CHAPTER 3

HISTORY, DEVELOPMENT AND PRORESS OF URBAN

CO-OPERATIVE BANKS
Sr.no Description Page No.
3.1 Introduction 3.2
3.1.1 Development of Co-operative Banks in the World 3.3
3.2 History of Urban Co-operative Banks in India 3.3
3.3 New Economic Policy 3.5
3.4 Trend and Progress of Co-operative Banking in 3.6
Maharashtra
3.4.1 Formative Stage 3.6
3.4.2 Development during Pre-independence Period 3.7
3.4.3 Development during Post-independence Period 3.8
3.5 Growth and Development of UCBs during the Period 3.9
under Study
3.6 Features of Urban Co-operative Banks 3.11
3.7 PEST Analysis 3.21
3.8 SWOT Analysis 3.23
3.9 Conclusion 3.29
References 3.31

3.1
 CHAPTER 3
HISTORY, DEVELOPMENT AND PRORESS OF URBAN
CO-OPERATIVE BANKS

"If Co-operation fails, there will fail the best hope of India" -Royal Commission on
Agriculture.

"Without character there is no co-operation" -Mahatma Gandhi

3.1 INTRODUCTION

The birth of the co-operative movement in India was in 1904. A century has
lapsed since then; still the urban co-operative banks enjoy a distinct position in the co-
operative movement. They cater to the financial requirement of urban population
particularly people with small means which are not cared for by the commercial banks or
private banks. Urban co-operative banks started getting importance during 1950s.
During 1957-58 RBI had conducted a survey on urban co-operative banks and
subsequently a study group on credit co-operatives in the non agricultural sector
popularly known as Varde Committee was constituted. The committee reported the need
for establishing new urban co-operative banks, extending membership making banks
economically viable, need for diversification of loan portfolio, and for ensuring more
financial assistance to small industrialists and artisans.
With a view to suggesting ways and means of effecting necessary changes in the
organization and activities of urban co-operafive banks, a working group on industrial
finance was set up in 1967 under the chairmanship of Shri P.N.Damry the then Deputy
Governor of RBI. The Damry Committee suggested that urban co-operative bank was the
only co-operative financing agency which could successfully undertake the function of
providing adequate finance to small scale industrial units .
The history of co-operative banks can be grouped into two categories, 1) Co-
operative banks in v^^orld and 2) Development in India.

5393
3.1.1 DEVELOPMENT OF CO-OPERATIVE BANKS IN THE WORLD ^
While England is the birth place of consumer's co-operation, which was started by
Rochdale, co-operative banking was started first in Germany and its pioneers were Herr
Schulze and Herr F.W. Raiffeisen. Soon after their retirement they had started social
work by founding the first loan society by Schulze in 1860. Raiffeisen had started another
loan society in which all borrowers became members. Thus two models of co-operative
organizations came into existence such as:
1. Schulze Delitzsch model and
2. Raiffeisen model
1. Schulz Delitzch Model: - According to this model, the credit bank was an association
of artisans and petty traders to provide credit facilities for its members only. Funds
were raised by means of share capital, by attracting deposits, and by means of
rediscounts by outside bank. Every member subscribed for one share and dividends
were paid in proportion to share money. Deposits were accepted in order to raise
fiinds and loans were granted to members on the basis of mortgaging their lands,
deposits of collateral and goodwill of the borrowers. Thus these banks trained people
and developed principles of self discipline, self growth and prudence.
2. Raiffeisen Model: - This model also worked with the same principles of Schulze
model but served the needs of rural poor. 'One village one society' motto was
accepted. Small savings of rural people were accepted and with this, small deposits
were created which were used to give loans to members.
Robert Owen, Dr.William King, Saint Simon and Schulz were recognized as
pioneers in developing co-operative movement in the world '

3.2 HISTORY OF URBAN CO-OPERATIVE BANKS IN INDIA *

The history of urban banking in our country is very old. The first non agricultural
credit society at Baroda was established in 1889, 15 years before the passing of first Co-
operative Societies Act. The first Co-operative Societies Act was passed in 1904. In 1915
Maclagan committee expressed its opinion that even urban people should get financial
assistance like their rural counter parts. This attitude was even encouraged by social
workers and leaders who started taking interest in developing the movement. The urban
co-operative banks enjoy a distinct position in the co-operative movement. They cater to

3.3
the financial requirement of urban population particularly people with small means who
were depending on money lenders and used to spend 80% of their income for payment of
exorbitant interest of money lenders. The co-operative banks were acted as 'gap fillers'
between moneylenders and commercial banks.
Before going into the present position of urban co-operative banks in
Maharashtra, it is necessary to understand the progress of such banks as well as their
comparative position vis-a-vis India.

Growth and development of urban co-operative banks in Maharashtra state from

1961 to 2000

Growth & Development of Urban Co-operative Banks from 1961 to 2000.

Table: 3.1
Sr no Particulars 61-62 71-72 81-82 91-92 99-2000
1. No. of urban co-operative banks 149 265 345 381 630
2. No. of Members ('000) 433 883 1618 4464 7782
3. Share Capital (Rs. In lakhs) 284 987 4201 18692 57032
4. Deposits (Rs. In lakhs) 1243 6832 65779 466298 350193
5. Loans Outstanding (Rs. In lakhs) 1671 5007 48003 322718 1691398
6. Overdue (Rs. In lakhs) NA 364 3752 45735 I03I08
(Source: Co-operative movement at a glance by 2002; CC &RCS, M.S. Pune.)

The above Table 3.1 shows the growth of urban co-operative banks from 1960 to 2000
which made a remarkable progress from 149 banks to 630 banks respectively. Thus
during the period of 40 years there was an all round progress in respect of various
indicators like number, membership, share capital, deposits and loans outstanding.
We can even make a comparative study of urban co-operative banks in
Maharashtra with the whole of India. Compared to states like Gujarat (341 Banks),
Karnataka (299), Tamilnadu (136) Maharashtra is having a maximum number of urban
co-operative banks 616 as on 31.3,1999.

3.4
Comparative Position of Urban co-operative banks in Maharashtra-vis-a-vis India
31.3.1999
Table 3.2
Sr no. Particulars India Maharashtra
1999 1999 2002

1. No. of Urban Co- 1936 632 657

operative Banks
2. No. of Members ('000) N.A 7757 8186
3. Share Capital (Rs. In N.A 48944 105544
lakhs)
4. Deposits (Rs. In lakhs) 5054000 2652300 4569095
5. Loans 3265000 1517700 2696671
(Source: Co-operative movement at a glance by 2002; CC &RCS, M.S. Pune.)

It is seen from the above table that as on 31-3-99 there were 632 urban co-
operative banks in Maharashtra out of 1936 banks in India. That means about 33% of
urban co-operative banks in India is constituted in Maharashtra. As regards deposit
mobilization and lending operations, the share of urban co-operative banks in
Maharashtra was 52% and 46% respectively of the total deposits and loans granted by all
the urban co-operative banks in India, in the year 1998-99. Thus Maharashtra has made
an outstanding progress compared to other states in India.

3.3 NEW ECONOMIC POLICY'*

The new economic policy is concerned with the restructuring of Indian economy,
which is popularly known as liberalization, privatization and globalization (LPG regime)
and has influenced the co-operative banks also. This has resulted in increased
competition, adoption of technology, as well as opening of foreign bank branches in
India. Professionalism and competence has become the order of the day. Due to the
regulations by the State Government in their operations, the co-operative banks have
ceased to be cost and quality conscious in their operations. They should come out of this
and should provide value addition in their services like advanced countries. Government
should help the co-operatives without much intervention.

3.5
 It is therefore thought useful at this juncture to attempt a historical review and
origin of urban co-operative banks in Navi Mumbai. It is also desirable to discuss the
problems and difficulties confronted by them particularly in the context of the
responsibilities and expectations that they have to fulfill.
The policy of encouraging urban co-operative banks once again re-established
when the Banking Commission 1972 recognized a definite role for the urban co-operative
banks in the total banking structure of the country in these words "The urban co-operative
banks do useful work in mobilizing deposits and financing the sector of small borrowers
such as small scale industries professionals, retailers and so on. Another useful activity is
financing of house construction and repairs for members of the banks. Also this type of
banking provides a useful avenue for those who have the necessary ability to set up a
bank".
The commission therefore recommended the grant of scheduled status to well
organised urban co-operative banks and also provision to remittance facilities and loan
assistance on reasonable terms through the nationalized banks to the non scheduled urban
co-operative banks.

3.4 TRENDS AND PROGRESS OF CO-OPERATIVE BANKING IN

MAHARASHTRA
The progress of co-operative banks can be divided into different stages like
formative stage, pre independence period and post independence period as well as LPG
regime.
3.4.1 FORMATIVE STAGE (1904-1915)*
After the passing Co-operative Societies Act, many primary co-operative societies
were established through which rural poor started getting loans and advances for
agricultural purposes. Many Central agencies were also established, and Government of
India passed co-operative societies Act 1912, which regularized many of the practices
which were adopted by these Primary Co-operative Societies.
By the end of 1914 the number of societies working in India increased with more
than six lakh membership and auditing as well as financial management of such societies
became complicated. This led to the appointment of Maclagan Committee in October

3.6
1914 which had laid down the norms and standards for financial management, liquidity,
audit and inspection.
3.4.2 DEVELOPMENT DURING PRE- INDEPENDENCE PERIOD '
The Mac lagan Committee report was published in 1915 which was a milestone in
banking industry. It suggested that co-operation spirit should be involved spontaneously,
along with thorough audit and supervision. It also suggested that, urban people also can
avail of credit from banks, as prior to this period; banks were meant only for agriculture
and the rural poor. The committee also suggested the need for urban banks.
The year 1925 was a landmark in the history of the co-operative movement in the
Bombay Province, as Bombay took lead in that year in legislating a separate Co-operative
Societies Act for the province. Till 1929-30, the Co-operative movement progressed quite
satisfactorily, but later on due to worldwide depression in thel930's the progress of banks
started declining. The great depression brought to the light that all was not well with the
movement. Many cases were referred to arbitration and Special Recovery officers were
appointed to recover the over dues. In 1931 Indian Banking Inquiry Committee observed
that there were many defects in the system. Only remedy suggested was the liquidation of
societies.
A Co-operative Round Table conference was held in June 1933 in Bombay which
recommended that under the leadership of Mr. K.L. Punjabi a committee should be
established for supervision of the working of co-operative organizations. Accordingly the
committee was appointed and this committee had submitted its report regarding the
proposal, desirability and feasibility of co-operative land mortgage banks in the province
and on the basis of the proposal of this committee government sanctioned the registration
often primary land mortgage banks with an Apex Bank at Bombay. The establishment of
these banks filled up a vital gap in the provision of long term finance to the agriculturist.
In the year 1936-37 when Sindh was separated from the Bombay Presidency, the
condition of the co-operative movement was not at ail satisfactory. In 1937-38 the
Government of Bombay requested V.N. Mehta and Mr. M.D. Bansali, the then registrars
to examine the existing position of the co-operative societies. In their joint report, a
number of suggestions were made. After making a thorough study of the cooperative
societies and suggested that those societies whose share capital was Rs.20, 000/- or more

3.7
than that, and those societies who allowed their members to withdraw the amount through
cheque, should be converted into co-operative banks. Co-operative Planning Committee
which was established in 1945 again emphasized the recommendations of Mehta
Committee.
In 1947 under the chairmanship of Sir Manilal Nanavati, a committee was
established, which recommended that. Co-operative Societies should be made
multipurpose Societies, which can be converted into banks.

3.4.3 DEVELOPMENT DURING POST INDEPENDENCE PERIOD

Between 1951-1960 the Varde Committee was appointed .During the Five Year
Plan period when many banks which were inefficient went into losses and this forced the
authorities to implement insurance facilities for co-operative banks also.
Varde Committee recommended that the concession of Deposit Insurance
Corporation should be given to co-operative banks and rules of Reserve Bank of India
should be made applicable to these banks. Before this urban co-operative banks were
guided by the Registrar of Co-operative Societies of that state.
In 1965 Banking Regulation Act was made applicable to co-operative banks and
its name was changed to 'Banking Regulation Act as applicable to urban co-operative
banks'. Because of this change the working of co-operative banks were regularized by
Reserve Bank of India's rules and guidelines. The deposit, loans ratio, interest rate
uniformity, cash reserve ratio etc., is guided by Reserve Bank of India. The Reserve Bank
of India made one directive, that those who would keep its deposits with co-operative
banks would get 1% more interest rate than others. Because of such policy the deposits in
co-operative banks were multiplied. In 1968 the deposits which were 4 lakhs had gone up
to Rs. 23 crore by the year 200 L
The internal administration, staff and organization structure was supervised by the
Registrar of Co-operative Societies who represents the state. The Varde Committee
stressed on the viability of village societies, which could cover a population of about
3000. The trend was to incorporate more and more of services of co-operatives to cover
the entire economic aspects of village life including servicing of agriculture.

3.8
 In 1987 some co-operative banks that had large amount of net worth continuously
for a period of three years and continued with the deposits of Rs. 1 OOcrores, like the
Rupee Co-operative Bank Limited, Janata Shahakari Bank Limited and Cosmos Co-
operative Bank Limited were brought under the status of scheduled bank.
From 1990, when the economy accepted the LPG concept, many foreign banks
wanted to grab the market. The starting years of 1990 were very good with quantitative
expansion. But later on when RBI had withdrawn all concessions enjoyed by the co-
operative banks and some international standards were made applicable to co-operative
banks, these banks were confronted with many problems. After 1995, there was no
qualitative improvement in the working of the bank. Reserve Bank of India gave the
directive to issue mortgage loans, and it was implemented.

3.5 GROWTH AND DEVELOPMENT OF URBAN CO-OPERATIVE BANKS

DURING THE PERIOD UNDER STUDY (2001-2005).
When the Banking Regulation Act was made applicable to urban co-operative
banks (1966) there were about 1100 urban co-operative banks with deposits of Rs 167
crores and advances worth Rs 153 crores. At the end of 1996 the number of urban co-
operative banks increased to 1501 and the deposits and advances rose to Rs 24161
crores and Rs 17927 crores respectively. The urban co-operative bank continued to
grow at a fast pace till 2003, when their number increased to 1941 and their deposits
and advances to 101,546 and Rs 64880 crores respectively. Subsequently the number of
urban co-operative banks started declining from 2004 onwards. It came down from
1941 to 1926 and 1872 in 2004 & 2005 respectively. The deposits were showing an
upward trend of Rs. 1,10256 crores and Rs.l, 05,021 even though the number had been
declined.
In the same way the market share of urban co-operative banks showed an increase
from 1998-2002 and thereafter started a decline due to several reasons. The spectacular
growth was visible till 2002. A major reason for the decline was loss of public
confidence and reputation due to the crisis among urban co-operative banks. In the year
2001 a large multi state bank in the state of Gujarat witnessed a sudden run on its
branches, following the rumors of its large exposure to a leading broker who had

3.9
 suffered a huge loss in share market. The large scale withdrawal of deposits within a
short time had resulted in severe liquidity problems to the bank. The bank was also
holding about 800 crores of inter bank deposits from a large number of co-operative
banks in the state and from other states, which posed a systematic risk. Later on an
order of moratorium was enforced on the bank by the Central Government. The bank
was subsequently placed under a scheme of reconstruction with the approval of RBI.
The decline of public confidence in the urban co-operative bank sector deepened
in the aftermath of crisis in Gujarat and Andhra Pradesh and concomitantly, the
position of urban co-operative banks generally started deteriorating. As on 30"^ June
2004, 732 out of the 1919 urban co-operative banks were categorized under Grade III
or IV signifying their weakness or sickness.
Decline Trend in Urban Co-operative Banks
Table 3.3
Year No. of urban co- Deposits Market share % Advances %Growth
operative banks of deposits Growth
2001 1618 80,840 6.3% 98.7 54389 95.6
2002 1854 93,069 6.4% 15.1 62060 14.1
2003 1941 1,01,546 6.3% 9.1 64880 4.5
2004 1926 1,10,256 5.8% 8.6 67930 4.7
2005 1872 1,05,021 5.3% -4.7 66874 -1.6
(Source: Trend & Progress of Banking in India -Various years.)

Let us also analyze the features of urban co-operative banks which will be very
useful in order to understand the progress and prospects of urban co-operative banks.
The features of urban co-operative banks always give a unique status to these banks in
Indian history.

3.10
3.6 SALIENT FEATURES OF URBAN CO-OPERATIVE BANKS

The main features of urban co-operative banks can be listed below: —

i) Organizational Structure
Most of the primary urban co-operative banks are small in size and have
unitary structure. They are affiliated to the concerned District Central Co-operative
Banks and can avail financial assistance from these banks. But most of the co-
operative banks are self sufficient and never rely upon these District Co-operative
banks.

ii) Registration
The authority for registering a primary co-operative bank vests with the Registrar
of Co-operative Societies of the State in which the bank is established .Its functioning
is therefore governed by the Co-operative Societies Act applicable to that State and
rules werefi-amedthere under .The constitution, functions, procedures and methods of
working, sources of fluids and manner of utilization, earnings and their disposal are
governed by the Co-operative Societies Act. The promoters of co-operative banks
usually adopt the bylaws formulated by the Registrar for the purpose with
modifications which are required with their own special needs. Any amendments
should be ratified by the Registrar.
iii) Licensing
The RBI is entrusted with the authority to grant license to co-operative banks
under section 22 of the Banking Regulation Act 1949 in order to carry on banking
business. Before granting license the RBI should consider the following while
verifying the application:-
(i) Viable status of the bank,
(ii) How the public interest will be served,
(iii) The capacity of the proposed bank's management to manage the affairs of the
bank ,
(iv) Safeguarding the interest of the depositors.

3.11
 iv) Co-operative Character
An urban co-operative bank is primarily a co-operative society should satisfy
certain basic co-operative principles. It should be characterized with the foUowing:-
(i) Principles of democratic management,
(ii) Principles of mutual interest and democracy,
(iii) One man, one vote,
(iv) Promotionof thrift and savings,
(v) Supremacy of general body in all matters.

v) Target group
Urban co-operative banks mainly cater to the requirements of small business
units, marginal entrepreneurs, women entrepreneurs, retail traders, professionals, and
middle income group and lower income group families. Their main focus of finance is
targeted towards priority sector to which 60% of total advances are being allocated.
Again 25% of this will be apportioned among poor and backward sections of the society.
The main thrust of such finance is for non agricultural productive purposes. These banks
bridge the gap between money lenders and commercial banks in rural and urban areas.
vi) Area of Operation
Usually urban co-operative banks are registered in a metropolitan city or town and
shall have an area of operation contiguous with the limit of metropolitan area limits
including the urban agglomeration and defined peripheral areas related to. Those banks
registered in urban, semi-urban centers are allowed to operate throughout the district of
registration and such banks may be permitted to finance non agricultural credit
requirements in areas which are ten kilometers from the boundary of the concerned urban
centre. The area of operation of scheduled urban co-operative banks would be made co-
extensive with the territorial jurisdiction of the state of registration.
For the purposes of extension of area of operation prior approval of RBI has to be
obtained.

3.12
 vii) Management Structure
The management of an urban co-operative bank includes the (i) general body, (ii)
the elected Board of Directors and (iii) the paid professional employees i.e. the chief
executive and other managerial personnel. Some banks have constituted subcommittees
for sanctioning loans and for other special purposes. The general body should convene a
meeting once a year and is the final and supreme authority. All functions and powers of
various bodies, procedure to be adopted are clearly laid down in the by- laws.
The general management of an urban bank is vested with a Board of Directors
elected at the general body meeting and the day to day management of the bank rests with
the managerial staff headed by a professionally competent person known as the Chief
Executive Officer. The bank is divided into different departments and the departments are
divided into sections each being placed under the charge of an officer with clear cut job
demarcation and fixation of responsibility. The board resolutions will specify the powers
of branch managers as well as delegation of powers by the chief executive.

viii) Sources of Funds

The sources of funds of an urban co-operative bank consist of their owned fiinds
as well as borrowed funds. The paid up share capital and the accumulated reserves
created out of profits are included as owned funds. Borrowed funds consist mainly of the
different types of deposits received from both members and non members, and also
include borrowings from central co-operative financial agencies and apex institutions.
ix) Uses of Fund
Urban co-operative banks grant fixed loans or cash loans to their members against
the mortgage of unencumbered immovable property, insurance policies, and fixed deposit
receipt or on surety of one or more persons who are also members of the bank. Salaried
people are entitled to personal loans up to a stipulated amount which will be the multiple
of their monthly salary while others can avail of loans and advances which are expressed
as a multiple of their contribution towards capital. Usually the urban co-operative banks
lend money for trade and commerce, extension and repairs of household property,
consumer loans for purchase of domestic appliances, vehicles etc. Apart from this loans
are also given for educational and medical expenses, religious ceremonies, working

3.13
capital of small scale industries, agricultural and allied activities, and a number of other
emergencies.
x) Investments
The investment policy of urban co-operative banks depend on the nature of its
resources, the period for which they are available and the objectives for which it has been
organized. The main income of these banks are from deposits and their investments are
only in short term and medium term They can utilize the available resources for granting
various types of advances to members as well as maintaining the minimum CRR and
SLR at 3% & 25% of total time and demand liabilities on a day today basis as per the
sections of 18 and 24 respectively of the Banking Regulation Act, 1949.Urban banks may
also invest a reasonable portion of their liabilities in Government and other trustee
securities and fixed deposits with other banks. In times of need and emergencies these
banks can fall upon the investments to secure financial accommodation by way of
overdraft against the government and other trustee securities or against the investments in
term deposits.

xi) Distribution of Profits

The main sources of urban co-operative banks are viz, (a) interest on loans and
advances, (b) interest on government and other securities, (c) commission from agency
services and bill collections, (d) dividend on shares issued by other co-operative banks,
(e) interests on deposits of other banks, (f) entrance fees, (g) commission or discounts
received on bills and cheques, and (h) profits from trading activities. The net profits
arrived at after meeting all expenses are distributed as per the rules and byelaws. A
certain percentage is transferred to the Statutory Reserve Fund, as well as Dividend
Equalization Fund, so that the banks can declare some dividend to its shareholders. The
maximum amount of dividend which can be declared is fixed at 15%. Some amount is set
apart for giving bonuses to employees. A certain portion is transferred to the common
fund which is utilized for charitable, educational and cultural purposes as decided by the
Board. Apart from this one portion is kept apart for Building Fund and the remaining may
be transfened to General Reserve Fund.

3.14
xii) Insurance Cover
The deposits of urban co-operative banks are covered under the Banking
Regulation Act are insured by the DICGC. As regards credit guarantee, it is optional for
the eligible banks to participate in the schemes available on the basis of agreement with
the corporation. Urban co-operative banks can participate in two schemes such as (a)
Small Loans (small scale industries) Guarantee Scheme 1981, and (b) Small Loans (Co-
operative Banks Guarantee Scheme, 1984.

xiii) Special Privileges

Urban co-operative banks serve a very useful role by uplifting economically
weaker sections of the society without any outside aid; it has been the state policy to
encourage the growth of these banks by providing them some special privileges.
Accordingly urban co-operative banks have been permitted to pay higher rate of interest
on their savings, an extra one percent per annum and on all term deposits an extra half
percent per annum at their discretion as compared with rates payable by scheduled
commercial banks. This helps them in deposit mobilization efforts. The prescribed rates
for cash reserve ratio and statutory liquidity ratio are lower than those prescribed for the
commercial banks. But, at present these concessions have been withdrawn.
While the commercial banks have to invest a major portion of their deposits in
government securities the urban co-operative banks can keep the statutory liquid assets
with Central Co-operative Banks or State Co-operative Banks which can enable them to
earn more rate of interest. Moreover in order to encourage urban co-operative banks to
finance SSI units in a greater measure, the RBI / NABARD has been granting
concessional refinance to urban co-operative banks at 2.5% below the bank rate. Besides,
urban co-operative banks, in their transactions with members, are exempt from stamp
duty. With a view to safeguarding the interest of smaller units, concessional refinance is
made available to small enterprises enjoying credit limits up to Rs 2 lakhs irrespective of
the period of their existence. Likewise, income of co-operative banks out of banking as
also incomes arising out of credit facilities to members were exempt till the assessment
year 2004-05. Presently our finance minister Mr.P.Chidambaram has removed this
exemption.

3.15
xiv) Dual Control
The Reserve Bank has no statutory powers in regard to registration,
administration, amalgamation, reconstruction, liquidation of urban co-operative banks
which on the contrary vests with the Registrar of Co-operative Societies under the
provisions of the Co-operative Societies Act of the state concerned. The Reserve Bank is
only entrusted with control and supervision over the banking business of such bank under
the provisions of the Banking Regulations Act 1949. At present a vision document has
been prepared for ensuring effective regulatory measures from the RBI and co-operation
department. The state government, the RBI, and the federation of urban co-operative
banks will shortly come to an understanding on the matter, where the role of every player
will be defined (The Times of India 6'*' January 2005).

XV) Scheduled Status*

The Government of India by their notification No 15/10/87 BO II.Ministry of
Finance, Department of Economic Affairs (Banking Division) dated 5'^ April 1988,
notified that the primary co-operative banks which are licensed and whose minimum
demand and time liabilities are not less than Rs.50 crore as financial institutions for the
purposes of sub clause (iii) of clause (a) of sub-section (6) of section 42 of the RBI Act
1934. Consequently the RBI , by their notification no UBD .BR .94 191 88-89 dated 18"'
August, 1988 directed the inclusion in second schedule to the RBI Act 1934, 8 urban co-
operative banks from Maharashtra and 3 from Gujarat with effect from 1^' September
1988. By another notification No UBD.BR.106/A90/91 dated l" November 1990; three
banks viz. Bassein, Cosmos and New India were given scheduled status with effect from
1" December 1990.
Scheduling confers certain positive advantages which most of the commercial banks
enjoy. It will enable them: -
(i) To have direct access to the RBI for availing themselves of refinance facilities
under Section 17 (2)( bb)of RBI Act 1934;
(ii) Extension of the facilities under the Refinance and Bills Rediscounting
Schemes operated by the Industrial Development Bank of India;

3.16
 (iii) To accept deposits from local bodies, quasi governmental organizations,
religious and charitable institutions etc;
(iv) To issue guarantees to Central and State Government departments;
(v) To become members of the clearing houses under the RBI as well as SBI;
(vi) To enter the call money market which gives an opportunity to invest surplus
funds at a profitable rate for short periods;
(vii) To avail the RBI Remittance Facilities Scheme 1975 for the purposes of
remitting ftinds by telegraphic transfer, mail transfer of drafts through offices
of RBI and SBI and its associate banks.
On the other hand the conferment of scheduled status also imposes some
obligations on the banks in the maintenance of books of accounts and submission of
returns.
(i) These banks are allowed to keep statutory reserves with themselves or in
current account with state /central co-operative banks or nationalized banks.
Under section 42(1) of the RBI Act the banks are required to maintain with
RBI an average daily balance ,the amount of which shall not be less than 3%
of total DTL subject to a maximum of 15% of total DTL, in India of such
banks as per the fortnightly return to be submitted to RBI. For this purpose,
such banks are required to maintain a deposit account with RBI. In case of
failure to maintain the required minimum balance a penal interest from 3% to
5 % above the bank rate is recoverable from the banks depending on the
length of the period for such violation.
(ii) Presently, the banks are required to submit the return in the forml indicating
the DTL on the alternate Friday and CRR and SLR maintained once in a
month .Again under section 42 of the RBI Act 1934, the banks are required to
submit fortnightly return indicating the position of DTL on alternate Fridays
within seven days from the close of fort night. If the alternate Friday is not the
last Friday of the month, the banks are required to submit an additional return
on the last Friday of the month, the banks are required to submit an additional
return of the last Friday of the month within 7 days.

3.17
xvi) Audit, Supervision & Inspection
The regulatory bodies of an urban co-operative bank consist of
three agencies viz Reserve Bank of India, Co-operation Department of the State
concerned and the financing bank. Control is broadly exercised through a system of
returns, inspection and audit. While inspection is carried out by all the three agencies at
different periodicity, annual audit is conducted by the Co-operation Department and in
certain states by the charted accountants approved by the Registrars of Co-operative
Societies. Inspection by the financing bank is conducted to ensure safety of fiinds lent
and fulfillment of terms and conditions attached to the sanction of the credit limit
including the proper utilization of funds. The working of urban co-operative banks is
supervised by RBI through its Urban Banks Department. Urban Banking Department
supervises through a system of (i) statutory and other retums;(ii) periodical inspections
including compliance and post inspection compliance, discussions with Chairman and
a few Directors of concerned banks and (iii) special investigations of follow up of the
fraud, complaint etc. The main objective of RBI inspection is to safeguard the interests
of depositors and to build up and maintain a sound banking system in conformity with
banking laws and regulations. It also looks into the development role played by the co-
operative banks in keeping with the country's socio-economic objectives.

xvii) Standing Advisory Committee

The RBI in January 1983 has constituted a Standing Advisory
Committee for urban co-operative banks under the chairmanship of the Deputy
Governor in charge of Urban Banks Department to advise the RBI on various aspects
related to urban co-operative banks such as organizational matters, mobilization of
resources and their deployment under various sectors, co-ordination with other
organizations such as IDBI, DICGC etc. It also takes care of training facilities offered
by these banks, rehabilitation of weak and non viable banks, introduction of
professional management etc. The membership of the Advisory Committee includes
representatives of Government of India (Ministries of Finance & Agriculture),
NABARD, State Governments, Urban Bank Federations, associations, urban co-
operative banks and other co-operative and commercial banks.

3.18
 xviii) SHGs and Co-operative Banks
The schemes of Self Help Groups (SHGs) suitably linked with the co-
operative banking institutions is gaining support. The National Bank for Agriculture
and Rural Development has visualized to cover at least 1/3 rd of the rural poor
population by the year 2008 through the one billion SHGs. Developing SHGs as sub-
system of co-operative finance can be useful both for strengthening co-operatives as
well as increased flow of credit to the rural poor for meeting their essential needs. The
process of linkage will help the rural and urban poor in meeting their essential financial
needs.'
xviii) Superiority of Urban co-operative banks
Urban co-operative banks have got certain advantages over the commercial
banks which make them superior to commercial banks. These banks are not mere
lending agencies set up as substitutes for money lenders or for the commercial banks.
Urban co-operative banks are better substitutes with a noble mission to promote thrift
and savings to rehabilitate the precarious economy of the weaker sections. The primary
motive of these banks is service than profits. Urban co-operative banks are interested
in local development. Further they are not to operate as just purveyors of finance but to
fiinction as friendly guides to their clients helping them to adopt better production
techniques, sound financing and accounting systems. They are in a better position to
appreciate the needs of the members and to adjust their policies and procedures to such
needs with a greater degree of flexibility.
The urban co-operative banks transact their operations in the language of the
people in that locality; adjust the office timings and thereby making the working hours
convenient to the local people. This has motivated even the housewives, artisans as
well as office goers to open savings account which can be accessed by them very
comfortably. This inculcates the habit of thrift among the members of the public. They
have cultivated mass banking instead of class banking which is promoted by the
commercial banks.

3.19
 As compared to commercial banks the financial accounts of co-operative banks
are very transparent. Unlike commercial banks it shows bad debts and reserves also. In
Indian banking system urban co-operative bank is the pioneer in acknowledging the
common man as its clientele who is to be serviced, and commercial bank has realized
this fact only after nationalization. If we compare the number of customers of a
commercial bank branch with a co-operative bank branch, the co-operative bank
branch out numbers the nationalized branch in Navi Mumbai. The mystery behind their
better performance lies in their familiarity with the members, democratic management,
local feel, personalized service, compactness in the area of operations, close
monitoring of loans and advances through repeated reminders to the customers,
maximum recovery of overdues etc. All these inherent characteristic features have
always helped the co-operative banks for their speedy and sustained growth.
The Gujarat Government has been asked to do SWOT Analysis of its co-
operative banks. The State Government can identify the financially weak banks and
provide necessary facilities to comparatively sound banks. (Financial Express- 6' Oct
2005). This news gives us food for thought. It is clear that co-operative banks should
be saved from this pathetic situation. The following paragraphs can throw light on the
SWOT Analysis of co-operative banks in general and how to save them from their
present dilemma.
Urban co-operative banks are acting as a liaison between private and public
sector banks. They help the small entrepreneurs and agriculturists from the clutches of
money lenders. Management of urban co-operative banks is altogether a different task.
Viability of a unit always depends on efficiency and effectiveness of management.
Since urban co-operative banks cater to the requirements of small and marginal
farmers as well as entrepreneurs, their success is very important. But due to the
changing financial environment there is a drastic change in the activities and
performances of these banks. Some of these banks are working at no profit no loss
basis and some are below break even. In order to avoid the dangers related to a
collapse of a bank, some banks are getting merged with heahhy banks. The number of
urban banks their deposits and advances level are decreasing year after year. The
following table is can be self explanatory in this regard:-

3.20
 Deposits & Advances of Urban Co-operative Banks from 2003-05.
Table 3.4
Year No. of UCBs Deposits Advances (in
(31/3) (in crores) crores)

2003 1941 101546 64880

2004 1926 110256 67930

2005 1872 105021 66874

(Source: - RBI Bulletin Jan 2007)

Table 3.4 presents the number of urban co-operative banks for a period between
2003-2005.The numbers of urban co-operative banks has declined from 1941 to 1926 in
the year 2004. Again the number has gone down tol872 in 2005. The decreasing trend
was due to several reasons such as mounting over dues, political interference,
mismanagement etc.
The numbers of urban co-operative banks is decreasing drastically year after year
due to various reasons. The poor performance and growth rate can be attributed to wide
variety of reasons including socio, political and economic reasons. Let us analyse the
urban co-operative banks in relation with their strengths, weaknesses, threats and
opportunities, which can throw light on the slow progress of these banks. We should also
find out the Political, Economic, Social and Technological (PEST) factors which are
responsible for the decay of the system

3.7 PEST ANALYSIS OF URBAN CO-OPERATIVE BANKS

An analysis of political, economic social and technological factors can also be

made by what is called as PEST Analysis. A study of various factors related to economic
and political system as well as socio -technological environment can help us to
understand the implications of these factors on the performance of urban co- operative
banks. An analysis of PEST factors will also help us to frame solutions to meet the
challenges in future by the urban co- operative banks. It can also suggest measures to
improve the performance of these banks.

3.21
Political Factors

Co operative banking as a whole in Maharashtra is highly affected by the political

pressures. Co-operative banks are used as war chests for political battles (The Business
Line May 8,2001). Some District co-operative banks and several urban co operative
banks in the state have collapsed owing to the dubious tactics. Several scams and the
misdeeds of co operative banks have affected thousands of middle income group people.
When a high profile political figure holds an office in these banks their political clout is
enough to cover up several skull drudgery that have been happening in the bank; when
powerful political figures are involved, the state goverrmient will think twice before
taking action against the guilty.

After the Madhavpura scam the RBI had directed all urban co operative banks to
have a minimum of two professional directors on their Boards, one a chartered
accountant while other could be any professional such as an MBA, economist or ex
banker. But very few banks have responded for this notification. In spite of Pandit
Jawaharlal Nehru in the 1950s, asking for the depoliticisation of co-operatives, things
have still not changed (Mr.Venitaramanan, Hindu Business line 25"" July 2005). Even
today many co-operative banks have politicians on their Boards and they ensure that they
control the banks.
Economic Factors

RBI has come up with some drastic remedies after the Madhavpura incident. RBI
wants the urban co operative banks to be prohibited from lending directly or indirectly to
individuals and corporate against security of stocks and connected deals. Urban co
operative banks are now brought into the SLR net which means that 25% of their net
demand and term liabilities have to be compulsorily put in the government securities. The
RBI policy has virtually abolished the minimum lending rate for loans above Rs 2 lakhs.
Operational flexibility is the mantra the RBI is reciting for its decision. Mostly urban co-
operative banks are in demand for small loans, often for sums below 2 lakhs .Now as per
the new credit policy they have to lend at the prime lending rate or even at higher rate to
get a decent return which will again create problems for these banks. Soon they will find

3.22
the number of persons wanting to borrow from them dwindling and it will affect the
return pattern.
Social Factors

Co -operative values such as self and mutual help, honesty and integrity are the
basic features and essence of urban co- operative banks. They have the culture of catering
to local people in an urban area. These banks are a big support to low income people and
small business men. Most of urban co operative banks restrict their activity to local area
banking. They can carve a niche for themselves focusing on the middle class and the
urban poor.
Technological Factors

Old private banks, new private banks and foreign banks are offering tough
competition to existing co operative banks. Some banks have taken remedial measures by
deploying latest technology and maintaining customer relationship management. But
these banks are not in a position to take fiill advantage of technology advancement
because the cost cannot be recovered from the customers which is possible for
commercial banks. Urban co- operative banks cater to the requirements of low income
group and middle class who cannot afford any extra cost burden as such. They should
multiply the customer base in order to tackle this problem.

3.8 THE SWOT ANALYSIS OF URBAN COOPERATIVE BANKS

A scan of the internal and external environment is an important part of a strategic
plarming process. The internal environmental factors of any organization can be classified
as strengths (S) or weaknesses (W) and those external to the firm can be classified as
opportunities (O) or threats (T). Such an analysis of strategic environment is referred to
as SWOT analysis. An effort has been made by the researcher to conduct a SWOT
analysis for the urban co-operative banks in general.

3.23
Strengths of Urban co operative banks

> CUSTOMER CENTRIC SCHEMES

These banks have different loan schemes tailor made to suit the needs of various
customers. For e.g. loans for purchase or construction of residential premises, repairs and
renewals, purchase of auto mobiles etc. They also have various schemes designed for
small entrepreneurs and business men. The procedure for sanctioning of loans under the
schemes has been simplified with a view to attract maximum customers.

> PROFESSIONALLY MANAGED BUSINESS UNITS

Survival of these banks depends upon their performance. They have understood
the importance of professionalism in this competitive world. The branch manager is
expected to play diverse and conflicting roles for which he is required to have good
communication skill, high motivation, initiative, team building capacity, marketing skills
etc. For e.g. banks like Cosmos bank, Saraswat co-operative bank etc are professionally
managed ones.

> FAVOURABLE TREATMENT BY RBI

When RBI is lender of last resort for commercial banks it is the lender of first
resort for co-operative banks. They provide financial resources in the form of initial
capital working capital, refinance etc to co- operative banks.

> LOWER C.R.R AND S.L.R BALANCES

Urban co- operative banks have to maintain lower C.R.R and S.L.R balances as
compared to commercial banks .This is another blessing for them. Recently this
concession has been withdrawn by the RBI.

> LATEST TECHNOLOGY

Some of the urban co operative banks are fully automated with many facilities
offered to customers. For e.g. they have started providing tele banking, internet banking
and A.T.M services along with cheque truncation system.

3.24
 > EXPERIENCED STAFF
Experienced staff is another important strength of these banks. Many people with
immense knowledge about this sector join because the work load is not much. Even the
Navi Mumbai Co-operative bank has appointed as managers and officers, those who have
taken voluntary retirement from public sector banks.

> FINANCIAL INDEPENEDNCE

Another noticeable feature of urban banking sector is its financial independence.
Unlike the agricultural co operative credit structure, the urban co-operative banks are not
surviving on external assistance such as refinance support.

> INNOVATIVE PRODUCTS

The banks are acting as 'one stop shop' by offering value added services with tie
up arrangement with other agencies. Many banks are offering foreign exchange
transactions, insurance business electronic fund transfer etc. In an interview with
Mr.Baltoda, MD of The Greater Bombay Co-operative Bank Ltd, he said that co-
operative banks have to become one-stop financial shops in order to tackle competition
(Co-operafive Banking @ 2005, 8"^ April 2005, Indian Express Mumbai).

WEAKNESSES OF URBAN CO -OPERATIVE BANKS

> BAD MANAGEMENT

Today co operative credit system neither has the leadership of men such as
Vaikunth Lai Mehta or D.R .Gadgil nor the guidelines of the RBI. It is in this sense that
the Co-operative system remains directionless and falls an easy victim to rapacious
elements which are on the lookout for such a prey. The trouble at Maratha Mandir Co-
operative bank brings to the fore, the financial irregularities at co-operative banks'.

3.25
 > DUAL CONTROL
Urban co-operative banks are subjected to duality of control i.e. the
administration related aspects are supervised by state government and the banking
operations are regulated by central bank of the country. This has resulted in overlapping
jurisdiction of the state government and the central bank of the country. While the central
bank of the country has the wherewithal under the Banking Regulation Act for dealing
with crucial aspects of functioning of commercial banks, in the case of co-operative
banks it requires the intervention of the Registrar of co-operative societies. Thus the
duality of control not only affects the quality of supervision and regulations, but also the
functioning of urban co operative banking sector. This 'nobody's child situation' has
stunted the growth of co-operative banks. (Your Money III Times of India, Jan 24th
2006.)

> LACK OF INNOVATION

Urban co-operative banks lack innovation. Majority of them do not have either
A.T.M facility or locker system which is the minimum expectations of modem day
customers. Most of them lack technological up gradation.'"
Most of them offer only onsite ATM facility according to the banking hours only.

> WORK CULTURE

There is an impact of the new banking culture, nurtured by banking sector reforms
co-operative managers who want to imitate public sector banks which in turn want to cast
themselves in the image of foreign banks. The emphasis now is on a "quick kill", rather
than extending to medium term and long term credit to productive sectors.

> LACK OF CAPITAL

Private and foreign banks backed by robust technology are gradually eating into
the customer base of co- operative banks. As a result smaller bank is forced to spruce up
their technology initiatives to beat competition. Urban co-operative banks cannot go
techno savvy because of lack of capital.

3.26
 > VERY POOR TRANSPERENCY WITHIN ORGANISATION

There is no transparency within the urban co operative banks. They always

maintain the hierarchy. Since there is no transparency employees' morale cannot be
boosted up and it affects their performance. Transparency is one of the important pillars
of corporate Governance".

OPPORTUNITIES OF URBAN CO-OPERATIVE BANKS

> COMMUNITY BASED BANKING

All the co-operative banks are generally community based like South Indian co-
operative bank, Saraswat Bank, Abhyudaya Co-operative Bank etc. They should try to
utilize this area to the fullest. This will ensure that people from the community use the
concerned banks facilities thus increasing the turnover of the banks.

> INNOVATIVE PRODUCTS TO MATCH WITH PRIVATE SECTOR BANKS

As of now urban co-of>erative banks don't have many products as compared to the
private sector banks. If they introduce more products they can compete with commercial
banks. Nowadays people want to get all the facilities under one roof Since the objective
of urban co-operative bank is to cater to the needs of local public these facilities will help
them in increasing their customer base.

> MORE CAPITAL

If urban co-operative banks can get more capital then they can invest that in
technology that will make them at par with commercial bank. Better technology will
result in better efficiency, thus making the bank competent. Government can allow strong
banks for their Initial Public Offers (IPO's) for increasing the net worth of the bank.

3.27
THREATS FACED BY URBAN CO-OPERATIVE BANKS
> PRIVATE SECTOR BANKS AND FOREIGN BANKS
The major threat is tough competition to existing co- operative banlcs from private
and foreign banks. These banks have got huge capital base with latest automation which
will enable them to provide superior services. They have invested in technology from
their inception and did not have to undergo the problem of legacy systems, change in
management etc. while this is not the case with co-operative banks.

> CHANGES IN POLICIES

As of now the policies are more favorable for urban co-operative banks. But with
the entry of private banks and foreign banks the changes have adversely affected the
urban Co- operative banks. The LPG concept has intensified the competition. The RBI
rules are applicable at par with commercial banks.

> ADVANCES TO UNORGANISED SECTOR.

Urban co-operative banks offer credit to unorganized sectors which is a threat as

it will increase their non performing assets. They offer loans and advances without
accepting proper securities or securities which are already pledged with any other agency.
The monitoring of loans and advances offered to customers will be another issue. The
manager in charge should be accountable for the monitoring system as well as recovery.

> POLITICAL INTERFERENCE

The political pressure in the management of urban co- operative banks is another
threat faced by these banks .The political parties tend to interfere with the functioning of
successful co-operative banks. This has resulted in some serious tragedy to these banks.
For e.g Janakalyan Co-operative Bank had given housing loan to one customer for Rs. 35
lakh even though the ceiling is Rs. 10 lakh since she was having a political connection.
RBI had given criminal complaint against this bank in the year 2004.

3.28
 The Environmental analysis can help the banks to find out the various
opportunities, strengths of the bank as well as to find out the ways and means to convert
threats into opportunities and weaknesses into strengths. These banks can convert
themselves into stronger units provided they decide about environmental analysis based
on which various strategies will be formed.

3.9 CONCLUSION
The economic and industrial development of any country mainly depends on the
contribution of banks. In India where more than 70% of the population still resides in
villages, 34% are still illiterate and the economy is predominantly agro- based, co-
operative banks play a ver>' vital role by tending to the collective savings of small
amounts of money of people from the same class or occupafion to help aggrandize their
income. The co-operative banks play as catalyst agents between the small and marginal
entrepreneurs and the Government. The urban co-operative banks can be regarded as
'back bone' of the economy helping the rural and urban poor.
Mr. H.V.R. Lengar former Governor of RBI expressed his concern at the failure
of Co-operative movement and pointed out that the responsibility of revival of co-
operatives lies to a great extent in the hands of non officials including politicians
(A.D.Shroff Memorial Trust Publicafion, Mumbai-1 p.3).
The Chief Executive, NAFUCB Mr.D.Krishna'^ in his working paper presented at
the National conference at New Delhi also pointed out that the financial inclusion and
non- frill accounts would be more acceptable to urban co-operative banks along with
micro finance, which will provide a great opportunity to the co-operative banks for
positioning themselves.
The challenge to urban co-operative banks is to take advantage of their strengths
and eliminate their weaknesses (Banking Finance Vol. XIII No.II p.3-5). The
Vaidyanthan Task Force appointed by Government of India has laid particular emphasis
on eliminating state interference in functioning of co-operative system. It has also given
guidelines about computerization, professional auditing etc. If all the state Government
implements these recommendations the co-operative system can regain its lost vitality
very easily. International agencies like ICA and IRU could help countries like India in

3.29
arranging financial resources from international financial agencies and other donor
agencies. This will greatly help in facilitating the development of infrastructure facilities
including computerization and mechanisation of banking operations and incorporation of
information technology and modem management practices. The greatest challenge in
cleaning the system would be the state government and domestic industries, both of
which enjoy tremendous amount of influence on the co-operative banks.
(www.Indiainfoline.com).

3.30
REFERENCES
1. RBI: Report of the Working Group on Industrial Financing through Co-
operative Banks (1968), Agricultural Credit Department, Bombay, p.54-55
2. B.N.Chaubey, principles and Practice of Co-operative Banking in India, Asia
Publishing House, Page 21 to 23,1'' Edition, 1968.
3. www.indiastat.com
4. B.N Chaubey, Principles and Practice of Co-operative Banking in India,
Asia Publishing house ,P-233&234 1'' edition ,1968
5. Sri D.S.Lokhande «& Sri B.M.Deshpande Evolution of Urban Co-operative
Banks in Maharashtra Feb 2005,p.l71-175
6. B.N Chaubey, Principles and Practice of Co-operative Banking in India, Asia
Publishing house, P-25-26, l" edition, 1968
7. K.N.Naik, Co-operative Movement in the Bombay State, Popular Book
Depot, p. 20-29,1'' Edition, 1953.
8. Government of India: Report of the Banking Commission(1972)Ministry of
Finance, New Delhi, p.231-232
9. Sisodia Report.htm, Capitalization under changing conditions versus close
ties with and benefits for members.
10. Amit Singh Sisodia & Jose M. Ittan, Article in Treasury Management-ICFAI
Press, September 2004.p.37.
11. K.R.Sampat, Law of Corporate Governance, Principles and Perspectives,
Showwhite Publications.
12. MnD.Krishna Chief Executive, NAFUCB-Urban Credit, July-September,
2007, p.9

3.31