Issues and Challenges in Regulating, Supervising and providing Deposit Insurance to Rural Banks and Cooperatives in India

Usha Thorat Chairperson, DICGC and Deputy Governor, Reserve Bank of India

Kula Lumpur November 01, 2007

Outline of presentation Indian Financial Intermediaries Deposit Insurance in India Rural and Cooperative Banking Issues, Challenges and Strategies: Regional Rural Banks (RRBs) Rural Cooperative Banks Urban Cooperative Banks (UCBs)
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(Figures in brackets indicate number of insured deposit accounts in millions)

Indian Financial Intermediaries
Banks (683)

NBFCs

PACS

Commercial Banks (552)

Coop. Banks (131)

Deposit Taking

Non-Deposit Taking

Public Sector Banks (451) Private Sector Banks /LABs (48)

Foreign Banks (2)

Urban Co-Op Banks (55)

State Co-Op Banks (5)

Deposits insured (mandatory)

Central Co-op Banks (71)

Deposits not insured

RRBs (51)

Indian Deposit Insurance a quick view

DICGC (Since1962) - Wholly owned by RBI. Pure Pay Box System of deposit insurance Limited to INR 100,000 (US $ 2,500) per depositor. Mandatory cover & uniform flat rate premium. Fully Protected: 95% of total deposit accounts; Insured Deposits: 59% of total assessable deposits; (coverage: 2.72 times of per capita GDP ) Insured accounts : 683 million; Insured deposits : U.S $ 352 billion; Reserve Ratio : 0.80 %
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Co-operative Banks Vs. Commercial Banks

(Share as of March 2007)

Co-operative Banks Insured Deposits Claims Settled Recovery Rate (Overall 5.13 %) 14.75 % 89.00 % 2.08 %

Commercial Banks 85.25 % 11.00 % 28.76 %

Aptly summarized
We are adopting a three-track approach with regard to capital adequacy rules. On the first track, the commercial banks are required to maintain capital for both credit and market risks as per Basel I framework; (urban) cooperative banks on the second track are required to maintain capital for credit risk as per Basel I framework and surrogates for market risk; RRBs (and rural cooperative banks) on the third track which though subject to prudential norms do not have capital requirement on par with the Basel I framework - Governor Dr.Y.V.Reddy
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Rural Banking

in India
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Rural / Cooperative Banking - Salient Features Key role in Financial Inclusion Limited area of operations; Local flavour Client profile: Typically farmers, small business establishments, small scale industries, retail traders, professionals, self employed persons New outreach: Self Help Groups / Joint Liability Groups and other micro credit vehicles.

Rural Cooperative Credit Structure - 3 Tiers

State Cooperative Banks (SCBs) 27 District Cooperative Banks (DCCBs) 363 Primary Agricultural Credit Societies (PACs) 109,000

5 Million Accounts Insured for USD 3,080 Million

71 Million Accounts Insured for USD 14,125 Million

128 Million Accounts No Deposit Insurance available Not regulated by RBI

Regional Rural Banks (RRBs)

Since 1976; Owned by Central/State Govts./Sponsor Banks. 196 RRBs (Sept. 2005); now, 95 following Mergers. Sponsored by 28 banks in 26 States; 14,519 branches. Business ranging from US $ 6 Million to US $ 1,200 Million each Local flavour; a major vehicle for inclusive growth. Higher Cost-income ratio & NPAs; lower profitability. Recap of RRBs having negative net worth GOI plan. Challenges Governance, Skills, IT, Payment systems. Deposit Insurance available; No impact on DICGC as yet.

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Task Force for Revival of Rural Cooperative Credit Structure (CCS) National level Task Force attributed problems of CCS to: Impairment in Structure Impairment in Governance Impairment in Management Financial Impairment
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Rural Cooperative Credit Structure

Recommendations of Task Force Special financial assistance Institutional restructuring; Changes in legal framework Capacity building ; Fit and proper criteria Road map for CRAR Current position Implementation of recapitalisation package underway in MoU States. No challenges posed to DICGC by Rural cooperative banks.
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Urban Co-operative Banks - a few large failures

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Dual Control Cooperative Banks

State Subject Central Act Federal Subject Multi State Co-operative Banks

Registration / Audit / Liquidation RCS State Govt.

Licensing / Supervision / DI BR Act (AACS) -RBI

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Urban Cooperative Banks (UCBs)

Mushrooming of UCBs. (1993-2001) Weak governance, managerial failures, poor financial health. Dual Control. Failure of a few large UCBs since 2001. Out of total claims of US $ 650 million admitted for all banks so far, over 88% was in respect of 176 UCBs alone.

Current concern to DICGC.

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Confidence in UCBs shaken!!

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Addressing UCBs Problem Our Approach

Bank / branch licensing on hold since April 2005. Vision Document. MoU/TAFCUB mechanism. Merger guidelines. Fit and proper criteria for CEOs. Twin tracked Regulatory/Supervisory regime. Incentives for stronger banks in MoU States. Graded Supervisory Action.
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UCBs - Current Challenges and Strategies

Restructuring of problem banks- our experiences. Avenues for raising Capital: working group recommendations. Scheme of amalgamation. Restructuring liabilities of problem banks. Expeditious settlement of claims: revised guidelines. Coordination mechanism between DICGC and RBI.

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UCBs Emerging Trends Rising Strength & Public Confidence As on No. of Of which: Deposits Advances Mar 31, UCBs Weak banks (US $ billion) (US $ billion) 2007 2006 2005 2004 1813 1853 1872 1926 563 677 725 732 30.2
(6.1%)

19.7
(9.8%)

28.5
(8.6%)

17.9
(7.1%)

26.3
(- 4.8%)

16.7
(-1.6%)

27.6

17.0
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(Figures in brackets indicate YoY Growth)

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