
2004) has amended Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest 2002 (SARFAESI), the Recovery of Debts to Banks and Financial Institutions Act, 1993 and the
Companies Act, 1956. By this amendment Act, the SARFAESI Act has been amended, inter alia, to:

(i) Enable the borrower to make application before the Debt Recovery Tritbunal against the measures
taken by the creditor without depositing any portion of money due;

(ii) Provide that the Debt Recovery Tribunal shall dispose of the application as expeditiously as possible
within a period 60days from the date of application; and

(iii) Enable any person aggrieved by any order made by Debt Recovery Tribunal to file an appeal before
the Debt Recovery Appellate Tribunal after depositing with the Appellate Tribunal fifty percent of the
amount of debt due from him as claimed by the secured creditor or as determined by the Debt Recovery
Tribunal, whichever is less.

The Credit Information Companies (Regulation) Act, 2005 is aimed at providing for regulation of credit
information companies and to facilitate efficient distribution of credit. The Act will come into force after it
is notified by Government in the official Gazette. After the Act comes into force, no company can
commence or carry on the business of credit information without obtaining a certificate of registration
from the Reserve Bank.

The Act sets out procedures for obtaining certificate of registration, the requirements of minimum capital
and management of credit information companies. The Act also empowers the Reserve Bank to
determine policy in relation to functioning of credit information companies and to give directions to such
companies, credit institutions and specified users.

The Act also lays down the functions of credit information companies, powers and duties of auditors,
obtaining of membership by credit institutions in credit information companies, information privacy
principles, alterations of credit information files and credit reports, regulation of unauthorized access to
credit information, offences and penalties, obligations as to fidelity and secrecy. Other salient features of
the Act include settlement of disputes between credit institutions and credit information companies or
between credit institutions and their borrowers. The Act also provides for amendment of certain
enactments so as to permit disclosure of credit information

LIABILITIES OF BANKS

Deposits

Commercial banks deal in other people's money which they receive as deposits of various types. These
deposits serve as a means of payment and as a medium of saving, and are a very important variable in
the national economy. Deposits constitute the major source of funds for banks, and in 1996 they were
about 92 per cent of total liabilities of all scheduled commercial banks.

Types of Deposit Indian banks accept two main types of deposits-demand deposits and term deposits.

Demand Deposits: Demand deposits can be sub-divided into two categories-current and savings.

Current Deposits

Current deposits are chequable accounts and there are no restrictions on the amount or the number of
withdrawals from these accounts. It is possible to obtain a clean or secured overdraft on current
account. Banks also extend to the account-holders certain useful services such as free collection of out-
station cheques and issue of demand drafts. At present banks generally do not pay interest on current
deposits. All current deposits are included in order to estimate the volume of money supply in a given
period of time.
Savings deposits earn interest; the rate of this interest was 5 per cent in 1990 and is 4.5 per cent at
present. Certain categories of banks are however allowed to pay interest (both on saving and fixed
deposits) at rates higher than the general level fixed for them. For example, with effect from July 1,
1977, banks with demand and time liabilities of less than Rs 25 crore were allowed to pay interest rate
higher by 0.25 to 0.50 per cent per annum on savings deposits and term deposits up to and inclusive of
five years. Although cheques can be drawn on savings accounts, the number of withdrawals and the
maximum amount that might, at any time, be withdrawn from an account without previous notice are
restricted. The practice with regard to the division of savings deposits into demand and time liabilities
has undergone a change.

Earlier, in respect of each account, the maximum amount withdrawable without prior notice (or where
the balance in the account was not more than this maximum, the whole of the balance) was regarded as
a demand liability; and the excess over the maximum amount was treated as a time liability.

With effect from August 16, the average of the monthly minimum balances in a savings account on
which interest is being credited is to be regarded as a time liability and the excess over the said amount,
as a demand liability. In other words, before August 1978, demand deposits included that portion of
savings deposits which was freely withdrawable, whereas after the new regulation, what is included is
the portion of savings deposits that is freely drawn upon by the depositors, while the portion which
remains with the banks earning interest is taken as time deposits. The new rule has resulted in an
increase in time deposits, and a decrease in demand deposits and money supply.

Call Deposit

Call deposits is the third sub-category of demand deposits. They are accepted from fellow bankers and
are repayable on demand. These deposits carry an interest charge. They form a negligible part of total
bank liabilities.
Term Deposits Time deposits are also known as fixed deposits or term deposits and they are a genuine
saving medium. They have different maturity periods on which depends the rate of interest.

BANKING ASSETS

Investments

Banks have four categories of assets:
Cash in hand and balances with the RBI,
Assets with the banking system,
Investments in government and other approved securities, and
Bank credit.
Among these assets, investment in cash and government securities serves the liquidity requirements of
banks and is influenced by the RBI policy. Quantitatively, bank credit and investment in government
securities are banks' most important assets. Commercial banks in India invest a negligible part of their
resources in shares and debentures of joint stock companies. In fact, for a long time they were
discouraged from undertaking such investments. However, since 2/3 years, the policy in this regard has
been liberalised and at present banks are allowed to invest five per cent of their incremental deposits in
corporate shares and convertible debentures.

Commercial banks' investments are of three types:

(a) Government of India securities;

(b) other approved securities, and

(c) non- approved securities.

While the first two types are known as SLR securities, the third one is known as non-SLR securities.

Investment in SLR Securities

At present, the banks are statutorily required to invest 25 per cent of their demand and time liabilities in
the first two types of securities. The investments in the first type of securities is the major part of banks'
investments. The government securities accounted for 95.59 per cent of their total investment portfolio
in 2002-03. Their investments in the second type are marginal, while those in the third type are
emerging as substantial investments.

The commercial banks' investments in Central government securities were 28.1 per cent and 31. 6 per
cent of their total assets in 2001-02 and 2002-03, respectively. The other approved securities accounted
for hardly one-or two per cent of the assets of commercial banks in the years just mentioned.

The phenomenon of investments in government securities far in excess of statutory requirements has
been due to
(a) high fiscal deficit effect,
(b) capital adequacy norms effect,
(c) foreign exchange sterilisation effect, and
(d) slack credit demand effect.
All these effects are easy to understand. The fiscal deficit has been largely financed through public
borrowings, and the banks have been the major subscribers to the government borrowing programme.
Similarly, due to unprecedented and heavy increase in foreign exchange accruals, the RBI has been
carrying out an intensive sterilisation Programme which has resulted in a significant increase in the
supply of government securities, which the banks have been purchasing. Further, all scheduled banks
are required to maintain minimum capital to total risk weighted assets ratio which was nine per cent in
2002-03. Given the very-low-risk (risk less) nature of the government securities, banks have preferred
to buy and hold substantial amount of government securities for this purpose also. Finally, due to
industrial recession in the recent past, the industrial sector's credit off take has been slack, and banks,
therefore, have invested their surplus liquidity in government securities.

Thus, the banks' investments in government securities cannot really be decided in terms of the ideology
of public vs. private sector. The large size of the State and the attendant enormous volume of
government expenditure, the portfolio management considerations of banks, the accrual of resources to
the banks, foreign capital flows, and demand for credit, have always determined and will continue to
determine the level of investment-deposit ratio of banks. Hence, it is erroneous to argue, as the RBI has
done, that a large recourse of banks to gilts to invest their resources is a dissipation of "banking
knowledge capital" regarding credit appraisal, or a possibility of severing of the link between liquidity,
credit, money, and economic activity.

Investment in Non-SLR Securities

After 1985, there has been a liberalisation of investment norms for banks which has enabled them to be
active players in financial markets. The ambit of eligible investments has been enlarged to cover
Commercial Paper (CP)" units of mutual funds, shares and debentures of PSUs, and shares and
debentures of private corporate sector, which are all known as non-SLR investments. Similarly, the limit
on investments in the capital market has been gradually increased. Now, banks can invest in equities to
the extent of five per cent of their outstanding (and not incremental as earlier) advances. Effective May
2001, the total exposure of a bank to stock markets with sub-ceilings for total advances to all stock
brokers and merchant bankers has been limited to five per cent of the total advances (including CPs) as
on March 31 of the previous year.

The aggregate balance sheet of SCBs expanded at a higher rate of 19.3% excluding the impact of
conversion of a non-banking entity into a banking entity since October 1, 2004) during 2004-2005 as
compared with 16.2 percent in 2003-04. The ratio of assets of SCBs to GDP at factor cost at current
prices increased significantly to 80% from 78.3% in 2003-04 reflecting further deepening of leverage
enjoyed by the banking sector. The degree of leverage enjoyed by the banking system as reflected in
the equity multiplier declined to 15.8-16.9 in the previous year.

The behavior of major balance sheet indicators show that a divergent during 2004-05. on the back of
robust economic growth and industrial recovery, loans and advances witnessed strong growth, while
investment in rising interest rate scenario, slowed down significantly. Deposits showed a lackluster
performance in the wake of increased competition from other saving instruments. Borrowings and net-
owned funds however, increased sharply underscoring the growing importance of non-deposits resources
of SCBs.

Bank group-wise, assets of new private sector banks grew at the highest rate.(19.4%),followed by
public sector banks(15.1%eacluding the conversion impact),foreign banks (13.6%) and old private
sector banks (10.6%).PSBs continued to accounts for the major share in he total assets, deposits,
advances and investments of SCBs at end-March 2005, followed distantly by new private sector banks.
The share of foreign banks in total assets and advances was higher than that of old private sector
banks.

Deposits
Deposits of SCBs grew at a lower rate 15.4 per cent (excluding the conversion impact) during 2004-05
as compared with 16.4 per cent in the previous year on account of slowdown in demand deposits and
savings deposits. Deceleration in demand deposits was due mainly to the base effect as demand
deposits had witnessed an usually high growth last year. The growth in demand deposits, however was
in line with the long-term average. Savings deposits, which reflect the strength of the retail liability
franchise and are at the core of the banks customer acquisition efforts grew at a healthy rate, though
the growth was somewhat lower than the high growth of last year. The higher growth of term deposits
was mainly o ac count of NRI deposits and certificate of deposits (CDs).Excluding these deposits, the
growth rate of term deposits showed a declaration, which was on account of a possible substitution in
favour of postal deposits and other investments products, which continued to grow at a high rate
benefiting from tax incentives and their attractive rate of return in comparison with time deposits.
Factors Affecting Composition of Bank Deposits

The following factors appear to be relevant:
(a) Increase in national income.
(b) Expansion of banking facilities in new areas and for new classes of
people.
(c) Increase of banking habit.
(d) Increase in the relative rates of return on deposits.
(e) Increase in deficit financing.
(f) Increase in bank credit.
(g) Inflow of deposits from Non-Resident Indians (NRIs).
(h) Growth of substitutes.

DEPOSIT INSURANCE

Bank deposits are insured up to a specified amount by the Deposit Insurance and Credit Guarantee
Corporation (DICGC). Deposit Insurance Corporation (DIC) was set up in January 1962, and it became a
part of DICGC subsequently: The insured amount has been increased in successive stages from Rs 1,500
in 1962, to Rs 5,000 in January 1968, Rs 10,000 in April 1970, Rs 20,000 in July 1976, Rs 30,000 in
June 1980, and Rs 1,00,000 in May 1993. It is necessary to raise this amount further now. The fully
protected accounts as a proportion of the total number of accounts have increased from 78 per cent in
1962 to 99 per cent in 1995-96. The proportion of insured deposits to total assessable deposits (i.e., the
entire amount of deposits including those which are not provided insurance cover) has also gone up
from 24 per cent in 1962 to 75 per cent in 1995-96.
Deposit Insurance Scheme covers commercial banks, co-operative banks, and the RRBs. As at the end
of March 1996, it covered 2,122 banks comprising 102 commercial banks, 196 RRBs and 1,824
cooperative banks.
Maturity profile of Assets and Liabilities of Banks
The maturity structure of commercial banks assets and liabilities reflects various concerns of banks
pertaining to business expansion, liquidity management, cost of funds, return on assets, assets quality
and also risk appetite during an industrial upturn. In general, major components of balance sheet,
including deposits, borrowings, loans and advances and investments , for all bank groups encompassed
a non-linear portfolio structure across the spectrum of maturity during 2004-05. Furthermore, for all
banks groups, the maturity structure of loans and advances depicted a synchronous behaviour with that
of deposits. The maturity structure of deposits and that of investments differed across bank groups.
PSBs and old private banks held a larger share of their investment in higher maturity bucket, particularly
more than five year maturity bucket, while private sector and foreign banks held more than 50% of their
investments in up to one year maturity bucket. The residual maturity classification of consolidated
international claims reveals that banks continued to prefer to invest in/lender for short-term purposes,
particularly upto 6 months period whose share in total claims incrased by3.4% points to 73.6% during
2004-05.
MONETARY CONDITION

Monetary condition remained comfortable during 2005-06, despite a sustained pick-up in credit demand
from the commercial sector. Banks were able to finance the higher demand for commercial credit by
curtailing their incremental investments in Government securities. Strong growth in deposits on the
current fiscal year and higher investment by non-bank sources in government securities also enabled
banks to meet credit demand. The year on year growth in M at 16.6% up to September 30, 2005 was
higher than the indicative trajectory of 14.5% indicated in the Annual Policy Statement for 2005-06.

Banks Operations in the Capital Market
In an increasing market oriented environment, banks need to continuously raise capital to sustain the
growth in their operations. Several banks therefore, accessed the capital market during 2004-05 to
strengthen their capital base.
BANK GROUP WISE DISTRIBUTION OF BRANCHES OF SCHEDULED COMMERCIAL BANKS (As at end-
June 2005)




CAPITAL BASED

The capital base of commercial banks has become a subject of great attention in the whole world in the
recent past. In India, it had become progressively very weak; the ratio of paid-up capital and reserves
to deposits of Indian banks had declined from 6.7 per cent in 1956 to 4.1 per cent in 1961, 2.4 per cent
in 1969, 1.2 per cent in 1984, and 2.1 per cent in 1986. It increased to 7.53 per cent in 1995. which
was the result of the prescription of capital adequacy norms by the authorities since 1992-93.

The Bas1e Committee on Banking Supervision appointed by the Bank for International Settlement (BIS)
established in 1988 a system in which minimum capital requirements were set for banking firms based
on the risk of bank assets. It specified Capital to Risk (weighted) Assets Ratio (CRAR) of eight per cent
as the capital adequacy norm. This risk-based capital standard has been adopted by many countries
including India where it came into force in 1992-93. In the following years, a multi-pronged policy has
been implemented to reach the said eight per cent level. First, the government has been providing
budgetary support to banks for this purpose.

In fact, it has contributed Rs 20,446 crore by way of capital to the banks during 1985 to 2002. Since
1992, it has contributed over Rs 17,746 crore to the capital base of the nationalised banks. Second, a
number of banks have raised equity capital on the stock market. In addition, banks have been allowed
since 1993-94 to issue, with the prior approval of the RBI, subordinated debts in the form of unsecured
redeemable bonds qualifying for Tier II capital. Seven public sector banks raised a sum of Rs 1145.74
crore during 1995-96 through such an instrument. The twelve PSBs have raised capital through fresh
capital issues to the tune of Rs 6501 crore during 1993-2002. Three PSBs raised another Rs 773 crore of
equity capital during 2002-03. Further, the nationalised banks have returned the capital of Rs 1253
crore to the government till the end of 2002-03. As a result, the government shareholding in PSBs has
declined. The share of the government in the equity capital of various banks ranged from 57 per cent to
75 per cent in 2003.

By the end of March 2003, all the PSBs have achieved CRAR above the stipulated minimum. In fact, 26
out of 27 PSBs had a CRAR above 10 per cent. For PSBS as a whole, the CRAR stood at 12.64 percent at
the end of March 2003. Similarly, now all the old private sector banks and foreign banks also have the
CRAR above the stipulated level now. The number of PSBs paying dividend to the government has
increased from seven in 1995-96 to 14 (out of 19) in 2000-01, and the total amount of dividend paid
has been about Rs 2294 crore during 1995-96 to 2001-01.






RISK EXPOSURES OF BANKS

The overall risk exposure of banks is determined by their lending to sensitive sectors such as capital
market, real estate, and commodities' and off-balance sheet activities. comprising forward exchange
contracts, guarantees, acceptances and endorsements. The exposure of scheduled commercial banks in
India on both of these counts has gone up significantly at present.

BANKS FOREIGN BUSINESS

Indian banks do business in foreign countries also and this business has grown slowly over time. Banks'
foreign business actually began during early 1940s on a very modest scale; it expanded to a certain
extent during the 1950s and 1960s; and the fastest growth of this business occurred really during 1975-
1982. This business is mainly concentrated in areas inhabited largely by Indian expatriate population,
and in countries which are important trading partners of India.

In 1985, 13 Indian banks had 139 offices in 26 countries. Bank of Baroda, Bank of India, State Bank of
India, and Indian Overseas Bank accounted, respectively, for 41, 17, 17, and 8 per cent of total
branches. Indian banks also have three deposit-taking companies, three wholly-owned subsidiaries, two
majority-owned subsidiaries and four joint venture banks abroad. There was a reduction in this business
after 1985. As a result of the closure of branches by some banks, the number of foreign offices of nine
banks was 114 as on 30 April, 1990, and the four banks had 11 representative offices in that year. The
banks have never done well in their overseas business. About $1 billion had to be provided in 1992-93
Jo meet provisioning requirements of overseas branches, some of which are being closed even now.



The total number of overseas branches of Indian banks was reduced from 101 to 97 as at the end of
June 1996, of which 96 branches belonged to eight public sector banks, and the remaining one belonged
to a private sector bank. The number of wholly-owned subsidiaries, joint venture banks, and
representative offices were 11,7, and 14, respectively in 1996.


BANKS AS AUTHORISED DEALERS

The RBI has designated 92 banks, including 35 foreign banks, as Authorized Dealers (ADs) in foreign
exchange, an they are functioning in this capacity through their 27,762 branches. ADs can buy and sell
foreign exchange on behalf of their clients, subject to limits deemed sufficient. Increase in capital flows
and the relaxation of balance sheet restrictions in respect of foreign exchange operations has
transformed banks into active participants in the foreign exchange market. The changes in capital flows
directly affect bank liquidity, profitability. The turnover in the foreign exchange business of banks has
increased over the years.

RETAIL BANKING

Banks today operate under their spreads, declining margins, and rising costs. Consumer finance was not
a favoured avenue for banks in India till the other day. They were primarily financing production-based
activities. but the industrial recession, economic downturn, industrial sickness, mounting NPAs with
corporates, failure of many big companies have made banks prefer to be selective in their lending to
corporates which has become more risky. As a result, banks are diverting their resources to retail
lending In addition to financing working capital of corporates and giving term loans, banks are
diversifying into retail banking or personal banking which appears to be a viable alternative to cope up
with the poor credit offtake and far augmenting business in the current situation. The reduction in
SLR/CRR, poor credit demand due to recession, greater risk due to high NPAs in traditional lending, and
similar changes have made banks to diversify their business in the form of retail, personal loans such as
education loans, home loans, auto loans, white goods loans, credit card loans, travel loans (along with
entering into treasury operations). The Indian commercial banks' retail lending has almost doubled
during 2000-03. Their housing loans disbursals increased from Rs 14746 crore in 2001-02 to Rs 33841
crore in 2002-03. Information technology, net banking, mobile banking, telebanking, A TMs, and demat
accounts have facilitated the growth of retail banking.
The retail banking has created challenges before the banks to set up and invest heavily in new credit
delivery or distribution channels which can economise on transactions costs, increase sales productivity,
and offer greater convenience in service provision. Banks are increasing off-site delivery channels which
are helping ill new product development, increasing speed of transactions processing and reducing
transactions costs. It has been suggested that banks should follow the following steps for making new
distribution channels successful (RBI, Bulletin, January 2004, pp. 103-105):
Understand customers' current transaction behaviour and their underlying attitude.

Use sophisticated experimental customer research to assess the economic impact of tactics designed to
change that behaviour.
Develop an integrated channel migration plan which blends economic and non-economic incentives to
ensure !hat right initiatives are targeted at the right customers Protect sales effectiveness by utilising
the non-branch channels .Design non-branch channels to emphasise personalised interaction to
counteract decreased / loyalty among remote customers.

Resources Raised by Banks From the Primary Capital Market

Scheduled Commercial banks, both in public and private sectors, raised large resources from the
domestic and international capital markets. Total resource mobilization by banks through public issues
(excluding offer for sale) in the domestic capital market increased sharply by 263.3 per cent during
2004-05. Encouraged by a firm trend in the prices of the banking sector scrips in the secondary market
and satisfactory financial results, seven banks raised Rs. 7,444 crore from the equity market during
2004-05. This included two equity issues aggregating Rs.3,336 crore (including premium) by public
sector banks and five equity issues aggregating Rs.4,108 crore by private sector banks.

Regional Rural Banks
Regional Rural Banks (RRBs) form an integral part of the Indian banking system with focus on serving
the rural sector. There are 196 RRBs operating in 26 States across 518 districts with a network of
14,446 branches as on March 31, 2004. Majority of the branches of RRBs are located in rural areas.
RRBs combine the local feel and familiarity with rural problems, which the co-operatives possess, and
the degree of business organisation as well as the ability to mobilise deposits, which the commercial
banks possess. RRBs are specialised rural financial institutions for catering to the credit requirements of
the rural sector. In the context of recent focus of the Government of India on doubling the flow of credit
to the agricultural sector, it is felt that the RRBs could be used as an effective vehicle for credit delivery
in view of their rural orientation

Development of co-operative bank
Co-operative banks in India have come a long way since the enactment of the Agricultural Credit Co-
operative Societies Act in 1904. The century old co-operative banking structure is viewed as an
important instrument of banking access to the rural masses and thus a vehicle for democratisation of
the Indian financial system. Co-operative banks mobilise deposits and purvey agricultural and rural
credit with a wider outreach. They have also been an important instrument for various development
schemes, particularly subsidy based programmes for the poor.

The co-operative banking structure in India comprises urban co-operative banks and rural co-operative
credit institutions. Urban co-operative banks consist of a single tier, viz., primary co-operative banks,
commonly referred to as urban co-operative banks (UCBs). The rural co-operative credit structure has
traditionally been bifurcated into two parallel wings, viz., short-term and long-term. Short-term co-
operative credit institutions have a federal three-tier structure consisting of a large number of primary
agricultural credit societies (PACS) at the grass-root level, central co-operative banks (CCBs) at the
district level and State co-operative banks (StCBs) at the State/apex level. The smaller States and Union
Territories (UTs) have a two tier structure with StCBs directly meeting the credit requirements of PACS.
The long-term rural co-operative structure has two tiers, viz., State co-operative agriculture and rural
development banks (SCARDBs) at the State level and primary co-operative agriculture and rural
development banks (PCARDBs) at the taluka/tehsil level. However, some States have a unitary structure
with the State level banks operating through their own branches; three States have a mixed structure
incorporating both unitary and federal systems

The Co-operative Movement was launched in India by the acts of 1904 and 1912 passed by the Central
Government .There are a number of State Co-operative banks, Central co-operative Banks, Land
Development Banks and a host of Credit Societies. The resources of Co-operative Credit institution
mainly consist of deposit and borrowings. Owing to the limited resources of the members, these
institution do not have much of share capital. Unfortunately, sufficient reserves have also not been built
up owing to meagre profits.

PUBLIC SECTOR BANKS

The term public sector banks by itself connotes a situation where the major/ful l stake in the banks are
held by the government.
Excepting the Reserve Bank of India which was nationalized in 1949 there was no other bank which had
the tag of public sector bank till 1969. with the nationalization of banks brought in by Banking
Companies Act,1970, 14 Banks each of which had a level of more than Rs 50 crores in time and demand
liabilities acquired the character of nationalized banks effective from 19 July 1969. This was
subsequently followed by nationalization of 6 more private Sector Commercial banks, each of which had
crossed the deposit limit of Rs 200 crore in the year 1980, effective from 15/4/1980. Thus, as on date
there are totally 19 nationalised banks existing as on date, consequent to the merger of New Bank of
India with Punjab National Bank in September 1993. Consequent to an Amendment made to the Banking
Companies Acts, 1970/1980 in 1994, Nationalised banks have been permitted to offer their equity
shares to the public to the extent of 49% of their capital.

Public sector banks are as follows
Nationalised Banks

Allahabad Bank
Andhra Bank
Bank of India
Bank of Baroda
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank

State Bank Group

State Bank of India
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Patiala
State Bank of Saurashtra
State Bank of Travancore
IDBI LTD.
Private Sector Banks
By private sector banks we mean those banks where equity is held by private share holders, that is to
say there is no government holding of the equity shares.
This category of banks also occupies a significant position in the Banking Scenario. There are already 25
private Sector operating in our country for quite some time. These banks are also listed as under
v The ING Vysya Bank Ltd.
v The Federal Bank Ltd.
v The Jammu Kashmir Bank Ltd.
v Bank of Rajasthan Ltd.
v Karnataka Bank Ltd.
v The South Indian Bank Ltd.
v The United Western Bank Ltd.
v The Catholic Syrian Bank Ltd.
v The Karur Vysya Bank Ltd.
v Tamilnadu Mercantile Bank Ltd.
v The Laxmi Vilas Bank Ltd.
v The Sangli Bank Ltd.
v The Dhanlaxmi Bank Ltd.
v Bharat Overseas Bank Ltd.
v City Union Bank Ltd.
v Lord Krishna Bank Ltd.
v Bareilly Corporation Bank Ltd.
v Nanital Bank Ltd.
v The Ratnakar Bank Ltd.
v The Ganesh Bank of Kurundwad Ltd.
v SBI Comm. & Int. Bank Ltd
v Development credit Bank Ltd
v Madura Bank Ltd.
There has been a growing presence of private sector banks more so, after the introduction of financial
sector reforms from 1991. Six new private banks listed as under were issued licences in 1994-95.
New Private sector Banks
Centurion Bank of Punjab Ltd.
HDFC Bank
ICICI Bank Ltd.
Indusland Bank Ltd.
Kotak Mahindra Bank Ltd.
UTI Bank Ltd.
Again, during 1995-96, the following three banks were issued the licence and commenced their
operations:
v Times Bank Ltd.
v Bank of Punjab Ltd.
v IDBI Bank Ltd.

Thus apart from the twenty-five old private sector banks, we have got nine private sector banks which
became operational subsequent to 1992.
The size of the private sector banks in our country as on date is furnished hereunder (as at June97)
v Number of private sector banks in operation : 35
v Number of bank branches of private sector banks : 4,473
v Amount of advances(as at March96) : 31,692 crores
v Amount of advances(as at March96) : 21,5888 crores( Sources RBI)
Private Sector Banks have been rapidly increasing their presence in the recent times and offering a
variety of newer services to the customer and possing a stiff competition to the group of public sector
banks
New Technology in Banking

The importance of sophisticated or high technology for improving customer service, productivity, and
operational efficiency of banks is well-recognised. As a part of their action plans, banks in India have
introd, :ed many new techniques and a considerable degree of mechanisation and computerisation in
their operations. By the end of June 1996, they had installed 13,522 Advance Ledger Posting Machines
(ALPM) at 4,238 branches, and 895 mini-computers at their regional and zonal offices at 441 branches.
Three banks had installed mainframe computers and others were at various stages of doing so. They are
developing and standardising suitable computer softwares in a big way. They have introduced
mechanised cheque clearance, using magnetic ink character recognition (MICR) technology. The
computerisation of clearing house settlement has been completed at a number of centres. They are in
the process of setting up exclusive data communication network for banks known as BANKNET. For this,
the RBI and 36 banks have become members of the Society for Worldwide Inter-bank Financial
Telecommunications (SWIFT) and have installed two SWIFT Regional Processors at Mumbai. Through
this network, any bank will be able to establish connection with its own offices and with any other banks'
offices/computers in the national and international network.

Banks are now switching to Personal Computers (PCs) and LAN/W AN systems. At the end of June 1996,
the banks had installed 2,120 PCs, LAN at 916 branches, WAN at 175 branches, 937 signature storage
and retrieval systems, and 315 on-line terminals. The RBI has put in place Electronic Funds Transfer
(EFT) system, Delivery vs. Payments (DVP) system, Electronic Clearing Services, and RBINET. It has
also taken steps to set up a Very Small Aperture Terminal (VSAT) Network which will cover all banks and
financial institutions to serve a number of tasks like MIS, data warehousing, transaction processing,
currency chest accounting, ATMs, EFT, EDT, Smart/Credit cards, etc. It will cover 2,800 centres soon. So
far all the PSBs have crossed the 70 per cent level of computerisation of their business. As a part of
Indian Financial Network (INFINET), the number of VSATs has increased from 924 in March 2002 to
more than 2000 in June 2003. Banks are sharing A TMs by forming alliances as it was done by UTI Bank,
Citi bank, IDBI Bank, and Standard Chartered Bank, which formed "Cashnet" alliance in 2003. Now,
there are 27 cities where cheque clearing is performed using mechanised technology of reader sorter
which process cheques at more than 2000 per minute. The 'currency verification and processing
systems' have been made operational at various offices of the RBI which has resulted ill the "clean note
policy".

In not a very far off future, the banking system in India and the payments mechanism (system) which it
operates would witness the following technological innovations, which are already a reality in a country
like USA. The place of physical transfer in the form of cash or cheques is being taken there by "On-line
electronics payments method" comprising fedwire, CHIPs, and ACHs. The Fedwire is a communication
system that allows banks to transfer deposits and government securities. It is an electronic equivalent of
payment by cash. The electronic equivalent of payment by cheque is the Clearing House Interbank
Payment System or CHIPs. Then there is ACHs which involves exchange of magnetic tapes rather than
pieces of paper (Automated Clearing Houses).

While Fedwire and CHIPs execute payments immediately, ACHs is a slower method of electronic
payments. The most ubiquitous medium of electronic payment spreading in developed countries is the
electronic debit card or cash card which is inserted in a machine and after punching in a personal
identification number (PIN) which gives access to the electronic payment systelH. There are two
principle types of machine into which card can be inserted: the automated teller machines (ATMs) and
the electronic funds transfer at point of sale (EFTPOs).

Other Diversifications in Banking

Since the mid-1980s, many far-reaching changes have taken place in the Indian banking sector. Many
banks have set up specialised subsidiary companies and assets-liabilities management companies, and
either through them or on their own, they have entered into related activities, such as merchant
banking, mutual funds, hire-purchase finance, housing finance, venture capital, equipment leasing,
factoring, securities booking and trading, and a host of other financial services. By the end of June 1996,
11 banks had set up 11 equipment leasing and merchant banking subsidiaries, while five public sector
banks had set up their mutual funds, which floated many investment (unit) schemes. Some banks have
also launched venture capital funds. The total number of housing finance subsidiaries of banks was eight
at the end of June 1996. They are entering into the areas of factoring, computer-related services and
equity participation also. Two subsidiaries of banks have invested in the equity capital of OTCEI. Banks
have begun to have portfolio investment in hire purchase companies and venture capital funds. Through
these changes, the interface and links of the banking sector with the capital market and other financial
institutions have been growing..

Asset-Liability Management

In the recent past, banks in India have started using the Asset-Liability Management (ALM) as the
technique or strategy for financial management. ALM aims at planning, directing, and regulating the
levels, changes, mixes of assets and liabilities of banks in the short-run, usually three to twelve months,
with a view to enable them to achieve their long-term objectives. The net interest margin and its
variability are the focus of its attention so as to maximise Return On Equity (ROE), and to minimise
fluctuations in ROE. It also links capital, non-interest income and expenses, and strategic choices
regarding products, markets, and bank structure. ALM involves giving balanced emphasis necessary in a
competitive environment characterised by deregulatiom. and greater viability (volatility) of interest
rates, variable rates pricing, and the use of interest rates derivatives.

Co-operative Banks


INTRODUCTION

Co-operative banks are an important constituent of the Indian financial system, judging by the role
assigned to them, the expectations they are supposed to fulfills, their number, and the number of offices
they operate. The co-operative movement originated in the West, but the importance that such banks
have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing
continues to be important even today, and their business in the urban areas also has increased in recent
years mainly due to the sharp increase in the number of primary co-operative banks.

ORIGIN AND GROWTH OF CO-OPERATIVE BANKS

Co-operative banks are a part of the vast and powerful superstructure of co-operative institutions which
are engaged in the tasks of production, processing, marketing, distribution, servicing, and banking in
India. The beginning of co-operative banking in this country dates back to about 1904 when official
efforts were initiated to create a new type of institution based on the principles of co-operative
organisation and management, which were considered to be suitable for solving the problems peculiar to
Indian conditions. In rural areas, as far as agricultural and related activities were concerned, the supply
of credit, particularly institutional credit, was woefully inadequate, and unorganised money market
agencies, such as money lenders, were providing credit often at exploitatively high rates of interest. The
co-operative banks were conceived in order to substitute such agencies, provide adequate short-term
and long-term institutional credit at reasonable rates of interest, and to bring about integration of the
unorganised and organised segments of the Indian money market.

When the national economic planning began in India, co-operative banks were made an integral part of
the institutional framework of community development and extension services, which was assigned the
important role of delivering the fruits of economic planning at the grassroot levels. In other words, they
became a part of the arrangements for decentralised plan formulation and implentation for the purpose
of rural development in general, and agricultural development in particular. Today co-operative banks
continue to be a part of a set of institutions which are engaged in financing rural and agricultural
development. This set-up comprises the RBI, NABARD, commercial banks, regional rural banks, and co-
operative banks. The relative importance of co-operative banks in financing agricultural and rural
development has undergone some changes over the years. Till 1969, they increasingly substituted the
informal sector lenders. After the nationalisation of banks and the creation of RRBs and NABARD,
however, their relative share has somewhat declined. All the institutional sources contributed about 4
per cent of the total rural credit till 1954. The contribution increased to 62 per cent by 1990. The share
of
co-operative banks in this institutional lending has declined from 80 per cent in 1969 to about 42 per
cent at present. The percentage of rural population covered by the agricultural credit co-operatives was
7.8 in 1951, 36 in 1961, and about 65 per cent at present.

Cooperative banks in India finance rural areas under:
Farming
Cattle
Milk
Hatchery
Personal finance
Cooperative banks in India finance urban areas under:
Self-employment
Industries
Small scale units
Home finance
Consumer finance
Personal finance
FEATURES OF CO-OPERATIVE BANKS

Some distinguishing characteristics of the nature of co-operative banks are as follows:

(i) They are organised and managed on the principles of co-operation, self-help, and mutual help. They
function with the rule of "one member, one vote".

(ii) They function on "no profit, no loss" basis. For commercial banks also, profitability is no longer the
main objective, but in their case this change has been brought about as a result of social or public
policy, while co-operative banks, by their very nature, do not pursue the goal of profit maximisation.

(iii) Co-operative banks perform all the main banking functions of deposit mobilisation, supply of credit
and provision of remittance facilities. However, it is said that the rang~, of services offered is narrower
and the degree of product differentiation in each main type of service is much less in the case co-
operativetive banks, compared to commercial banks. In other words, co-operative banks are
characterised by functional specialisation. It should be added that this is true with much less force now,
because many changes have taken place in the co-operative banking system since the Banking
Commission arrived at the above-mentioned conclusion. For example,\co-operative banks now provide
housing loans also. The UCBs provide working capital loans \and term loans as well. The State Co-
operative Banks (SCBs), Central Co-operative Banks (C0)3s) and Urban Co-operative Banks (UCBs) can
normally extend housing loans up to Rs one 1akh to an individual. The scheduled UCBs, however, can
lend up to Rs three lakh for housing purpose. The UCBs can provide advances against shares and
debentures also.

(iv) As said earlier, co-operative banks do banking business mainly in the agricultural and rural sector.
However, certain types of banks viz., UCBs, SCBs and CCBs operate in semi-urban, urban, and
metropolitan areas also. The urban and non-agricultural business of these banks has grown over the
years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks,
from urban to rural.

(v) Co-operative banks are perhaps the first government-sponsored, government-supported, and
government-subsidised financial agency in India. They get financial and other help from the RBI,
NABARD, Central government and state governments. They constitute the "most favoured" banking
sector with no risk of nationalisation. For commercial banks, the RBI is a lender of last resort, but for co-
operative banks, it is the lender of first resort which provides financial resources in the form of
contribution to the initial capital (through state governments), working capital, and refinance. The
promotional role of the RBI can be seen in respect of co-operative banks, and this role supersedes its
regulatory role, in respect of these banks.

A corollary of government help to co-operative banks is that there is much government intervention in
their working. Co-operative banks are subject primarily to the control, audit, supervision and periodic
inspection of the co-operative department of the state government under the Cooperative Societies Act,
but less rigorously, by the RBI under the Banking Regulation Act. The RBI and the state government lay
down rules for investment of surplus resources, reserves, and the loan policy of co-operative banks.
Consequently, compared to commercial banks, they have less freedom and flexibility in conducting their
operations.

(vi) Co-operative banks belong to the money market as well as to the capital market. Primary
agricultural credit societies provide short-term and medium-term loans. Land Development Banks LDBs)
provide long-term loans, DCBs meet working capital as well as fixed capital requirements, and SCBs and
CCBs also provide both short-term and term loans. Similarly, they accept short-term and long-term
deposits, and some of them mobilise resources through the issue of debentures.

(vii) Co-operative banks are financial intermediaries only partially. The sources of their funds resources)
are: (a) Central and state governments, (b) the RBI and NABARD, (e) other cooperative institutions, (d)
ownership funds, and (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows
of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits,
borrowings, and credi\t form a significant part of assets and liabilities of co-operative banks. This means
that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative banks.

However, co-operative banks face stiff competition from commercial banks and other financial
intermediaries. Till their nationalisation, commercial banks did not pose any competition to coperative
banks. In fact, till then, certain areas of operations were deliberately left to co-operative anks. But
recently, the cornpetition from LIC, DTII and small-savings organisation has become quite tough, and
co-operative banks are in a disadvantageous position in this area of inter-sectoral competition.

(viii) Co-operative banks have a federal structure of three-tier linkages. Further, their operation - of
mixed banking type. Primary credit societies are unit banks; many DCBs also are unit banks. But SCBs,
DCBs (CCBs), and SLDBs, PLDBs and many DCBs have a number of branches. object to this, it can be
said that each co-operative institution in each tier is a separate entity with definite jurisdiction and has
an independent board of management.

(ix) Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance,
SCBs and some DCBs are scheduled banks but other co-operative banks are non-scheded banks.At
present, 28 SCBs and 11 DCBs with Demand and Time Liabilities over Rs 50 crore each are included in
the Second Schedule of the RBI Act.

x) As said earlier, co-operative banks accept current, saving, and fixed or time deposits from individuals
and institutions including banks. Some DCBs numbering about 40 in 1989 are allowed open and
maintain NRI accounts in rupees but not in foreign currency. Deposits mobilised by them in a given area
are used for financing activities in that locality.

Some co-operative banks, namely, Land Development Banks (LDBs), issue debentures to raise resources
for their operations. These debentures are secured by mortgaging lands belonging to borrowers from
LDBs and are often guaranteed by the state government. They are regarded as -tee securities and are
treated on par with government securities for making advances. There are three types of such
debentures: ordinary, rural, and special. These debentures are almost entirely subscribed by such
institutional investors as banks, LIC, and the government.

xi) The co-operative banks are subject to CRR and liquidity requirements as other scheduled non-
scheduled banks are. However, they are required to maintain the CRR and SLR only at = level of three
per cent and 25 per cent respectively, at present. They are subject to SCCs also. Further, the DCBs have
been advised to lend 60 per cent of their total advances to the priority ors. It means that the target for
priority sector lending has been fixed at a higher level for these banks compared to commercial banks.
Similarly, while the CAS has now/been withdrawn in the e of commercial banks, it is still applicable to
the DCBs, although in a liberalized form. With effect from January 1989, they have to seek prior
approval of the RBI for grant of advances to a single party exceeding certain credit limits, which vary
from bank to bank depending on their size.

xii) Since 1966, the lending and deposit rates of commercial banks have-been directly regulated by the
RBI. Although the RBI had powers to regulate the 'rates of co-operative banks also, these powers were
not exercised much till about 1979, in respect of their lending rates. From the early years till 1979, the
SCBs and CCBs were expected to provide finance for agricultural and allied activities to the ultimate
borrowers at reasonable rates, i.e., at concessional rates, by virtue of their being entitled to
concessional refinance from the RBI. In case of their non-agricultural advances for the purpose of
production and marketing activities of cottage and small scale industries, the RBI imposed certain
conditions as regards rates to be charged by these banks for such purposes. In respect of their non-
agricultural advances, they were free to charge any rates at their discretion. The RBI did not regulate at
all the lending rates of DCBs, because of which there was little uniformity in the rates charged by
different DCBs. The SCBs were also exempted from the levy of interest tax.

In early 1979, the RBI decided to maintain parity with regard to the rates of interest on all agricultural
advances irrespective of the credit agency. As a result, the rates of interest charged to the ultimate
borrowers by co-operative banks were also brought in line with those charged by commercial banks.
Accordingly, the RBI advised all SCBs in 1980 to charge certain ceiling rates on agricultural advances.
While ceiling rates were prescribed for short-term agricultural advances, the lending rates for medium-
term agricultural credit were stipulated as fixed rates. Similarly, lending rates of co-operative banks
including DCBs for non-agricultural advances also became subject to the directives issued by the RBI
with effect from 1981. As a result of measures adopted by the RBI in 1980 and 1981, a certain amount
of uniformity has been brought about with regard to the lending rates charged by co-operative banks in
different states, and between commercial banks and co-operative banks.

However, since 1974, the deposit rates of co-operative banks including DCBs, have been regulated by
the RBI. To begin with, the RBI policy in this respect was to specify that the rates prescribed for
commercial banks should be considered as the minimum to be offered by the cooperative banks. This
was unlike the directives in the case of commercial banks for whom fixed rates have been stipulated for
different types of deposits. Their current accounts were also excluded from the purview of the directive,
while commercial banks were prohibited from paying interest on current accounts. This, however, led to
relatively higher rates being paid by co-operative banks on their deposits which adversely affected the
deposit mobilisation efforts of the commercial banks. Therefore, the RBI once again changed its policy in
1974 and began to direct co-operative banks not to pay interest at rates in excess of certain
percentages over the minimum rates prescribed by the RBI for commercial banks. The ceilings laid down
over the minimum rate were 0.25, 0.5, and 1.0 per cent with regard to SCBs, CCBs, and Primary
Agricultural Credit Societies (PACSs) respectively, on term and saving deposits. Likewise, they have
been prohibited since 1975, from paying interest at a rate exceeding 0.5 per cent per annum on current
accounts. deposits up to 14 days, and those subject to withdrawal or repayment after a notice of 14
days or less. The latter facility, however, has been withdrawn with effect from March 1989 in respect of
DCBs.

In the recent past, the RBI has introduced changes in interest rates of co-operative banks also. along
with changes in interest rates of commercial banks. The interest rates structure of cooperative banks is
quite complex. The rates charged by them depend upon the type of bank, th3 type of loans, and vary
from state to state.

(xiii) Although the main aim of the co-operative banks is to provide cheaper credit to the members, and
not to maximise profits, they may access the money market to improve their income so that they
remain viable. This is in keeping with the opening up of the non-farm sector to them in the recent past.
Their need to access money market arises due to a variety of factors. First, CCBs are mainly in the field
of financing seasonal agricultural operations, which creates cycles of flows of funds. Second, the short-
term agricultural loans are given at a concessional rate of inter~st whereas interest rates paid on
deposits by co-operative banks are higher than those paid by the commercial banks. It is true that they
get concessional refinance from the NABARD, but its availability depends upon fulfilling conditions such
as minimum involvement, non-overdue cover, etc. Similarly, many DCBs often have surplus funds which
they mostly keep with the SCBs at a fixed rate of interest. There is, therefore, a need for co-operative
banks to access money market to deploy their short-term funds profitably and cross-subsidise their
lending operations.

(xiv) Co-operative banks (COBs), in short, have played a pivotal role in the development of short-term
and long-term rural credit structure in India over the years. The co-operative credit endeavour is said to
be the first ever attempt at micro-credit dispensation in India. The entire cooperative credit system
covers more than 74 per cent of rural credit outlets, and it has a market share of about 46 per cent of
total rural credit in the country. From being the providers of loans for redemption of debt, COBs have
gone on to meet the investment requirements of all activities in rural areas. The co-operative credit
structure had a membership of 1.3 crore, net owned funds of Rs 3191 crore, and outstanding loans and
advances of Rs 17261 crore in 20012. The COBs have borne the major share of the task of widening
institutional agricultural credit because their retail outlets are so widespread and far flung that no other
type of agency can percolate to all corners of the country as COBs have done. However, too much
intervention by the State in day-to-day management has contributed to the lack of involvement and
ownership of people in their functioning. The COBs need to become member-driven banks. There is also
a need to do away with the duality of control over them by the RBI and state government. They need
support in respect of infrastructure, resource base, professional management, etc.





SALIENT FEATURES OF THE OPERATION OF CO-OPERATIVE BANKING' SYSTEM

A few salient features of the operations of the co-operative banking system which emerge from this, and
related information are as follows:

(1) There was an increase in the number of all types of co-operative banks except the CCBs (which
declined), during the two decades after 1951. During the 1970s and 1980s, the number of all types of
banks except thy PACSs remained constant; the number of the latter declined drastically. As a result,
the total number of co-operative banks increased till 1970 and declined thereafter.
The co-operative banks now operating in India outnumber the commercial banks. At present, we have
about 297 commercial banks (including RRBs) compared to about 92,571 co-operative banks including
the PACSs and 3101 co-operative banks excluding the PACSs.

In 1989, the total number of offices of co-operative banks was 1,02,184 including those of PACSs and
15,184 excluding them, the latter being one-fourth the size of the total number of offices of commercial
banks. Similarly, the deposits and credit of co-operative banks were about 15 per cent and 35 per cent
respectively of those of commercial banks in 1988-89. In 1996, the total number of offices of co-
operative banks was 1,10,137 including those of PACSs and 20,137 excluding them, the latter being
about 32 per cent of the offices of the commercial banks. Similarly, the deposits and credit of co-
operative banks were about 14 per cent and 29 per cent respectively of those commercial banks in
1994-95. The co-operative banks excluding PACs had the total deposits of Rs 2,12,859 crore, or about
17 per cent of the total deposits of scheduled commercial banks in 200-03. Similarly, their total
outstanding credit was Rs 1,81,912 crore or about 25 per cent of commercial bank credit in that year.
The SBI alone has a far higher amount of deposits than the whole of the co-operative banking sector. It
follows that co-operative banking, unlike commercial banking, is small-scale banking and it does not
suffer from the concentration of business in the hands of a few. Table 9.2 gives an idea about the
average (per bank) size of different types of co-operative banks in 1950-51, and 1994-95 and 2002-03
in terms of deposits and credit. The average size has increased over the years.

(2) Deposits, credit, working capital and other indicators of all types of co-operative banks and the co-
operative banking sector as a whole have also grown manifold over the period, 1951 to 2003. Their
growth has not been uniform over the span of 53 years. On the whole, the annual rate of growth of all
co-operative banks (in terms of deposits) has varied between 13 to 19 per cent in different
quinquenniums during 1961-1986.

3) If we rank different types pf banks, it would be found that in terms of deposits, CCBs were the most
important, followed by UCBs, SCBs and PACSs, in that descending order in 1988-89. however, in terms
of outstanding credit, the descending order in that year was CCBs, PACSs, SCBs, and LDBs. in 1994-95
was CCBs, UCBs PACSs, SCBs and SLDBs. In period 2002-03, the descending order was UCBs, CCBs,
SCBs, SLBs and PLDBs in term of deposits as well as outstanding credit.

(4) The composition of resources and other operational ratios of different types of co-operative banks
differ significantly from those of commercial banks. The ratios also vary among the cooperative banks
themselves.

(5) In the recent past, a number of COBs have come under stress or failed. Many DCBs are in precarious
conditions. Some of them have been found to have manipulated government securities transactions. In
2003, as many as 163 DCBs out of the total number of 2104 of DCBs were under liquidation ..

(6) The co-operative banks are not allowed to approach debt recovery tribunals, and are not covered
under the Securitisation and Reconstruction Ordinance. They are also not allowed to access capital
markets, bullion markets, and derivatives markets.

(10) Capital adequacy requirements for the COBs are, at present, lower than those prescribed for
commercial banks. However, all DCBs and other COBs would have to achieve the CRAR level which is
applicable to commercial banks by March 31, 2005. They are required to adhere to capital adequacy
standards in a phased manner over a period of three years beginning with 2002.
(11) The state co-operative bank is the apex co-operative financial institution in each state.

PROBLEMS AND POLICY

As in the case of commercial banks, the quantitative growth of co-operative banks has not been
accompanied by a qualitative growth. There have always been a number of weak..'1esses in their
performance. Many of these weaknesses were identified by the All India Rural Credit Survey Committee
(AIRCSC) in the early 1950s. By that time, co-operative banks had been in the business for 45 years
and the AIRCSC had concluded that co-operatives had failed, but that they must succeed. As a result,
special measures were introduced by the government and the RBI to revive and strengthen co-
operative banks. Even after a span of 35 years, an assessment of the cooperative banks shows that" ...
many of the weaknesses of the co-operative credit system identified by the Rural Credit Survey
Committee continue to persist even today.

In the same vein, the Khusro Committee asserts: "No credit system has been subjected to as much
experimentation at the dictates of those outside the system as the co-operative credit system has been
The history of co-operative credit system has been the history of alternating periods of growth,
stagnation and reorganisation and yet quantitatively the achievements of the co-operative systems have
by no means been insignificant. Thus looking to the stake of the movement even in the limited sphere of
credit, the classic assertion of the Rural Credit Survey made 35 years ago still seems valid that Co-
operation has failed but Co-operation must succeed.

Main weakness of Co-operative Banks

The main weaknesses of co-operative banks are as follows:

(a) The vital link in the co-operative credit system namely, the PACSs, themselves remain very weak.
They are too small in size to be economical and viable; besides too many of them are dormant, existing
only on paper.

(b) With the expanding credit needs of the rural sector, the commercial banks have come in actively to
meet the credit requirements of this sector, and this has aggravated the difficulties of co-operative
banks. The theory that co-operative banks would be buoyed up by the competition from other financial
institutions does not appear to have worked.

(c) Co-operative banks are not doing well in all the states; only a few account for a major part of their
business. For example, 75 per cent of total deposits mobilised by SCBs was from only seven states in
1987-Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, and Uttar
Pradesh.

(d) These banks still rely very heavily on refinancing facilities from the government, the RBI, and
NABARD. They have yet not been able to become self-reliant in respect of resources through deposit
mobilisation.

(e) They suffer from dangerously low or weak quality of loan assets, and from highly unsatisfactory
recovery of loans.

(f) They suffer from infrastructural weaknesses and structural flaws. They do not look like banks and do
not inspire confidence in the potential members, depositors and borrowers.

(g) They suffer from too much officialisation and politicisation. Undue governmental interventions have
prevented them from developing steadily as a self-reliant and resilient credit system. Most of them are
headed by politicians.

(h) They unduly depend on government capital rather than member capital. (i) There is no active
participation of their members in their working, which can come about if they work with members'
money rather than government largesse.

(j) They have been resorting to unethical practices. There are many regulators for them, but still there
are many lacunea in their regulation. In fact, the existence of multiple regulatory authorities has come in
the way of effective regulation, control, and monitoring of COBs.





GOVERNMENT INITIATIVES TO STRENGTHEN THE DEVELOPMENT OF CO-OPERATIVE BANKS

Even before the submission of the Khusro Committee Report, the government and the RBI had initiated
certain measures to strengthen the development of co-operative banks. Some of these policy initiatives
were as follows:

(i) The NABARD had formulated a scheme for the reorganisation of PACSs and the implementation of
this scheme had started in those states which have accepted it.

(ii) The programme for development of selected P ACSs into truly multi-purpose co-operative societies
has been implemented in many states and Union Territories.

(iii) In addition to such programmes, certain state governments like Andhra Pradesh, Madhya Pradesh
West Bengal had also initiated development programmes to strengthen the working of the co-operative
credit institutions at the base level.

(iv) On the basis of their financial position as on 30 June 1987, 175 CCBs and 7 SCBs in the country
were identified as 'weak' banks and brought under the programme of rehabilitation which, however, did
not really work quite well.

(v) With a view to enabling weak banks which were either ineligible or were on the verge of becoming
ineligible for refinance SUPP011, a 12-Point Action Programme had been formulated and circulated by
NABARD to all the state governments.










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Urban Co-operative Banks

Primary (urban) co-operative banks play an important role in meeting the growing credit needs of urban
and semi-urban areas. UCBs mobilise savings from the middle and lower income groups and purvey
credit to small borrowers, including weaker sections of the society. The number of UCBs stood at 1,872
at end-March 2005, including 79 salary earners' banks and 119 Mahila banks. Total number of scheduled
UCBs were 55 at end-March 2005. Scheduled UCBs are under closer regulatory and supervisory
framework of the Reserve Bank.

Various entities in the urban co-operative banking sector display a high degree of heterogeneity in terms
of deposits/asset base, areas of operation and nature of business. In view of its importance, it is
imperative that the sector emerges as a sound and healthy network of jointly owned, democratically
controlled and professionally managed institutions. In order to achieve these objectives, the Reserve
Bank took a series of policy initiatives in 2004-05. The most significant initiative in this regard was the
Vision Document and Medium-Term Framework (MTF) for UCBs. With a view to protecting depositors'
interests and avoid contagion on the one hand, and enabling UCBs to provide useful service to local
communities and public at large on the other, a draft Vision Document was prepared and placed in
public domain for eliciting comments. Based on the feedback received from different quarters, the
necessary modifications were carried out in the vision document to evolve as the medium-term
framework for the sector
Regulatory Initiatives for UCBs
UCBs have grown rapidly since the early 1990s. During the phase of rapid expansion, however, the
sector showed certain weaknesses arising out of lack of sound corporate governance, unethical lending,
comparatively high level of loan defaults, inability to operate in a liberalised and competitive
environment. The Reserve Bank, therefore, has been striving to harness the growth of UCBs with
appropriate application of prudential regulation and supervision to safeguard the interests of depositors.
The Reserve Bank initiated several regulatory measures during 2004-05 to ensure the growth of UCBs
along sound lines.

Regulation and Supervision UCBs

The Reserve Bank is entrusted with the responsibility of regulation and supervision of the banking
related activities of primary co-operative banks under the Banking Regulation (B.R.) Act, 1949 As
Applicable to Co-operative Societies (AACS). Other aspects such as incorporation, registration,
administration, management and winding-up of UCBs are supervised and regulated by the respective
State Governments through Registrars of Co-operative Societies (RCS) under the Co-operative Societies
Acts of the respective States. UCBs with a multi state presence are registered under the Multi State Co-
operative Societies Act, 2002 and are regulated and supervised jointly by the Central Government
through Central Registrar of Co-operative Societies and the Reserve Bank.

The current legislative framework provides for dual control over UCBs. For resolving problems arising out
of dual control regime, a draft legislative bill proposing certain amendments to the Banking Regulation
Act, 1949 (AACS), based on the recommendations of the High Powered Committee on UCBs, was
forwarded to the Government. Pending the amendment to the Act, the Reserve Bank is entering into a
regulatory arrangement with the State Governments through Memorandum of Understanding (MoU) to
facilitate proper and coordinated regulation and supervision of UCBs. MoUs have already been signed
between the Reserve Bank and three States that have a large network of UCBs, viz., Andhra Pradesh,
Gujarat and Karnataka. As a follow-up to the signing of MoUs, the Reserve Bank has constituted
TAFCUBs in these States. Efforts are being made to enter into MoUs with other States having a large
number of UCBs.







Licensing of New Banks/Branches

Consequent upon the easing of licensing norms in May 1993, more than 800 licences were issued (up to
June 2001) for setting up urban cooperative banks. However, close to one-third of these newly licensed
UCBs became financially weak within a short period There was, thus, a need to moderate the pace of
growth of this sector, particularly given the vexatious issue of dual control over CBs. The Reserve Bank
proposed certain amendments to the Banking Regulation Act,1949 (AACS) to overcome the difficulties
arising out of dual control. Pending enactment of these amendments it was announced in the Annuall
Policy Statement for 2004-05 that issuance of fresh licences would be considered only after a
comprehensive policy on UCBs including an appropriate legal and regulatory framework for the sector, is
put in place and a policy for improving the financial health of the urban co-operative banking sector is
formulated. Accordingly, at present, applications for banking licence, including licence for opening of new
branches, are not considered.

Supervisions of UCBs

Inspections

The on site financial inspection carried out by the Reserve Bank continues to be one of the main
instruments of supervisions over UCBs. The Reserve Bnak carried out statutory inspections of 812 UCBs
during 2004-05 as against of 848 UCBs conducted during the previous year.

Off-site Surveillance

The off-site surveillance system (OSS) for supervision was made applicable to all scheduled UCBs from
March 2001.The returns for OSS were reviewed and a revised set of 8 returns was prescribed from
March 2004.The OSS returns of UCBs are designed to monitor compliance and obtain information from
them on areas of prudential regulations. The main objective of the OSS returns is to obtain relevant
information on areas of prudential interest, address the management information needs, strengthen the
management information system (MIS) capabilities within the reporting institutions and to sensitise bank
managements about concerns of the supervisory authority. Compliance monitored through these returns
covers assets and liabilities, earnings, assets quality, sector/ segment-wise analysis of advances,
concentration of exposures, connected or related trending and capital adequacy. These concerns earlier
were being addressed through periodical on-site inspections of banks undertaken at intervals ranging
from one to non-scheduled banks with deposit base base of over Rs.100 crore from June 2004.






























Operational and Financial Performance of Urban Co-operative Banks

Operations of UCBs ( both scheduled and non scheduled) have expanded Rapidly since 1966, when they
were brought under the purview of the Banking Regulation Act, 1949 (AACS). Deposits and advances of
UCBs Increased sharply from RS.153 crore and Rs.167 crore, respectively, in 1966 to Rs1,02,089 crore
and Rs,65,951 crore ,respectively, at end March 2003, registering an
annual compound growth rate of 19.2 per cent and 17.5
Per cent, respectively .The annual compound growth rate of deposits and Advances, however, slowed
down to 1.4 per cent and 0.7 per cent, respectively, during last two years, i,e.,2003-04 and 2004-05.

Regulation of Rural Co-operative Banks/Central Co-operative Banks

Licensing of State Co-operative Banks / Central Co-operative Banks
No new licence was granted during 2004-05. Total number of licensed State co-operative banks (StCBs)
and Central co-operative banks (CCBs) Were 13 and 73, respectively, at end-March 2005, show cause
notices Were issued to six CCBs in 2004-05 for rejection of their licence applications As at end-March
2005, nine CCBs were placed under the Reserve Banks Directions prohibiting them from granting loans
and advances to certain areas and/or accepting fresh deposits. No scheduled status was granted to any
StCB during the year for inclusion in the Second Schedule under Section 42 of the RBI Act,1934. Total
number of scheduled StCBs remained at 16at end-March 2005.









Supervision of the Rural Co-operative Structure

NABARD undertakes inspection of RRBs, StCBs and CCBs in accordance with the powers vested under
Section 35(6) of the Banking Regulation Act, 1949 (AACS). Besides, NABARD conducts voluntary
inspection of SCARDBs, Apex weaver Co-operative Societies and State Co-operative Marketing
Federations. The frequency of statutory/voluntary inspections by NABRAD is being increased from 2005-
06. Accordingly, statutory inspections of all StCBS as well as of those CCBs and RRBs which are not
complying with minimum capital requirements as required under the B.R.Act,1949 (AACS) and the
Reserve Bank of India Act, 1934, respectively, and voluntary inspections of all SCARDBs will be
conducted on an annual basis. The statutory inspections of CCBs and RRBs with positive net worth as
also the voluntary inspections of Apex co-operative Societies/Federations would continue to be conduct
once in two years. With the introduction of annual inspection, the system of conducting quick inspection
has been dispensed with. Inspection of 326 banks (12StCBs,181CCBs and 133 RRBs) and voluntary
inspection of 11 SCARDBs and four Apex institution were carried out during the year.

State Co-operative Banks

Operation of state Co-operative

Asssets/liabilities of StCbs grew at a higher rate during 2003-04 as compared with the preceeding year.
Deposits of StCBs grew significantly during the year. Most of such deposits were deployed in
investments, a trend which wa observed in respect of other financial institution as well. Many financial
institutions increased their exposure to investments for making capital gains in a declining interest rate
scenario. Loans and advances extended by StCBs. However, decelerated further from the low growth
witnessed in the previous year





Financial performance of state Co-operative Banks

Interest income of the StCBs declined by Rs 267 crore during 2003-04.This, however, was more than
compensated by a sharp increase in other income, on the one hand, and decline in interest expense
ded and operating expenses, on the other. As a result, operating profits of StCBs improved marginally
during the year. However, a sharp increase in provisions and contingencies resulted in declined in net
profits by Rs 20.6 crore at end-March 2004 from Rs.343 crore at end of the previous year.twenty seven
out of 31 StCBs earned profits, while four incurred losses during the year. Twenty StCBs earned higher
Profits during 2003-04, while seven earned lower profits. Losses incurred by three loss making StCBs
declined while it increased for one

Central Co-operative Banks Operation of Central Co-operative Banks

Total Assets and Liabilities of Central co-operative banks (CCBs) expanded at a lower rate during 2003-
04 as compared with the previous year mainly due to slowdown of deposits, borrowings and internal
generation. The impact of this slowdown was felt mainly on loan and advances, which grew at a much
lower rate as compared with the previous year. Investments, however, increased sharply, a trend which
was observed in respect of other financial intermediaries as well. The structure of liabilities and assets of
CCBs remained broadly unchanged

Primary Agricultral Credit Societies (PACS)

Primary agricultural credit societies (PACS) is the foundation of the co-operative credit system on which
the superstructure of the short term co-operative credit system rests. It is the PACS which directly
interface with individual farmers, provide short-term and medium-term credit, supply agriculture inputs,
distribute consumer articles and arrange for making of produce of its members through a co-operative
marketing society.



ANNEXURE MAJOR POLICY DEVELOPMENT OF COMMERCIAL BANKS AND CO-OPERATIVE BANKS

Announcement
Date Measures
2005 COMMERCIAL BANKS
March 11
Parameters on pilot implementation of Cheque Truncation Image Standards issued to banks .
Drafts guidelines on implementation of the New Capital Adequacy Framework issued for comments on
managements of risk.
March 29
Banks advised to exercise caution in outsourcing of their systems and ensure that risks in this regard
are minimized.
March 30
Banks advised to implement some recommendation of the Vyas Committee. These included:
1. Constitution of local advisory committee for all rural branches:
2. Setting up of micro-finance cells at banks, central offices:
3. Encouraging SHGs to use local book writers in association with concerned agencies promoting these
SHGs for maintaining the quality of books of accounts.

CO-OPERATIVE BANKS
April 15
Comprehensive guidelines issued for investment in non- SLR securities by Urban Co-operative Banks.
April 21
All States Co-operative Banks and Central Co-operative Banks advised that the interest rate on NRE
Deposits for one to three years maturity, contracted effective close of business in India on April 17, 2004
, shall not exceed the LIBOR/SWAP rate for dollar of corresponding maturity. Further, the interest rate
on NRE savings deposits has also been linked to LIBOR/SWAP rates with effect from close of business in
India on April 17, 2004. the interest rates on NRE savings deposits should not exceed the LIBOR/SWAP
rate for six months maturity on US dollar deposits and may be fixed quarterly on the basis of the
LIBOR/SWAP rate of US dollar on the last working day of the preceding quarter.