Module 1 Indian Financial System and Cooperative Credit Structure

crr
Certified Professional in Cooperative

Banking (CPCB)-Level-I Certification
Course- 2022-23 Batch
Module 1: Indian Financial

System and Cooperative
Credit Structure
2022
Centre for Professional Excellence in Cooperative (C-PEC),
Bankers Institute of Rural Development (BIRD)

Centre for Professional Excellence in Cooperatives (C-PEC),
Bankers Institute of Rural Development (BIRD)
An autonomous institute established by NABARD.
Sector-H, LDA Colony, Kanpur Road, Lucknow – 226 012, INDIA
Phone +91-522-2421799
Email cpec.bird@nabard.org
Homepage https://bird-cpec.nabard.org/
www.birdlucknow.in
Table of Contents
Unit 1: Indian Economy ....................................................................................... 1

1.1 Lesson No.1 Indian Economy and its Structure ........................................ 1
Objective........................................................................................... 2
Introduction...................................................................................... 2
Overview of Economic Scenario.......................................................... 2
Agriculture ....................................................................................... 4
1.1.5 Industry ........................................................................................... 6
1.1.6 Services ............................................................................................ 6
1.1.7 Employment ..................................................................................... 7
1.1.8 Mixed Economy .................................................................................... 7
1.1.9 Let us sum up................................................................................... 9
1.1.10 Keywords ........................................................................................... 9
1.1.11 Check your progress-questions ........................................................... 9
Terminal/ Multiple Choice questions ............................................ 10
References for Further reading ..................................................... 12
1.2 Lesson 2: Planning in India ................................................................... 13
1.2.1 Objective......................................................................................... 14
1.2.2 Introduction.................................................................................... 14
1.2.3 The Five Year Plans and Rationale for setting up NITI Aayog ............. 14
1.2.4 Agriculture and Rural Development through Five Year Plans and NITI
Aayog 15
Developments under various Five Year Plans ................................................ 23
1.2.5 National Institution for Transforming India (NITI) Aayog: ...................... 34
1.2.6 Let us sum up .................................................................................... 43
1.2.7 Keywords .......................................................................................... 44
1.2.9 Terminal/ Multi-Choice Questions ................................................... 44
1.2.10 References for further reading ...................................................... 48
1.3 Lesson No.3 Contribution of Agriculture, MSMEs and Service Sector to
Indian Economy ............................................................................................. 51
1.3 Contribution of Agriculture, MSMEs and Service Sector to Indian Economy
...................................................................................................................... 53
1.3.1 Objectives .......................................................................................... 53
1.3.2 Introduction.................................................................................... 53
1.3.3 Agriculture ..................................................................................... 53
1.3.3 Micro, Small and Medium Enterprises ............................................. 57
1.3.4 Service Sector: Introduction............................................................ 61
1.3.4 Let us sum up................................................................................. 64
1.3.5 Keywords ........................................................................................ 64
1.3.6 Check your progress questions ........................................................ 64
1.3.10 Multiple Choice Questions ................................................................ 65
1.3.11 References for further reading ........................................................... 67
Lesson No. 4 Developments in Indian Economy ............................................... 68
1.4.1 Objectives ....................................................................................... 69
1.4.2 Introduction.................................................................................... 69
1.4.3 Impact of Liberalization, Privatization and Globalization ................... 69
1.4.4 Reform Measures ............................................................................ 70
1.4.5 Financial Sector Reforms ................................................................. 71
1.4.6 Goods & Services Tax (GST) ................................................................ 72
1.4.7 Let us sum up ................................................................................... 82
1.4.8 Keywords ........................................................................................ 82
Key to Multiple Choice questions ................................................................. 83
1.4.10 Terminal/ Multiple Choice questions ................................................. 83
Key to terminal/Multiple Choice questions ................................................... 85
1.4.11 References for further reading ...................................................... 85
Unit 2: Indian Financial System ......................................................................... 86
2.1 Lesson No. 1 Introduction to Indian Financial System ............................ 86
2.1.1 Objective......................................................................................... 87
2.1.2 Introduction.................................................................................... 87
2.1.3 Financial System ............................................................................ 87
2.1.4 Financial Markets ........................................................................... 87
2.1.5 Financial Intermediation ................................................................ 88
2.1.6 Financial Instruments ..................................................................... 88
2.1.6.3.1 ........................................................................................................ 94
2.1.6.5 Let us sum up ............................................................................ 101
2.1.6.6 Keywords...................................................................................... 101
2.1.7 Check your progress -questions ........................................................ 101
2.1.8 Terminal/ Multiple Choice Questions ................................................ 102
2.2 Lesson No. 2 Reserve Bank of India & NABARD ................................... 105
2.2.3 Role & Functions of RBI ................................................................ 105
2.2.4 Developmental and Promotional Functions of RBI .......................... 105
2.2.11 References for further reading ......................................................... 105
2.2.1 Objectives ........................................................................................ 106
2.2.2 Introduction ................................................................................... 106
2.2.3 Role & Functions of RBI ................................................................... 106
2.2.3.1 Developmental and Promotional Functions of RBI .......................... 109
2.2.4 National Bank for Agriculture and Rural Development (NABARD) ..... 111
2.2.5 Let us sum up .................................................................................. 116
2.2.6 Keywords ......................................................................................... 117
2.2.7 Check your progress-questions ........................................................ 117
2.2.8 Terminal/Multiple Choice Questions ................................................ 117
2.3 Lesson No. 3 Banking Industry ............................................................ 121
2.3.1 Objectives...................................................................................... 121
2.3.2 Introduction .................................................................................. 121
2.3.3 Types of Banks .................................................................................... 121
2.3.3.4 Cooperative Banks ............................................................................ 121
2.3.4.2 RBI Guidelines on Targets/Sub Targets of Priority Sector Lending ... 121
2.3.5 Monitoring of Priority Sector Lending targets......................................... 121
2.3.6 Non-achievement of Priority Sector targets ........................................ 121
Let Us Sum Up ............................................................................. 121
2.3.8 Keywords ........................................................................................ 121
2.3.9 Check Your Progress-questions ........................................................ 121
2.3.10 Terminal Questions ........................................................................ 121
2.3.11 References for further reading ........................................................ 121
2.3.1 Objectives ..................................................................................... 122
2.3.2 Introduction ..................................................................................... 122
2.3.3 Types of Banks ................................................................................. 123
2.3.4 Priority Sector lending ...................................................................... 132
2.3.5 Let us sum up .................................................................................. 141
2.3.6 Keywords ......................................................................................... 141
2.3.7 Check your progress-questions ......................................................... 142
2.4 Lesson No.4 : Non-Banking Financial Intermediaries................................ 146
2.4.8 Check Your Progress -questions .................................................... 146
2.4.9. Terminal Questions ......................................................................... 146
2.4.10 References for further reading ....................................................... 146
2.4.1 Objective .......................................................................................... 147
2.4.2 Introduction ..................................................................................... 147
2.4.3 Non- Banking Financial Companies (NBFCs) ..................................... 147
2.4.4 Micro Finance Institutions (MFIs) ...................................................... 150
i. Loan to be extended without collateral; ...................................................... 151
2.4.5 Let us sum up .................................................................................. 155
2.4.6 Keywords ......................................................................................... 156
2.4.7 Check your Progress-Questions......................................................... 156
2.4.8 Terminal questions ........................................................................... 156
2.4.9 References for Further reading .......................................................... 158
2.5 Lesson No.5: Financial Sector Reforms ................................................... 159
2.5.1 Objectives ........................................................................................ 160
2.5.2 Financial Sector Reforms- Background .............................................. 160
2.5.3 BASEL COMMITTEE ..................................................................... 166
2.5.4 Let us sum up............................................................................... 171
2.5.5 Key words ..................................................................................... 171
2.5.6 Check your progress questions ...................................................... 171
2.6 Lesson No.6 Financial Inclusion for Inclusive Growth ........................... 175
2.6.1 Objectives ........................................................................................ 176
2.6.2 Introduction.................................................................................. 176
2.6.3 Financial Exclusion .......................................................................... 176
2.6.4 Financial Inclusion ....................................................................... 177
2.6.5 The Committee on Financial Inclusion -Dr. Rangarajan Committee . 178
2.6.6 National Strategy for Financial Inclusion 2019-24.............................. 185
Important recommendations ...................................................................... 186
2.6.7 Let us sum up............................................................................... 188
2.6.8 Key words ..................................................................................... 189
2.6.9 Check your progress questions ...................................................... 189
2.6.10 Terminal Multiple Choice Questions ........................................... 190
2.6.11 References for further reading .................................................... 192
Unit 3: Foundation of Cooperatives: Evolution, Status, Values, Principles and
Structure ........................................................................................................ 193
3.1 Lesson No. 1 Introduction to Co-operative Credit Structure................... 193
3.1.1 Objectives ........................................................................................ 194
3.1.2 Introduction.................................................................................. 194
3.1.3 Definitions ....................................................................................... 194
3.1.4 Evolution and Status of Cooperatives in India ................................ 194
3.1.5 Cooperative values and Principles .................................................. 195
3.1.6 Features of cooperatives ................................................................ 197
1.3.7 Types of Credit Co-operatives ....................................................... 198
3.1.7 Let us sum up............................................................................... 199
3.1.8 Keywords ...................................................................................... 200
3.1.9 Check your progress-questions ...................................................... 200
State True or False .................................................................................... 200
3.1.10 Terminal questions .................................................................... 201
07. What does the Third Principle: Members Economic Participation mean?202
3.2 Lesson No. 2: Co-operative Credit Institutions: Structure and their role in
Rural Economy ............................................................................................ 203
3.2.4.2 District Central Cooperative Banks (DCCBs) ............................... 203
3.2.1 Objectives ........................................................................................ 204
3.2.2 Introduction.................................................................................. 204
3.2.3 Co-operative Credit Structure ........................................................... 204
3.2.4 Objectives and role of Cooperative Credit Structure in Rural Economy 205
3.2.5 Distinction between Primary and Federal or Secondary Co-operatives
211
3.2.6 Major problems of the Rural Credit System ........................................ 211
3.2.7 Performance of Rural Credit Cooperatives – a brief review .................. 212
3.2.8 Reorganization of Cooperative Credit Structure .................................. 214
3.2.9 Let us sum up............................................................................... 214
3.2.10 Keywords ................................................................................... 215
3.2.11 Check your progress –questions ................................................. 215
3.2.11 Terminal/ Multiple Choice Questions.......................................... 215
Lesson No. 3: Cooperatives in Five Year Plans and Important Acts for
Development of Co-operative Credit Institutions ............................................ 219
3.3.5 Formation of new ‘Ministry of Co-operation’ ....................................... 219
3.3.1 Objectives ..................................................................................... 220
3.3.2 Introduction.................................................................................. 220
3.3.3. Emphasis on Cooperatives in Five Year Plans ................................. 220
3.3.3 Cooperatives in NITI Aayog ............................................................ 227
3.3.4 Formation of new ‘Ministry of Co-operation’ ................................... 227
3.3.5 Let us sum up............................................................................... 228
3.3.6 Keywords ...................................................................................... 228
3.3.7 Check your progress – questions (CARE: questions to be added) ..... 228
Unit 4: Recommendations of Select Committees................................................ 232
4.1 Lesson No1: All India Rural Credit Survey Committee, 1954 ................. 232
4.1.1 Objectives ........................................................................................ 233
4.1.2 Introduction.................................................................................. 233
4.1.3 Viewpoints of the Committee ......................................................... 233
4.1.4 Major Recommendations of the Committee ..................................... 234
4.1.5 Developments after the Committee’s report .................................... 235
4.1.6 Let us sum up............................................................................... 236
4.1.7 Key words ..................................................................................... 237
4.1.8 Check your progress ..................................................................... 237
4.1.9 Terminal Multiple Choice questions ................................................... 237
4.2 Lesson No. 2: All India Rural Credit Review Committee, 1969 ............... 240
4.2.1 Objectives ........................................................................................ 241
4.2.2 Introduction.................................................................................. 241
4.2.3 Observations/Viewpoints .............................................................. 241
4.2.4 Recommendations of AIRCRC ........................................................ 241
4.2.5 Let us sum up............................................................................... 244
4.2.6 Key words ..................................................................................... 244
4.2.7 Check your progress questions State True or False ......................... 245
4.2.7 Terminal / multiple choice questions ............................................. 245
4.3 Lesson No 3: Committee to Review the Arrangements for Institutional
Credit for Agriculture and Rural Development (CRAFICARD), 1981 ................ 248
4.3.1 Objectives ........................................................................................ 249
4.3.2 Introduction.................................................................................. 249
4.3.3 Terms of Reference .......................................................................... 249
4.3.4 Select observations and recommendations of CRAFICARD .............. 249
4.3.5 Let us sum up............................................................................... 257
4.3.6 Key words ..................................................................................... 258
4.3.7 Check your progress – questions.................................................... 258
4.3.7 Terminal / Multiple Choice questions ............................................ 259
4.4 Lesson No. 4 Vaidyanathan Committee, 2004 - GOI Revival Package ..... 262
4.4.1 Objective .......................................................................................... 263
4.4.2 Introduction.................................................................................. 263
4.4.3 Task Force on Revival of Rural Cooperative Credit Institutions ........ 263
4.4.4 Nature and Extent of Impairment and Remedial Measures .............. 264
4.4.5 General Approach and Financial Restructuring .............................. 264
4.4.6 Implementation Mechanism........................................................... 267
4.4.7 Transitional Problems and Long Term Outlook ............................... 269
4.4.8 Issues in Implementation .................................................................. 272
4.4.9 Implementation of Revival Package for Short Term Rural Cooperative
Credit Structure (STCCS) -- Progress ......................................................... 274
4.4.10 Impact of the Revival Package ......................................................... 275
4.4.11 Let us sum up ................................................................................ 275
4.4.12 Key words .................................................................................. 276
4.4.13 Check your progress -questions .................................................. 276
4.4.14 Terminal/ Multiple Choice Questions ............................................. 277
Unit 5: Important Provisions of Select Acts ....................................................... 280
5.1 Lesson No1 Cooperative Societies Act and the 97 th Amendment to the Indian
Constitution ................................................................................................. 280
5.1.3.3.1 Evolution.................................................................................... 280
5.1.3.3.2 Registration ................................................................................ 280
5.1.3.3.3 By-Laws & Membership .............................................................. 280
5.1.3.3.4 Audit .......................................................................................... 280
5.1.3.3.6 Other issues ............................................................................... 280
5.1.3.3.7 Rules.......................................................................................... 280
5.1.3.4 State Cooperative Societies Acts ..................................................... 280
5.1.1 Objectives ........................................................................................ 281
5.1.2 Introduction.................................................................................. 281
5.1.3 The Cooperative Societies Act ............................................................ 281
5.1.4 The 97th Constitutional Amendment ................................................. 296
5.1.5 Let us sum up............................................................................... 298
5.1.6 Key words ..................................................................................... 298
5.1.7 Terminal/ Multiple Choice questions ............................................. 299
5.2 Lesson No 2 Multi- State Co-operative Societies Act, 2002 ................... 303
5.2.1 Objectives ........................................................................................ 304
5.2.2 Introduction.................................................................................. 304
5.2.3 Evolution ...................................................................................... 304
5.2.4 Registration .................................................................................. 305
5.2.5 Membership .................................................................................. 307
5.2.6 Management of Societies ............................................................... 307
5.2.8 Annual General Meeting ................................................................... 311
5.2.9 Audit ............................................................................................ 313
5.2.10 Disputes .................................................................................... 317
5.2.11 Bar of Jurisdiction of Courts ........................................................... 317
5.2.12 Appeal ............................................................................................ 318
5.2.13 Winding up and liquidation of Multi-State Co-operative Society ... 320
5.2.14 Let us sum up ........................................................................... 322
5.2.15 Keywords ................................................................................... 322
5.2.16 Check your progress questions ................................................... 322
5.2.17 Terminal Questions /Multiple Choice Questions.......................... 323
5.3 Lesson No.3 Self-Reliant Cooperative Societies Act................................ 326
5.3.1 Objectives ........................................................................................ 327
5.3.2 Introduction.................................................................................. 327
5.3.3 Purpose ........................................................................................ 327
5.3.4 Conversion of Co-operative society into self-reliant Co-operative society
328
5.3.5 Recommendations of the Task Force:................................................. 330
Recommendations of the Task Force: ......................................................... 331
5.3.6 Present status: ................................................................................. 332
5.3.7 Let us sum up............................................................................... 332
5.3.8 Key words ..................................................................................... 333
5.3.9 Multiple Choice Questions ............................................................. 333
5.3.10 References for further reading ................................................... 336
5.4 Lesson No.4 The Banking Regulation Act, 1949 (As applicable to
Cooperative Societies) and recent amendments .............................................. 337
5.4.1 Objectives ........................................................................................ 338
5.4.2 Introduction -Banking Regulation Act, 1949: Application of the Act to
Cooperative Banks -- Important Provisions ................................................. 338
5.4.3 Co-operative Banks ....................................................................... 339
5.4.3.1 Business.................................................................................... 339
5.4.4 Cash Reserve Ratio & Statutory Liquidity Ratio .............................. 341
5.4.5 Licensing ...................................................................................... 342
5.4.6 Key points .................................................................................... 346
5.4.7 Reforms in the BR Act 1949 .......................................................... 347
5.4.8 Amendment to Banking regulation act 2020 ...................................... 347
5.4.9 Let us sum up............................................................................... 350
5.4.10 Key words .................................................................................. 350
5.4.11 Check your progress- questions .................................................. 350
5.5 Lesson No. 5 Negotiable Instruments Act, 1881 ................................... 354
5.5.1 Objective .......................................................................................... 355
5.5.2 Introduction.................................................................................. 355
5.5.3 Basics of Negotiable instruments ................................................... 355
5.5.4. Main types of Negotiable Instruments ............................................... 356
5.5.5 Crossing of cheques .......................................................................... 361
5.5.6 Parties to a cheque ........................................................................... 363
5.5.7 Important Aspects of Endorsements............................................... 364
5.5.8 Return of Cheques or bouncing of Cheque ..................................... 366
5.5.9 Special instruments- Demand Draft and Banker's cheque .............. 371
5.5.10 Paying Banker – Duties and Responsibilities ............................... 371
5.5.11 Collecting banker- duties and responsibilities ............................. 374
5.5.13 Changes made by Amendment to the Act in 2018 ............................ 376
5.5.14 Let us sum up ........................................................................... 377
5.5.15 Key words .................................................................................. 377
5.5.18 References for further reading ................................................... 380
5.6 Lesson No. 6 The Right to Information Act, 2005 .................................. 381
5.6.1 Objectives ........................................................................................ 382
5.6.2 Introduction and objective of the Act .............................................. 382
5.6.3 Features ....................................................................................... 382
5.6.4 Powers under the Act ........................................................................ 383
5.6.6 RTI Fee Rates ................................................................................ 385
5.6.7 Exclusions .................................................................................... 386
5.6.8 Role of Government ....................................................................... 387
5.6.9 Let us sum up............................................................................... 387
5.6.10 Key words .................................................................................. 388
Abbreviations
AGM Annual General Meeting

AIRCS All India Rural Credit Survey Committee
ALM Asset –Liability Management
AMA Advanced Measurement Approach
ANBC Adjusted Net Bank Credit
APIO Assistant Public Information Officers
ARDC Agriculture Refinance and Development Corporation
ARF Asset Reconstruction Fund
BC Business Correspondent
BCBS Basel Committee on Banking Supervision
BCs Business Correspondents
BFs Business Facilitators
BIA Basic Indicator Approach
BIRD Bankers Institute of Rural Development
BPL Below Poverty Line
BPO Business Process Outsourcing
BSF Border Security Force
CAC Current Account Convertibility
CARE Credit Analysis Research Limited
CAS Common Accounting System
CBLO Collateralized Borrowing and Lending Obligation
CBS Core Banking Solution
CCIL Clearing Corporation of India
CCS Cooperative Credit Structure
CD Certificate of Deposits
CEO Chief executive officers
CFMS Centralized Funds Management System
CID-CB Crime Investigation Department- Crime Branch
CISF Central Industrial Security Force
CMA Credit Monitoring Arrangements
CP Commercial Paper
CRAFICARD Committee to Review the Arrangements for Institutional Credit
for Agriculture and Rural Development
CRAR Capital- to-Risk- Weighted Asset Ratio
CRISIL Credit Rating and Information Services of India Ltd.
CRPF Central Reserve Police Force
CRR Cash Reserve Ratio
CSDL Central Securities Depository Ltd
CSR Corporate Social Responsibility
D&B Dun & Bradstreet
DCCBs District Central Co-operative Banks
DDP Desert Development Program
DFI Department of Financial Institutions
DHFI Discount and Finance House of India Ltd
DICGC Deposit Insurance and Credit Guarantee Corporation
DLCC District Level Consultative Committee
DLIC District level implementing committee
DPAP Drought Prone Areas Program
DRDA District Rural Development Agencies
DRI Differential Rate of Interest
DWCRA Development of Woman and Children in Rural Areas
EAS Employment Assurance Scheme
EDP Electronic data processing
EFC Electronic Filing Cabinet
EGS Employment Guarantee Scheme
EXIM Export Import
FDI Foreign Direct Investment
FIIA Foreign Investment Implementation Authority
FIs Financial Instruments
Forex foreign exchange
FSC Farmers' Service Centers
FSS Farmers’ Service Societies
GCC General Credit Cards
GDP Gross Domestic product
GIS Geographic Information System
Deutsche Gesellschaft für Internationale Zusammenarbeit
GIZ (GIZ) GmbH
GOI Government of India
G-Secs Government Securities
ha Hectare
HFCs Housing Finance Companies
Human Immunodeficiency Virus / Acquired Immunodeficiency
HIV/AIDS Syndrome
HPC High Powered Committee on Cooperatives
HQs Headquarters
IARI Indian Agricultural Research Institute
ICA International Cooperative Alliance

ICAAP Internal Capital Adequacy Assessment Process
ICAR Indian Council of Agricultural Research
ICFAI The Institute of Chartered Financial Analysts of India
ICICI Industrial Credit and Investment Corporation of India
IDBI Industrial Development Bank of India
IFCI Industrial Finance Corporation of India
ILAF Interim Liquidity Adjustment Facility
IOU Instruments of the Union Government
IPO Initial Public Offer
IRB Internal Rating-Based Approach
IRDP Integrated Rural Development Program
IT Information Technology
ITBP Indo-Tibetan Border Police
ITeS IT-enabled services
Integrated Watershed, Drought and Desert Development
IWDDDMP Management Program
Integrated Watershed, Desert Development Management
IWDDMP Program
IWDMP Integrated Watershed, Drought Area Management Program
IWMP Integrated Watershed Management Programme
IWMP Integrated Watershed Management Program
IWMP Integrated Watershed Management Program
JLG Joint Liability Groups
KVI Khadi and Village Industries
KYC Know Your Customer
LABs Local Area Banks
LAF Liquidity Adjustment Facility
LAMPS Large-sized Adivasi Multi-Purpose Societies
LDBs Land Development Bank
LIC Life Insurance Corporation of India
LPG Liberalization, Privatization and Globalization
MD Managing Director
Marginal Farmers and Agricultural Labourers Development
MFAL Agency
MFDEF Micro Finance Development and Equity Fund
MFI Micro Finance Institutions
MFs Mutual Funds
MIG Middle Income Group
MNREGA Mahatma Gandhi National Rural Employment Guarantee Act
MIS Management Information System
MORD Ministry of Rural Development
MoU Memorandum of Understanding
MSCS Multi-State Cooperative Societies
MSME Micro, Small and Medium Enterprises
MSMED Act Micro, Small and Medium Enterprises Development Act
NABARD National Bank for Agricultural and Rural Development
NBFC Non-Banking Financial Company
NCD Non-Convertible Debentures
NCDC National Cooperative Development Corporation
NCUI National Cooperative Union of India
NDDB National Dairy Development Board
NDS Negotiated Dealing System
NDTL Net Demand and Time Liabilities
NFBS National Family Benefit Scheme
NGO Non-Government Organization
NHB National Housing Bank
NI Act NEGOTIABLE INSTRUMENTS ACT
NIMC National Implementing and Monitoring Committee
NIPTA Nodal Implementing and Pass Through Agency
NIRD National Institute of Rural Development
NITI Aayog National Initiative for Transforming India Aayog
NLRMP National Land Records Modernization Programme
NMBS National Maternity Benefit Scheme
NOAPS National Old Age Pension Scheme
NOF Net Owned Funds
NPAs Non-performing assets
NRHM National Rural Health Mission
NRLM National Rural Livelihood Mission
NRI Non-Resident Indian
NRIFP National Rural Financial Inclusion Plan
NRLM National Rural Livelihood Mission
NSAP National Social Assistance Program
NSAP National Social Assistance Programme
NSG National Security Guard
ODI Organisation Development Intervention
OMO Open Market Operations
OTC Over-The-Counter
PACS Primary Agricultural Credit Societies
PCARDB Primary Co-operative Agricultural and Rural Development Bank
PDOs Public Debt Offices
PD Primary Dealers
PIO Public Information Officer
PMAY Pradhan Mantri Awas Yojna
PPP Public- Private- Partnership

PRIs Panchayati Raj Institutions
PURA Providing Urban Facilities in Rural areas
RBI Reserve Bank of India
RCRC Rural Credit Review Committee
RCS Registrar Cooperative Societies
REC Rural Electrification Corporation
RIDF Rural Infrastructure Development Fund
RLEGP Rural Landless Employment Guarantee Programme
RMK Rashtriya Mahila Kosh
RORs Records of rights
RRBs Regional Rural Banks
RTGS Real Time Gross Settlement
RTI Right to Information
SCARDB State Co-operative Agricultural and Rural Development Bank
StCB State Cooperative Bank
SCB Scheduled Commercial Bank
StCBs State Co-operative Banks
SCRA Securities Contract Regulation Act
SEBI Securities Exchange Board of India
SEZ Special Economic Zone
SFCs State Financial Corporations
SFDA Small Farmers Development Agency
SGSY Swarnjayanti Gram Swarozgar Yojana
SHG Self Help Groups
SITRA Supply of Improved Toolkits to Rural Artisans
SJSRY Swarna Jayanti Shahari Rozgar Yojana
SLBC State Level Banker’s Committee
SLIC State Level Implementing and Monitoring Committee
SLR Statutory Liquidity Ratio
SMERA SME Rating Agency of India
SRLM State Livelihood Mission
SRMS Scheme for Rehabilitation of Manual Scavengers

ST Short Term
STA Standardized Approach
STCCS Short Term Rural Cooperative Credit Structure
TPA Third Party Administration
TRYSEM Training of Rural Youth for Self-Employment
UCB Urban Cooperative Bank
UT Union Territory
VaR value at risk
WMA Ways and Means Advances
Disclaimer
This book is meant for educational and learning purposes. The author of the
book has taken all reasonable care to ensure that the contents of the book do
not violate any existing copyright or other intellectual property rights of any
person / institution in any manner. Wherever possible, acknowledgements /
references have been given.
Unit 1: Indian Economy
1.1 Lesson No.1 Indian Economy and its Structure
1.1.1 Objective
1.1.2 Introduction
1.1.3 Economic Scenario
1.1.3.1 Agriculture
1.1.3.2 Research and Development
1.1.3.3 Industry
1.1.3.4 Services
1.1.3.5 Employment
1.1.4 Mixed Economy
1.1.5 Let Us Sum Up
1.1.6 Keywords
1.1.7 Check your Progress-questions
1.1.8 Terminal Questions
1.1.9 References for further reading
1
Objective
The objective of this lesson is to understand the system and structure of

Indian economy.
Introduction
Any nation’s development is measured and understood on the basis of its

improvement on the economic front among other developments. Since
independence, India has followed a ‘mixed economy’ model, which is a
combination of capitalism and socialism and in which there are government
enterprises combined with market led private enterprises.
Overview of Economic Scenario
The economic scenario of our country today is not just of current making; it
has its roots steeped in the past history, especially in the period when India
was under British rule which lasted for almost two centuries before India
became independent in 1947. Under the British rule, policies of the
government were concerned more with the protection and promotion of British
economic interests than with the need to develop the economic condition of
Indian people. Cambridge historian Angus Maddison’s work1 shows that
India’s share of world income shrank from 22.6% in the year 1700-when it
was the world’s the biggest economy—almost equal to Europe’s share of
23.3%—to 3.8% in 1952.
At the time of independence, the country was suffering from abject poverty
and other features of underdeveloped economy. Our Government started
efforts on all fronts (agriculture, industry, infrastructure, health, education,
etc.) immediately after independence but it took time for results to show and
the growth rate of the economy continued at low rate ranging from 3 to 4% in
the three decades after independence till the 1980s. Since the mid-1980s,
India slowly opened up its markets through economic liberalization.
After more fundamental reforms since 1991- termed as “LPG”- “Liberalization,

Privatization and Globalization”, India has today progressed towards a more
free market economy. As a result of these efforts put by the Government and
all stakeholders including the citizens, India has achieved tremendous
progress and has become the fifth largest economy in the world in 2021-22
with the size of the economy at US$ 3.53 trillion and it aspires to become a
US$ 5 trillion economy by 2024-25.
1
Maddison, Angus (2007). Contours of the World Economy 1–2030 AD: Essays in Macro-Economic History.
Oxford University Press. p. 379. ISBN 978-0-191-64758-1
2
The year 2020-21 and year 2021-22 are affected adversely due to the
pandemic of COVID-19. In the year 2020-21 the estimated growth rate as per
the Economic Survey is (-) 7.9% - an extent of economic contraction never
seen in the country after independence. However in view of recovery after the
pandemic, the GDP growth rate stands 8.7%% during 2021-22.
For the purpose of understanding the composition of economy, it is classified

in three broad sectors- Primary sector (comprising of agriculture, fisheries
forestry, etc.), Secondary sector (comprising of industries) and Tertiary sector
(the services). The sectoral composition of the Indian economy has been
changing over the period and is presented in Table 1.1 considering 1950-51
(immediately after independence), 1990-91 (at the time of starting reforms)
and the recent year – 2020-21.
Table 1.1: Changing sectoral composition of Indian Economy in terms

of percentage contribution to GDP
(%)
Sector 1950-51 1990-91 2020-21
Agriculture 59.0 34.9 16.38
Industry 13.0 24.6 29.34
Services 28.0 40.5 54.27
It may be observed from Table 1.1 that, the share of primary sector
(agriculture, forestry and fisheries) was over 59% in 1950-51 (around
independence) but due to various factors, the share declined over the period
and was 16.38% in 2020-21. On the other hand, the share of industries and
services in Indian economy have reached 29.34% and 54.27% respectively in
2020-21.
India ranks 2nd in the world in respect of agricultural production, 6th in

respect of Industrial production and 8th in respect of Services. However,
Indian economy continues to be predominantly an agriculture economy as a
large proportion of its population of total workers depend on agriculture. At
the time of India’s independence, 75%, 10% and 15-20% of the population
were engaged in agriculture, manufacturing and service sectors, respectively.
Even in more recent times, over 50% population (to be precise 54.6% in 20112)
continue to depend on agriculture for livelihood.
2
GOI(2019) Agricultural Statistics at a Glance 2019, Table 2.3
3
India is celebrating the 75th anniversary of its independence as AZADI KA
AMRIT MAHOTSAVA in 2022 and for this purpose a detailed strategy has been
prepared by NITI Ayog for meeting the rising aspirations of our young
population especially by achieving and sustaining a high rate of GDP growth
for the next three decades.
Agriculture
India is blessed with wide variety of agro-climatic regions as well as natural

resources, which enables cultivation of a wide variety of agricultural and allied
activities. Although, India is seventh largest in the world in terms of total area,
in terms of arable land, India ranks second in the world after USA. This has
helped our country in reaching among the top three positions in the world in
respect of several agricultural parameters. The position of India in respect of
major agricultural parameters is presented in Table 1.2.
Table 1.2: India’s Position in the World in 2019
Item India World % Share India's Rank Next to

Total Area 328.73 13486.03 2.44 Seventh Russian Federation,
(million ha) Canada, U.S.A., China,
Brazil, Australia
Arable Land 156.46 1390.70 11.25 Second U.S.A.
Crop production (Million Tonnes)
Total Cereals 313.61 2980.17 10.52 Third China, U.S.A
production
Wheat 98.51 771.72 12.77 Second China
Rice (Paddy) 168.50 769.66 21.89 Second China
Pulses 23.24 95.98 24.21 First -
Sugarcane 306.07 1841.53 16.62 Second Brazil
Cotton (Lint) 6.05 24.77 24.43 Second China
Fruits and 290.48 2445.98 11.88 Second China
vegetables
(including potatoes
and onions)
Livestock- Cattle 185.1 1491.69 12.41 Second Brazil
(million heads)
Livestock – 113.33 200.97 56.39 First -
Buffaloes
(Million)
Milk production 176.27 827.88 21.29 First -
(Million tonnes)
Source: GoI (2019) Agricultural Statistics at a Glance 2019
It may be observed from the above table that India now is among top three
producers of major agricultural and allied products.
One important parameter of assessing agricultural development in any

country is productivity of agriculture measured as ‘yield per unit’. At the time
4
of independence, productivity in the agricultural sector in India was low
because of the use of old technology, the absence of required infrastructure
for the majority of farmers and critical dependence on monsoon for rains.
These issues were tried to be addressed by the great achievement of “Green
revolution” which started in 1960s. “Green revolution” refers to the large
increase in production of food grains resulting from the use of the technology
comprising of high yielding variety (HYV) seeds especially for wheat and rice.
The use of these seeds required application of inputs viz., the fertilizer,
pesticide and water for irrigation in correct proportions. The Green Revolution
enabled India to achieve self-sufficiency in food grains and improve
productivity. This was further supported with the special emphasis placed on
agriculture in the five-year plans and steady improvements in irrigation,
technology, application of modern agricultural practices, provision of
agricultural credit and several other promotional efforts to help agriculture in
general and small farmers in particular.
Some of the recent initiatives for agricultural development are:
1. Establishment of agricultural universities for professional education in

the field of agriculture and related areas
2. Establishment of network of extension institutions like Krishi Vigyan

Kendras (KVK) – Agricultural Science Centres- across the country
3. Establishment of National Bank for Agriculture and Rural Development

(NABARD) and measures by Reserve Bank of India (RBI) for increasing
credit flow to agriculture
4. Mission for “Doubling Farmers’ Income” by 2022
5. The schemes for Farmer Producers Organisation (FPO)
1.1.4.1 Research and Development
The Indian Agricultural Research Institute (IARI), established in 1905, was

responsible for the research leading to the "Green Revolution". The Indian
Council of Agricultural Research (ICAR) is the apex body in agriculture
research and related fields, including research and education. The Indian
Agricultural Statistics Research Institute develops new techniques for the
design of agricultural experiments, analyses data in agriculture, and
specializes in latest techniques for animal and plant breeding. State
Agricultural Universities (SAUs) are also engaged in agriculture research and
extension.
5
1.1.5 Industry
Secondary sector comprises of manufacturing industries in addition to

mining, quarrying, electricity and gas. Economists have found that nations
can progress only if they have a good industrial sector as industry provides
employment which is more stable than the employment in agriculture; it
promotes modernization, higher incomes and overall prosperity. India ranks
sixth in the world in factory output. In Indian economy, this sector accounted
for 13.3% in 1950-51 of the GDP which increased gradually and stands at
29.34% in 2020-21. It employed quite less proportion of employable people
(labour force) earlier. The available data shows that it was 11% in 1960 in
India which has reached 25.4% of the total workforce in 2010. Economic
reforms introduced after 1991 brought foreign competition, led to
privatization of certain public sector industries, opened up sectors hitherto
reserved for the public sector and led to an expansion in the production of
fast-moving consumer goods. In recent years, many Indian cities have shown
all-round growth. It is a matter of concern that excessive and burdensome
business regulations remain a problem in few cities.
Post-liberalization, the Indian industrial sector faced foreign competition,

including the threat of cheaper Chinese imports. It has since handled the
change by squeezing costs, revamping management, focusing on designing
new products and relying on low labor costs and new technology. The Indian
market now offers vast opportunities for investors.
1.1.6 Services
In the economic development context, ‘Services’ means Tertiary sector which

helps ‘Primary’ and ‘Secondary’ sectors in the economy. These ‘Services’
include activities like transport, communication, banking and finance,
Information Technology (IT) services, health care, education, defense,
hospitality (hotels/restaurants etc.), public administration and such other
services. Colin Clark- a famous British economist, had observed that-“a high
average level of real income per head is always associated with a high
proportion of the working population engaged in tertiary industries. Low real
income per head is always associated with a low proportion of the working
population engaged in tertiary production and a high percentage in primary
production.” This is also evident in very high proportion – in the range of 70
to 80% of tertiary sector’s contribution to the economy of developed countries
like USA, UK and Germany. India ranks eighth in the world in respect of
services output. The Service sector was contributing around 28.0% to the
Indian economy in the year 1950 but the sector now contributes more than
half (54.27% in 2020-21). With the Indian economy growing and new and
6
innovative products getting added every day, the share of services will
continue to increase in our country as well.
1.1.7 Employment
Productive employment is the key to economic development of a country like

India. High level of unemployment is the most important reason for poverty
and provision of employment is one of the most important strategies for
eradication of poverty. Even after seven decades of independence, one of the
major concerns still is the growth of unemployment and under employment.
The unemployment rate in India was hovering around 5.3 to 5.8% for around
2 decades from 1991 to 2019 but has risen sharply in 2020 to 7.1% (World
Bank)3. The unemployment rate in India is higher than the developed
countries like UK and Germany (around 4%) as well as China (5%). The
situation has not become so much improved during 2021-22 due to lot of loss
of employment opportunities because of COVID-19 pandemic.
Notwithstanding the COVID situation, the Government of India and State

Governments have been putting in huge efforts for creating jobs for skilled as
well as unskilled workers especially in rural areas. Mahatma Gandhi National
Rural Employment Guarantee Act, 2005 is a major initiative to assure 100
days employment to one person in each and every rural household. Besides
that, efforts to improve employability by way of skilling of youth through
National Skill Development Mission have also been taken. We are facing a
paradox that while on one hand there are huge number of unemployed
persons and on the other hand, finding suitable skilled persons for several
positions/jobs is still very difficult. Providing employment to the large number
of unemployed people is thus a big challenge and there is a long way to go to
overcome this issue.
1.1.8 Mixed Economy
India followed a ‘mixed economy’ model since independence, which is an

economic system in which both the state and private sector direct the economy,
reflecting characteristics of both market economies and planned economies.
Most mixed economies can be described as market economies with strong
regulatory oversight, in addition to having a variety of government-sponsored
aspects.
The basic approach of the mixed economy is that both the public sectors
(Government owned enterprises) and the private sectors (privately owned
enterprises) co-exist – complementing as well as competing with each other.
At times, the public sector, due to the resources at its command, is expected
3
World Bank (2021) https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=IN (accessed on 10.6.21)
7
to be the leader and initiator for stimulating a sector or set of businesses. The
markets remain the dominant form of economic coordination. Profit-seeking
enterprises and the accumulation of capital would be the fundamental driving
force behind economic activity. However, the government would wield
considerable indirect influence over the economy through fiscal and monetary
policies designed to counteract economic downturns and capitalism's
tendency toward financial crises and unemployment, along with playing a role
in interventions that promote social welfare. Further, some mixed economies
have expanded in scope to include a role for indicative economic planning
and/or large public enterprise sectors.
In a mixed economy there is a degree of freedom for private economic

initiatives mixed with a degree of government regulation of markets. The
relative strength or weakness of each component in the national economy can
vary greatly among countries. The term is also used to describe the economies
of countries which are referred to as welfare states. Governments in mixed
economies often provide environmental protection, maintenance of
employment standards, a standardized welfare system, and maintenance of
competition.
A "mixed economy" being a combination of governmental enterprise and free-

enterprise, nearly every economy to develop in human history, meets this
definition. Though some systems may be so close to being completely one way
or the other that to call them mixed is redundant and it is more meaningful
just to call them a free market economy or a command economy.
India is regarded as a good example of ‘Mixed Economy’. The concept of mixed

economy was accepted and implemented in India through the first Industrial
Policy Resolution in 1948 under which the Government demarcated
promotion of industries in public as well as private sectors. In India certain
categories of industries were made exclusive domain of public sector (e.g.,
defence, basic infrastructure, railways, space exploration, etc.).
Nationalization of banks in 1969 was a big step in this direction to channelize
banking facilities and investment to ‘socially desirable’ areas like agriculture,
MSME, rural development etc. In most of the other sectors participation of
private sector was sought. Over the years, however, the participation of private
sector in many areas, including defence, has increased.
With LPG reforms in place and the needs of private sector support being
unavoidable, the concept of mixed economy has to continue with more and
more participation of private sector. It appears that extensive privatization
may not be the answer in each and every sector. At the same time, the public
sector cannot handle all the developmental activities. Therefore the mixed
economy model is expected to continue for long time to come.
8
1.1.9 Let us sum up
At the time of independence in 1947, India was suffering from poverty and
other features of underdevelopment but over the years with our model of
‘Mixed economy’, we have achieved considerable progress especially after
‘Green revolution’ and the ‘LPG’. Now India has become the fifth largest
economy in the world besides being among the top producers of many
agricultural commodities. The sectoral changes in the economy also indicate
the robust developments in agriculture, industry and services. Though, as a
country we have a long way to go to ensure high quality of life for all the
citizens and the journey is full of challenges (including the pandemic currently
underway), India has demonstrated its capacity to overcome and make good
progress in the years ahead.
1.1.10 Keywords
Mixed economy, sectoral composition of economy, primary, secondary and

tertiary sectors, Green Revolution, economic reforms, ‘LPG’ (“Liberalization,
Privatization and Globalization”), Economic Scenario, the Indian Council of
Agricultural Research (ICAR), Public sector, Private sector.
1.1.11 Check your progress-questions
State True or False
1. Before British rule, in the 1700s, India’s economy was the world’s
largest economy.
2. ‘LPG’ was a major reform initiative of India in 1990s.
3. Agriculture contributed 63% to India’s GDP in 2020-21
4. Mixed economy is an economic system in which both the state and
private sector contribute to the economy, reflecting characteristics of
both market economies and planned economies
5. RBI policies about agricultural credit have no impact on credit flow for
agriculture.
6. Unemployment and under employment would always come in the way
of economic development.
7. Among the broad sectors of economy, at present the contribution of
Agriculture Sector is the highest to the GDP of India.
Key to questions
9
1. True 2. True 3. False 4. True 5. False 6. True 07.
False
Terminal/ Multiple Choice questions
1. Overall economic development of a country calls for support from the

sectors like
a. Agriculture (Primary Sector)
b. Industry (Secondary Sector)
c. Services (Tertiary Sector)
d. All of these
2. In a Mixed Economy scenario, there is no place for Private sector

association and participation.
a. True
b. False
c. Private sector participation is optional
d. Public sector participation is optional
3. Post Liberalization era paved way for new industries in various sectors
to emerge in our country.
a. True
b. False
c. In fact there has been reduction in development
d. No progress is seen in any areas.
4. The size of Indian economy now in 2021-22 is around _____
a. US$ 0.1 trillion
b. US$ 1.0 trillion.
c. US$ 3.53 trillion.
d. US$ 10.0 trillion.
5. The share of agriculture in India’s national income / GDP is at present

____ % in 2020-21.
a. 75%
10
b. 50%
c. 33%
d. 16%.
6. The biggest sector in terms of percentage share in India’s GDP is ___.
a. Agriculture
b. Industries
c. Services
d. All sectors have equal share.
7. The percentage share of agriculture/ primary sector in India’s GDP has

_______ over the past years since independence.
a. Increased
b. Decreased
c. Remained fluctuating- sometimes up and sometimes down
d. Remained constant
8. The proportion of India’s population dependent on Agriculture at

present is around___:
a. 100%
b. 75%
c. 50%
d. 25%
9. The full form of ‘NITI’ in ‘NITI’ Ayog is:
a. National and International Tourism Industry
b. National Institution for Transforming India
c. National Institute of Treatment of Internal problems
d. National Initiative for Transparent India
10. India is top most producer of which of the following items in the world?
a. Wheat
11
b. Rice
c. Milk
d. None of the items.
11. Which of the following initiatives of Government are for improving

farmers’ income?
a. Mission for “Doubling Farmers Income” by 2022
b. The scheme for Farmer Producers Organisation (FPO)
c. Establishment of Agricultural Universities and KVKs for research

and extension in agriculture
d. All of the above.
12. Under MGNREGA how much employment is assured?
a. 100 days to each rural household
b. 365 days to each rural household
c. 365 days to each household
d. 100 days to each household
13. Which is correct statement about ‘Green Revolution’?
a. It refers to the large increase in production of food grains
b. It was primarily due to use of inputs like HYV seeds of wheat

and rice, fertilizer and pesticides
c. Both (a) and (b) are correct
d. None of the above
Key to Terminal/ Multiple Choice Questions
01. (d) 02. (b) 03. (a) 04. (c) 05. (d) 06. (c) 07. (b) 08. (c) 09. (b)
10. (c) 11 (d) 12 (a) 13. (c)
References for Further reading
GoI (2020) Economic Survey
12
NABARD (2020) Annual Report
Gaurav Datt and Ashwani Mahajan (2015) Datt and Sundharam’s Indian
Economy, 71st Edition
*****
1.2 Lesson 2: Planning in India
13
1.2.1 Objective
The objective of this lesson is to understand the contribution of economic

planning in the development of the country over the years.
1.2.2 Introduction
After Independence, active measures were taken by the Government of India

to develop the country in every field. One such measure was the introduction
of Five Year Plans. Initially, each Five Year Plan concentrated on one or the
other aspect related to economic development. At the same time, other sectors
were also provided adequate support. In the year 2015, The Planning
Commission, which was established by the Government of India in 1950, was
replaced with a new institution named NITI (National Institution for
Transforming India) in view of the changed dynamics of the Indian economy.
1.2.3 The Five Year Plans and Rationale for setting up NITI Aayog
The Five-Year Plans (FYPs) were centralised economic and social growth
programmes on the pattern of similar plans of the erstwhile USSR. In India,
the Planning Commission was set up in 1950 and the first Five Year Plan was
launched in 1951. The idea was to plan public spending for equitable growth
rather than leaving expenditure to the market forces. The last plan was 12th
Five Year Plan for the years 2012 to 2017. However, with the change in the
government in the year 2014, the Planning Commission was replaced with the
new idea of NITI (National Institution for Transforming India) Aayog in 2015.
The rationale for setting up NITI Aayog was as follows: For a long time, there
had been a feeling that for a country as diverse and big as India, centralised
planning could not work beyond a point due to its one-size-fits-all approach.
It was also felt that reflecting the spirit and the changed dynamics as also the
aspirations of the new India require institutional reforms in governance and
dynamic policy shifts that can seed and nurture unprecedented change.
Further, due to the top-to-bottom – one way approach in centralised planning
of the Planning Commission, it was felt that the states needed to have greater
say and participation in planning in the true spirit of ‘cooperative federalism’.
Moreover, since the Planning Commission used to be controlled by the Central
government, sometimes there was a criticism that there is unfair treatment of
the states ruled by the opposition parties when it came to allocating funds.
Due to these factors in keeping with these changing times, the Government
of India set up NITI Aayog (National Institution for Transforming India), in
place of Planning Commission, as a means to serve the needs and aspirations
of the people of India in a better way. The new institution is envisaged to be
a ‘Think Tank’ and a catalyst to the developmental process; nurturing an
14
overall enabling environment, through a holistic approach to development,
operationalizing the principle of Cooperative Federalism.
NITI Aayog has around 32 different divisions like Agriculture Division, Rural
Development Division, etc., to deal with the matters of importance. Thus
setting up of NITI Aayog is a major development and will have long term
impact on the India for times to come.
1.2.4 Agriculture and Rural Development through Five Year Plans and
NITI Aayog
Nearly 70 per cent of India’s population is rural, 25 per cent of which lives in
poverty. The Rural Development Division of the NITI Aayog oversees the
Government’s mega schemes which seek to ensure that benefits of growth
reach rural India, and empower its inhabitants to rise above the poverty line.
The function of the Rural Development Division of the erstwhile Planning
Commission, Govt. of India, was primarily to provide overall policy guidance
in formulation of plans and programmes for Rural Development. The rural
development vertical of NITI Aayog provides overall policy guidance to the
Department of Rural Development, Ministry of Rural Development (MoRD),
GoI. It also monitors the progress of the various schemes and programmes
implemented by the Ministry. Key schemes of the Ministry looked after by the
vertical are DAY-National Rural Livelihood Mission (NRLM), MGNREGA,
Pradhan Mantri Awas Yojana, National Social Assistance Scheme, Pradhan
Mantri Gram Sadak Yojana, among others.
Details about these schemes are given in the following paragraphs:
1.2.4.1 Mahatma Gandhi National Rural Employment Guarantee Act

(MNREGA)
The Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)

was launched on February 2, 2006 and the first full year of operation was
2006-07 covering 200 districts. The programme was expanded to 330 districts
in 2007-08 and covers the whole country from 01 April, 2008. The primary
objective of the scheme is to provide guaranteed work for 100 days for any
rural household wishing to have such employment. Although all households
are eligible, the expectation is that only the poorer sections, i.e., landless
labour and marginal farmers would actually seek work. The secondary
objective is to ensure that the employment generated is from works that raise
land productivity. It is one of the largest programmes with huge outlays. The
allocation during the year 2020-21 was Rs 1.11 lakh crore.
15
1.2.4.2 DEENDAYAL ANTYODAYA YOJANA – National Rural Livelihood
Mission (NRLM)
The Swarnjayanti Gram Swarozgar Yojana (SGSY) was a flagship programme

of the Ministry of Rural Development. It was started in 1999 and was
restructured in 2010-11 for implementation as the National Rural Livelihood
Mission (NRLM). The SGSY aimed at providing sustainable income to rural
Below Poverty Line (BPL) households through income generating
assets/economic activities in order to bring them out of poverty.
Evaluation of the SGSY by National Institute of Rural Development (NIRD),

Bankers Institute of Rural Development (BIRD) and several others institutions
around 2010 showed mixed results. Out of estimated 25 million households
organized into SHGs until 2010, only 22% succeeded in accessing bank
credit. The studies showed that there were significant variations in the extent
of mobilization of poor SHGs and the quality of their operation. The one-off
asset provision programme focusing on single livelihood activity did not meet
multiple livelihood requirements of the poor. Often, the capital investment
was provided up-front as a subsidy, without adequate investment in social
mobilization or group formation.
Furthermore, uneven geographical spread of SHGs, high attrition rates among

members of SHGs, and lack of adequate banking sector response impeded the
programme performance. Several states did not fully invest the funds received
under SGSY. This fact indicated a lack of proper delivery systems and
dedicated efforts for skill training and building capacity for resource
absorption among the rural poor. There was a considerable mismatch
between programme capacity and programme requirements. Absence of
collective institutions in the form of SHG federations precluded the poor from
accessing higher order support services for productivity enhancement,
marketing linkages or risk management.
It is in this context that the Ministry of Rural Development (MoRD),

Government of India (GoI) constituted a Committee on Credit Related Issues
under SGSY (under the Chairmanship of Prof. Radhakrishna) to examine
various aspects of the scheme implementation. The Committee recommended
adoption of a ‘Livelihoods Approach’ to rural poverty elimination. The
approach encompassed the following four inter-related tasks:
• Mobilizing poor households into functionally effective SHGs and their
federations
• Enhancing access to bank credit and financial, technical and

marketing services
16
• Building capacities and skills for gainful and sustainable livelihoods
development
• Converging various schemes for efficient delivery of social and economic

support services to poor households
The government accepted the recommendation of the Committee and

restructured SGSY into National Rural Livelihoods Mission (NRLM) in 2010-
11 to provide a sharper and greater focus as well as momentum for poverty
reduction. The decision also aimed to achieve the Millennium Development
Goals (MDG) by 2015. The Framework for Implementation for NRLM was
approved by the Ministry on 9th December, 2010 and the Mission was
formally launched on 3rd June, 2011. In November 2015, the programme was
renamed Deendayal Antayodaya Yojana- National Rural Livelihood Mission
(DAY-NRLM).
DAY-NRLM is the flagship programme of Govt. of India for poverty reduction
through building strong institutions of the poor, particularly women, and
enabling these institutions to access a range of financial services and
livelihood services. DAY-NRLM is designed to be a highly intensive programme
and focuses on intensive application of human and material resources in
order to mobilize the poor into functionally effective community owned
institutions, promote their financial inclusion and strengthen their
livelihoods. DAY-NRLM complements these institutional platforms of the poor
with services that include financial and capital services, production and
productivity enhancement services, technology, knowledge, skills and inputs,
market linkage, etc. The community institutions also offer a platform for
convergence and partnerships with various stakeholders by building
environment for the poor to access their rights and entitlements and public
service.
NRLM set out with an agenda to cover seven Crore rural poor households,
across 600 districts, 6000 blocks, 2.5 lakh Gram Panchayats and six lakh
villages in the country through self-managed Self Help Groups (SHGs) of
women and federated institutions and support them for livelihoods collectives
in a period of 8-10 years. Important features of NRLM are as under:
1.2.4.2 Financial Assistance to the SHGs
I. Revolving Fund (RF): DAY-NRLM provides Revolving Fund (RF)

support to SHGs in existence for a minimum period of 3/6 months and
follow the norms of good SHGs, i.e. they follow ‘Panchasutra’ – the 5
principles, viz.: – regular meetings, regular savings, regular internal
landings, regular recoveries and maintenance of proper books of
accounts. Only such SHGs that have not received any RF earlier will
17
be provided with RF, as corpus, with a minimum of Rs 10,000 and up
to a maximum of Rs 15,000 per SHG. The purpose of RF is to
strengthen their institutional and financial management capacity and
build a good credit history within the group.
II. Capital Subsidy has been discontinued under DAY-NRLM:
No Capital Subsidy will be sanctioned to any SHG from the date of
implementation of DAY-NRLM.
III. Community Investment Fund (CIF)
CIF is be provided to the SHGs in the intensive blocks, routed through
the Village level/ Cluster Level Federations (CLF), to be maintained in
perpetuity by the Federations. The CIF will be used by the Federations,
to advance loans to the SHGs and/or to undertake the
common/collective socio-economic activities.
IV. Introduction of Interest subvention:
DAY-NRLM has a provision for interest subvention, to cover the
difference between the Lending Rate of the banks and 7%, on all credit
from the banks/ financial institutions availed by women SHGs, for a
maximum of Rs 300,000/- per SHG. This will be available across the
country in two ways:
(i) In 250 identified districts, banks will lend to the women SHGs
@7% up to an aggregated loan amount of Rs 300,000/-. The
SHGs will also get additional interest subvention of 3% on
prompt payment, reducing the effective rate of interest to 4%.
(ii) In the remaining districts, the banks will lend at their
respective lending rate applicable to SHGs. All women SHGs
under DAY– NRLM, will be eligible for interest subvention on
prompt payment to the extent of difference between the
lending rates and 7% for the loan up to Rs. 300,000/- subject
to maximum of 5.5 % or as prescribed by the MoRD. This part
of the scheme is being operationalized by State Rural
Livelihood Missions (SRLMs).
V. Loan amount: Emphasis is laid on the multiple doses of assistance
under DAY- NRLM. This would mean assisting an SHG over a period of
time, through repeat doses of credit, to enable them to access higher
amounts of credit for taking up sustainable livelihoods and improve on
the quality of life.
SHGs can avail either a Term Loan (TL) or a Cash Credit Limit (CCL)
loan or both based on the need. In case of need, additional loan can be
sanctioned even though the previous loan is outstanding.
18
The amount of credit under different facilities would be as follows:
VI. Cash Credit Limit (CCL): In case of CCL, banks are advised to
sanction minimum loan of Rs 5 lakh to each eligible SHG for a period
of 5 years with a yearly drawing power (DP). The drawing power may
be enhanced annually based on the repayment performance of the
SHG. The drawing power may be calculated as follows:
• DP for First Year: 6 times of the existing corpus4 or minimum
of Rs 1 lakh whichever is higher.
• DP for Second Year: 8 times of the corpus at the time of review/
enhancement or minimum of Rs 2 lakh, whichever is higher.
• DP for Third Year: Minimum of Rs 3 lakh based on the Micro
credit plan prepared by SHG and appraised by the Federations
/Support agency and the previous credit history.
• DP for Fourth Year onwards: Minimum of Rs 5 lakhs based on
the Micro credit plan prepared by SHG and appraised by the
Federations /Support agency and the previous credit History.
VII. Term Loan: In case of Term Loan, banks are advised to sanction loan
amount in doses as mentioned below:
• First Dose: 6 times of the existing corpus or minimum of Rs 1
lakh whichever is higher.
• Second Dose: 8 times of the existing corpus or minimum of Rs 2
lakh, whichever is higher.
• Third Dose: Minimum of Rs 3 lakh based on the Micro credit
plan prepared by the SHGs and appraised by the Federations
• Fourth Dose: Minimum of Rs 5 lakh based on the Micro credit
plan prepared by the SHGs and appraised by the Federations
Banks have been advised to take necessary measures to ensure that
eligible SHGs are provided with repeat loans. Banks are advised to
work with DAY-NRLM to institutionalize a mechanism for online
submission of loan application of SHGs for tracking and timely disposal
of application.
4
“Corpus” is inclusive of revolving funds, if any, received by that SHG, its own
savings, interest earning by SHG from on-lending to its members, income
from other sources, and funds from other sources in case of promotion by
other institutes/NGOs.
19
VIII. Purpose of loan and repayment:
The loan amount will be distributed among members based on the
Micro Credit Plan (MCP) prepared by the SHGs. The loans may be used
by members for meeting social needs, high cost debt swapping,
construction or repair of house, construction of toilets and taking up
sustainable livelihoods by the individual members within the SHGs or
to finance any viable common activity started by the SHGs.
In order to facilitate use of loans for augmenting livelihoods of SHG
members, it is advised that at least 50% of loans above Rs 2 lakh and
75% of loans above Rs 4 lakh be used primarily for income generating
productive purposes. Micro Credit Plan (MCP) prepared by SHGs would
form the basis for determining the purpose and usage of loans.
For implementing DAY-NRLM, each State has created the State Rural
Livelihood Mission (SRLM) with its structure at district level and sub-
district/block level (called Cluster). In effect DAY-NRLM has proved to be a
very successful and sustainable scheme for poverty alleviation and
sustainable livelihood generation.
Pradhan Mantri Awas Yojna- Grameen (PMAY-G)
Pradhan Mantri Awaas Yojna was previously known as Indira Awaas Yojna
(IAY). The IAY was being implemented as an independent scheme since 1996.
PMAY aims to provide assistance for construction Pucca house with basic
amenities to all households and those households living in Kuchcha and
dilapidated house, by 2022 to the Below Poverty Line (BPL) rural households,
with special emphasis on SCs, STs and freed bonded labour categories. A
maximum assistance of Rs.1.20 lakh per unit is provided for construction in
plain areas and Rs.1.30 lakh per unit for hilly/difficult areas. The funding of
PMAY is shared between the Centre and State in the ratio of 60:40. (90:10 for
N.E. and Himalayan States). A willing beneficiary is to be facilitated to avail
institutional financial up to Rs.0.70 lakh which could be monitored by State
Level Bankers Committee (SLBC) and District Level Consultative Committee
(DLCC).
National Social Assistance Programme (NSAP)
The National Social Assistance Programme (NSAP) was launched with the aim
to provide social assistance benefit to poor households in the case of old age,
death of primary breadwinner and maternity. The programme supplements
the efforts of the State Governments with the objective of ensuring minimum
national levels of wellbeing. The Central assistance is an addition to the
benefit that the States are already providing on Social Protection Schemes.
20
With a view to ensure better linkage with nutrition and national population
control programmes, the Maternity Benefit Component of the NSAP was
transferred to the Department of Family Welfare, Ministry of Health and
Family Welfare with effect from 2001-02. The schemes of NSAP and
Annapurna have been transferred to the State Plan with effect from 2002-03
with a view to provide requisite flexibility to the State / UT in the choice and
implementation of the schemes. NSAP at present, comprises of Indira Gandhi
National Old Age Pension Scheme (IGNOAPS), Indira Gandhi National Widow
Pension Scheme (IGNWPS), Indira Gandhi National Disability Pension Scheme
(IGNDPS), National Family Benefit Scheme (NFBS) and Annapurna scheme
(under this scheme 10 kgs of food grains-wheat or rice is given per month per
beneficiary for food security).
Pradhan Mantri Krishi Sinchai Yojana (PMKSY)
With the aim of reducing the dependence of farming on the monsoon, the
government has approved the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) -
Prime Minister’s Agricultural Irrigation Scheme. The major objective of PMKSY
is to achieve convergence of investments in irrigation at the field level, expand
cultivable area under assured irrigation (the slogan is "Har Khet Ko Paani",-
water for every farm), improve on-farm water use efficiency to reduce wastage
of water, enhance the adoption of precision-irrigation and other water saving
technologies (the slogan is “More crop per drop”), enhance recharge of aquifers
and introduce sustainable water conservation practices by exploring the
feasibility of reusing treated municipal waste water for peri-urban agriculture
and attract greater private investment in ‘precision irrigation’ system.
PMKSY has been conceived as convergence and amalgamation of ongoing

schemes viz. Accelerated Irrigation Benefit Programme (AIBP) of the Ministry
of Water Resources, River Development and Ganga Rejuvenation
(MoWR,RD&GR), Integrated Watershed Management Programme (IWMP) of
Department of Land Resources (DoLR) and the On Farm Water Management
(OFWM) of Department of Agriculture and Cooperation (DAC).
For this scheme, Rs 50,000 crore has been allocated for the next five years
and for the year 2021-22, allocation of Rs. 5,588 crores has been made in this
scheme. Considering the use and utilization of funds by the States, year-wise
usage and total allocated funds can also be extended for this programme, so
that every farm has water and every drop is utilized for more crop production
as well as food safety of the whole country.
The scheme is implemented by Ministries of Agriculture, Water Resources

and Rural Development. Ministry of Rural Development is to mainly
undertake:
• Rain water conservation,

• Construction of farm pond,
• Water harvesting structures,
21
• Small check dams and contour bunding
• Creation of assured irrigation source,
• Construction of diversion canals, field channels, water
diversion/lift irrigation, including development of water
distribution systems.
Ministry of Agriculture promotes efficient water conveyance and precision

water application devices like drips, sprinklers, pivots, rain-guns in the farm
“(Jal Sinchan)”, construction of micro-irrigation structures to supplement
source creation activities, extension activities for promotion of scientific
moisture conservation and agronomic measures.
Programme architecture of PMKSY is to adopt a ‘decentralized State level

planning and projectised execution’ structure that will allow States to draw
up their own irrigation development plans based on District Irrigation Plan
(DIP) and State Irrigation Plan (SIP). It is a convergence platform for all water
sector activities including drinking water & sanitation, MGNREGA,
application of science & technology etc. through comprehensive plan. State
Level Sanctioning Committee (SLSC) chaired by the Chief Secretary of the
State is vested with the authority to sanction projects and oversee
implementation thereof.
The programme is supervised and monitored by an Inter-Ministerial National

Steering Committee (NSC), constituted under the Chairmanship of Prime
Minister with Union Ministers from concerned Ministries. A National
Executive Committee (NEC), under the Chairmanship of Vice Chairman, NITI
Aayog, is constituted to oversee programme implementation, allocation of
resources, inter-ministerial coordination, monitoring and performance
assessment, addressing administrative issues etc.
Pradhan Mantri Gram Sadak Yojana (PMGSY)
The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in the year
2000 with the objective of providing rural connectivity by way of all- weather
roads to the unconnected villages/ habitations for uplifting the socio-
economic condition of the rural population. The scheme was launched as
PMGSY-II in 2013 and PMGSY-III in 2019. The scheme is managed by
Ministry of Rural Development. Under the scheme the Union Government
bears 90% of the project cost in respect of projects sanctioned in North-
Eastern and Himalayan States, whereas for other states the Union
Government bears 60% of the cost. A total of about 6 lakh Km road length
has been constructed under the scheme since inception till 2019.
National Land Records Modernization Programme (NLRMP)
The existing system of land records in the country was quite complicated with
lot of variation across the states. In order to resolve the issues, in the year
2008, the National Land Records Modernization Programme (NLRMP) was
22
conceptualized as a major system and reform initiative, which is concerned
not merely with computerization, updating and maintenance of land records
and validation of titles, but also as a programme, that will provide a
comprehensive database for planning developmental, regulatory and disaster
management activities by providing location-specific information based on
land records data. It attempts to develop an Integrated Land Information
Management System (ILIMS) across the country, on which different States can
also add State-specific needs as they may deem relevant.
Under the NLRMP, the data have been integrated on a geographic information
system (GIS) platform. All ‘cadastral maps’ (maps and records of land in
physical / paper form) are to be digitized, and data is to be included with plot
numbers and unique id for each land parcel.
The activities to be supported under the programme, inter alia, include

survey/re-survey using modern technology including aerial photo, updating
of land records, mutation records, completion of computerization of the
records of rights (RORs), computerization of registration, automatic
generation of mutation notices, digitization of maps, integration of digitization
of maps and training and capacity building of the concerned officials and
functionaries. Connectivity amongst the land records and registration offices
and land records management centres at tehsil /taluka/circle/block level
would be supported. Access to land records data would be provided to
commercial banks, cooperative banks and other financial institutions for
facilitating credit. This Central Sector scheme has been extended up to 2020-
21 at a total cost of Rs. 950 crores.
Developments under various Five Year Plans
As mentioned earlier, India adopted five year planning as a method for

achieving development under the erstwhile Planning Commission since 1951.
Twelve Five Year Plans were prepared before NITI Aayog replaced Planning
Commission. Through these mechanisms, overall development of the country
is being planned by allocating programmes and required funds for different
sectors and programmes. Important developments in this regard are given
below:
Community Development and Rural Extension
Community Development was the method and Rural Extension was the
agency through which the Five Year Plan sought to initiate a process of
transformation of the social and economic life of the villages. The programme
was launched during 1952 with Rs. 90 crores allocated for community
projects and proposed the establishment over a period of about ten years of a
network of extension workers throughout the country. ‘Development Blocks’
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were formed consisting of a group of villages and ‘Block Development Officer’
(BDO) was the head of Block Development Office. A small group of villages
was allotted to a village level worker (VLW).
The initial programme was started with approximately 55 Projects of rural

development located in select areas in several States. A certain degree of
flexibility was allowed in the actual allotment of projects. As increased
agricultural production was the most urgent objective, one of the basic criteria
in the selection of the first set of Project areas was the existence of irrigation
facilities or assured rainfall. In assessing irrigation facilities and the
possibilities of development, irrigation from river valley projects, from tube
wells, as well as from minor irrigation works were taken into account.
The main lines of activity undertaken in a Community Development project

could be briefly divided into the following: agriculture and related matters
such as irrigation; communications, education, health, supplementary
employment, housing, training and social welfare.
1.2.4.3 Agriculture and related matters
The programme included reclamation of available virgin and waste land,

provision of commercial fertilizers and improved seeds, promotion of fruit and
vegetable cultivation, adoption of improved agricultural technique, efficient
land utilization, supply of technical information, improved agricultural
implements, improved marketing and credit facilities, provision of soil surveys
and prevention of soil erosion, encouragement of the use of natural and
compost manures and improvement of livestock. The main thrust was on the
establishment of key villages for breeding pedigree stock and the provision of
veterinary aid, as well as artificial insemination centres. For attaining this
objective, agricultural extension services were set up.
1.2.4.4 Irrigation
Importance was given to make available sufficient water facility for irrigation
through minor irrigation works, e.g., tanks, canals, surface wells, tube wells,
etc.
1.2.4.5 Communications
Understanding the need for well-connected systems to ensure movement of

people and products, measures were taken to provide suitable road system
on the country side.
1.2.4.6 Education
It was realized that the complete development of a community cannot be

achieved without a strong educational base. The community projects were
24
planned to provide for social education, expansion and improvement of
primary and secondary education and its gradual conversion to basic type,
provision of educational facilities for working children and promotion of youth
welfare. Training facilities were made available to provide the inputs regarding
the techniques associated with agriculture production to derive benefits.
1.2.4.7 Health
The Health Organization of the Project area to cover at least 3 primary health
units in the Development Blocks and a secondary health unit equipped with
a hospital and a mobile dispensary at the headquarters of the Project area
and serving the area as a whole were envisaged. Its aim was to improve
environmental hygiene, including provision and protection of water supply;
proper disposal of human and animal wastes; control of epidemic diseases
such as Malaria, Cholera, Small-pox, Tuberculosis, etc., provision of medical
aid along with appropriate preventive measures and education of the
population, hygienic living and improved nutrition.
1.2.4.8 Supplementary Employment
Efforts were put in place during the Plan period to generate supplementary
employment. In this direction attention and importance were given to make
available employment in the cottage and small-scale industries, construction
of brick kilns and saw mills and encouragement of employment through
participation in the tertiary sector of the economy.
1.2.4.9 Housing
Apart from the provision of housing for community projects personnel, steps
were taken, wherever possible, to provide demonstration and training in
improved techniques and designs for rural housing.
1.2.4.10 Training
The training of village level workers, project supervisors and other personnel
for the Community Development Programme, were carried out in 30 training
centres, which were set up with the assistance of the Ford Foundation of
America. Each training centre could accommodate about 70 trainees. Each
centre had double training staff so that the trainees could be divided into two
groups. One group concentrated on practical exposure and the other group
learnt theoretical aspects in a class room environment.
1.2.4.11 District Administration Development
The first Five Year Plan’s experience and exposure gave better ideas for the
government to take into account various issues during the Second Five Plan.,
It was felt in the area of Agriculture and Rural Development that the grass
25
root level administration needed to be strengthened, which was called the
‘District Administration Development’.
Under this item, importance was given to the following:
i. Establishment, for the development at the village level, of an

appropriate agency which derives its authority from the village
community;
ii. Strengthening of the village level panchayat system to involve them in
the developmental activities of the respective villages.
iii. Integration of activities of various development departments in the
district and the provision of a common extension organization;
iv. Linking up, in relation to all development work, of local self-governing
institutions with the administrative agencies of the state government;
v. Regional coordination and supervision of district development
programmes;
vi. Improvement in general administration.
1.2.4.12 Housing as an important component of urban and rural

planning
Housing being a fundamental need, lot of importance was given to this area.
Setting up of Housing Boards, acquiring lands for construction of houses and
offering them to the needy poor and middle class were given due importance
under this plan. This has led to employment generation both in a direct as
well in an indirect manner.
Some of the significant developments in this direction included -housing for

industrial workers, housing for dock workers, housing for plantation
labourers, Middle Income Group housing (MIG), rental housing for state
government employees, slum clearance and improvement, rural housing,
schemes for financing housing loans, and research and training. All these led
to the overall economic development. These also paved the way for many to
have housing facilities at affordable costs.
1.2.4.12 Co-operation and Community Development
The Five Year Plans concentrated on co-operation and community

development as important components of overall planning. Understanding
the significance of having cooperative institutions and community based
participative organizations as financial institutions (credit cooperative
societies and cooperative banks) for continuous credit flow was given due
26
importance. Further, co-operative marketing, co-operative processing, co-
operative handling of agricultural inputs, storage, consumer co-operation
were developed. In semi-urban and urban areas, the role of urban co-
operative banks was also strengthened.
The Community Development Programme started in 1952, provided new

dimensions to Rural Development.
1.2.4.13 Development of the Poorest of the Poor
To have focused attention to ensure that the poorest of the poor and hitherto
neglected sectors got due recognition and support, the ‘20- Point Programme’
was announced by the then Prime Minister on 1st July 1975. The introduction
of the same had far reaching effects on economic development. Various
schemes were introduced to address the issues relating to poor people of the
country. Subsequent to nationalization of banks in 1969, the banks were
directed to participate in the welfare activities of such people by extending
credit facilities at very low costs with minimum formalities. Besides,
agriculture sector covering minor irrigation, soil and water conservation,
forestry, animal husbandry, dairy farming, fisheries, flood control, etc. were
some of the segments which received benefit under this plan.
A ‘Food for Work Programme’ was initiated in 1977-78, aimed at creation of

additional employment in rural areas. The concept of an Integrated Rural
Development Programme (IRDP) was first proposed in the Central Budget of
1976-77, and a beginning was made.
1.2.4.14 Poverty Alleviation
Poverty alleviation has always been a high priority for the Government and
several efforts have been made in this regard. Earlier, to develop the rural
youth, Training of Rural Youth for Self-Employment (TRYSEM) was started on
15th August 1979. The aim was to train two lakh rural youth to give them
empowerment and have self-employment. In 1982 the introduction of
Development of Woman and Children in Rural Areas (DWCRA) had provided
opportunities for development of women and children in the rural areas. The
National Rural Employment Programme (NREP) was launched in October,
1980 and became a regular Plan programme from April, 1981. NREP aimed
to generate gainful employment for the unemployed and underemployed
persons in rural areas, to create productive community assets for direct and
continuing benefits to poverty groups and to strengthen the rural, economic
and social infrastructure to bring about a general improvement in the overall
quality of life in rural areas. It also aims to improve the nutritional standards
of rural poor through the supply of food grains as part of wages. On 15th Aug
27
1983, a new programme viz., Rural Landless Employment Guarantee
Programme (RLEGP) was launched.
Focus was given to poverty alleviation programmes. Integrated Rural

Development Programme (IRDP), launched in 1978, was given appropriate
importance and it became very popular. The Public Sector Banks were
involved in the financing of the rural credit requirements while the subsidy
support was provided by the government, which led to huge progress in the
programme.
1.2.4.15 Other Development Programmes
Besides the above mentioned programmes, several other development

programmes were launched. Some of the important programmes are
discussed briefly below:
(i) Employment Guarantee Schemes of Maharashtra and Gujarat

States (EGS):
Maharashtra Employment Guarantee Scheme (EGS) was a unique

experiment which was started in 1971-72 for providing gainful
employment in rural areas and "C" class Municipal areas (smaller towns).
Similarly, a special employment programme was introduced in Gujarat in
1991 under which two districts, Dang and Gandhinagar, were selected for
achievement of zero unemployment and, in the remaining districts of
Gujarat, additional employment opportunities were created in the rural
areas. Further, an ‘Employment Assurance Scheme (EAS)’ was launched
on 2nd October, 1993 in 1775 identified backward blocks situated in
drought prone, desert, tribal and hill areas.
(ii) Land Reforms
The land reforms policy consisted of the following:
a. Abolition of intermediaries;
b. Tenancy reforms with security to actual cultivators;
c. Redistribution of surplus ceiling land;
d. Consolidation of holdings; and
e. Updating of land records.
(iii) Self-employment Programmes

The successive Five Year Plans concentrated more on Self-employment
programmes such as IRDP and allied programmes. ‘Supply of Improved
28
Toolkits to Rural Artisans’ (SITRA) was started in July 1992 as a sub
scheme of IRDP.
(iv) The National Social Assistance Programme (NSAP): NSAP came into
effect from 15th August, 1995, to address the issues relating to the old age
persons. This programme has three components: namely (i) National Old
Age Pension Scheme (NOAPS); (ii) National Family Benefit Scheme (NFBS);
and (iii) National Maternity Benefit Scheme (NMBS); targeted at people
living below the poverty line. Through this, old age pensions for the
deserving poor in rural areas were introduced.
(v) Overall development of agriculture and rural areas
In view of the significance of agriculture and rural sectors in the

development of the country, high priority has been accorded to agriculture
and rural development. Self-employment schemes have been given due
importance under the Plans. A greater importance was given for
strengthening the Self-Help Groups (SHGs). Rural poverty alleviation
programmes were revamped and re-focused during these Plans to increase
their effectiveness. Programmes that provide self-employment and wage
employment to the poor were implemented with greater vigour during the
11th Plan.
The nationwide implementation of Rural Employment Guarantee

Programme was started during the 11th Plan from the year 2006.
(vi) Bharat Nirman: The GoI, in recognition of the role played by

infrastructure in poverty removal, had implemented various projects for
construction of rural infrastructure under different programmes in the past.
The government launched a time-bound plan under a programme called
‘Bharat Nirman’ in 2005 for implementation during the four-year period,
2005–09. The first half of the programme was in the Tenth Plan period and
the second half was covered in the first two years of the Eleventh Plan period
(2007–12). The six components included under the programme were
irrigation, drinking water, electrification, roads, housing and rural telephony.
Various rural development schemes in the areas like rural infrastructure,

rural health and literacy were implemented under the Bharat Nirman Yojana.
Another innovative scheme implemented for development of rural areas was
‘PURA’ (Providing Urban Facilities in Rural Areas) through Public Private
Partnership (PPP) framework for providing livelihood opportunities and urban
amenities to improve the quality of life in rural areas. This scheme was
implemented by Ministry of Rural Development (MoRD) on a pilot basis in
seven clusters for a period of three years from 2004-05 to 2006-07.
29
1.2.4.16 Focus of the Five Year Plans
The focus of different Five Year Plans varied based on the priorities at that
time. An attempt is made to summarize the focus areas of these Plans below:
Plan Focus Particulars
First Plan Agriculture • It was based on ‘Harrod-Domar Model of
(1951 - 56) Development Development’5.
• Community Development Programme was
launched in 1952.
• Focus on agriculture, price stability, power and
transport. The idea was that agriculture
development would lead to higher rate of
economic growth.
• It was a successful plan primarily
because of good harvests in the last
two years of the plan.
• The national income increased in
the first Plan at the rate of 3.6% p.a
against a target of 2.1%.
Second Import • Also called Mahalanobis Plan, named after the
Plan substitution well-known economist.
(1956 - 61) led growth, • Focus was on rapid industrialization.
heavy and • Advocated huge imports through foreign loans.
basic • Shifted basic emphasis from agriculture to
industries industry.
• During this plan, prices increased by 30%,
against a decline of 13% during the First Plan.
Wrong assessment of food situation and rapid
industrialization led to imbalances in the
economy in the form of food shortage, price rise,
foreign exchange problem and unemployment.
• Target Growth: 4.5% Actual Growth: 4.1%
Third Plan Economic • At its conception, it was felt that Indian
(1961 - 66) sufficiency economy has entered a take-off stage.
Therefore, its aim was to make India a 'self-
reliant' and 'self-generating' economy.
• Based on the experience of first two plans,
agriculture and allied activities was given top
priority to support the exports and industry.
5
‘Harrod-Domar Model of Development’ is a Keynesian model of economic growth which
postulates that increased investment can lead to a cycle of higher growth and savings
which in turn will accelerate investment.
30
• Performance fell short of expectations due to
unforeseen events - Chinese aggression (1962),
Indo-Pak war (1965), severe drought 1965-66.
Three Agriculture • Prevailing crisis in agriculture and serious food
Annual shortage necessitated the emphasis on
Plans agriculture during the Annual Plans.
(1966-69) • During this plan, a whole new agricultural
Plan strategy was implemented. It involved wide-
holiday for spread distribution of high-yielding varieties of
3 years. seeds, extensive use of fertilizers, exploitation
of irrigation potential and soil conservation
(Green Revolution).
• During the Annual Plans, the economy
absorbed the shocks generated during the
Third Plan. It paved the path for the planned
growth ahead.
Fourth Plan Technological • Main emphasis was on growth rate of
(1969 - 74) reforms in agriculture to enable other sectors to move
agriculture, forward.
growth with • It emphasized reducing fluctuations in
stability agricultural production and reducing
dependence on foreign assistance.
• First two years of the plan saw record
production. The last three years did not
measure up due to poor monsoon.
Fifth Plan Elimination of • It proposed to achieve two main objectives:
(1974-79) poverty 'removal of poverty (Garibi Hatao)’ and
'attainment of self-reliance'.
• Promotion of high rate of growth, better
distribution of income and significant growth in
the domestic rate of savings were seen as key
instruments.
Sixth Plan Food and fuel • Focus shifted to formulating programmes
(1980 - 85) strategy specifically directed to the poor.
• Special programmes aimed at tackling poverty
were introduced like short term wage
employment in rural areas.
31
Seventh Human • Aimed at a direct attack on the problems of
Plan Resource poverty, unemployment and regional
(1985 - 90) Development imbalance.
• Many anti-poverty programmes were made the
focus of the planning strategy.
• Plan aimed at extending Green Revolution to
new areas through its emphasis on raising the
productivity of rice in the eastern region and in
dry land areas.
Eighth Plan Privatization, • Worsening Balance of Payment position and
(1992 - 97) liberalization inflation during 1990-91 were the key issues
and during the launch of the plan.
globalization • The plan undertook drastic policy measures to
combat the bad economic situation and to
undertake an annual average growth of 5.6%
• Some of the main economic outcomes during
eighth plan period were rapid economic growth,
high growth of agriculture and allied sector,
and manufacturing sector, growth in exports
and imports, improvement in trade and current
account deficit.
• A review on various poverty alleviation schemes
already launched was made.
Ninth Plan Growth with • It was developed in the context of four
(1997- social justice important dimensions: Quality of life,
2002) and equity generation of productive employment, regional
balance and self-reliance.
Tenth Plan Growth with • Reduction of poverty ratio ,
(2002 - social justice • Providing gainful high quality employment to
2007) and equity the addition to the Labour force,
• Universal access to primary education,
• Reduction in gender gaps in literacy and wage
rates
• All villages to have sustained access to potable
drinking water by 2012.
32
Eleventh Faster, broad • Increase agricultural GDP growth rate to 4%
Plan based and per year,
(2007 - inclusive • Create 70 million new work opportunities and
2012) growth reduce educated unemployment to below 5%,
• Provide clean drinking water for all by 2009,
• Ensure that at least 33 percent of the direct and
indirect beneficiaries of all government
schemes are women and girl children,
• Connect every village by telephone by
November 2007 and provide broadband
connectivity to all villages by 2012,
• Increase forest and tree cover by 5 percentage
points and
• Increase energy efficiency by 20 percentage
points by 2016-17.
• Target Growth 9.0%. Actual growth 8.3%.
Twelfth Faster, More • India’s five year plan creates 50 million work
Five Year Inclusive and opportunities in Non-Farm Sector.
Plan (2012- Sustainable • Increasing green cover by 1 million hectare per
2017) Growth year.
• PPP Model for Investments.
• Provide access to banking services to 90% of
households.
• Remove gender and social gap in school
enrolment.
• Enhance access to higher education.
• Reduce malnutrition among children 0-3 year
• Provide electricity to all villages.
• Ensure that 50% of rural population have
access to pure drinking water.
• Real GDP growth target was initially 9.0% but
finally approved at 8.0% by National
Development Council. The estimate of
achievement by NITI Aayog is around 7.0%.
1.2.4.17 Limitations of Five Year Plans
Implementation of the Five Year Plans was not smooth. These Plans faced a
lot of hurdles, but despite the shortcomings, these plans have contributed for
the nation’s development. In fact a country like India, with huge population,
divergent views, geographical limitations, different political parties holding
power at State levels as well as at the Centre at different times; launching five
year plans and having optimum results at all times is not an easy task. Still
33
the fact that our country and the rural population have gained on account of
the five year plans, cannot be denied.
1.2.5 National Institution for Transforming India (NITI) Aayog:
1.2.5.1 Background and constitution
NITI Aayog is basically a policy think tank of Government of India and State
Governments. It replaced 65-year old Planning Commission. Union
Government of India had announced formation of NITI Aayog on 1st January,
2015. The NITI Aayog comprises the following governance structure, members
and bodies:
(i). Prime Minister of India is the Chairperson of NITI Aayog.
(ii). Governing Council comprising of the Chief Ministers of all States and
Union Territories with legislatures and Lieutenant Governors of other Union
Territories.
(iii). Regional Councils have been constituted to address specific issues and
contingencies impacting more than one state or region. The aim of the
Regional Councils is to amicably settle disputes between two or more states
facing a common set of problems that usually delay the progress of
developmental projects. These councils will be formed for a specified tenure.
The Regional Councils’ meetings are convened and chaired by the chairperson
of the NITI Aayog (the Prime Minister) or his nominee and comprise of the
Chief Ministers of States and Lt. Governors of Union Territories in the region
for addressing specific issues.
(iv). Experts, specialists and practitioners with relevant domain knowledge

may be called as special invitees, to be nominated by the Prime Minister.
NITI Aayog is expected to serve as a “think tank” of the government as a

“directional and policy dynamo” and would provide strategic and technical
advice to the Central and State governments on key policy matters including
economic issues of national and international importance. Thus NITI Aayog
will never plan, rather it will formulate policy. By following these policies,
various Ministries of the Central Government will prepare developmental
projects considering the need of long term development. NITI is in favour of
cooperative federal structure where both the Centre and States jointly prepare
developmental policies. But NITI, at the same time, wants to promote healthy
competition among the developing states.
Thus, the propulsive concept behind the new body would be “co-operative
federalism” entailing that the states to have their say in framing plans and
policies for development. NITI Aayog will have regional councils to focus on
34
developmental activities on specific areas and is patterned on the National
Reforms Development Commission of China. While the Planning Commission
had the power to allocate funds to states for attaining regional development,
the NITI Aayog will not have such powers. Rather, the task of allocating funds
to states is now being vested with the Finance Ministry, GoI.
The primary job of NITI Aayog would be to undertake long term policy and
design frameworks and take necessary initiatives for attaining faster
development and to monitor these activities. Thus, NITI Aayog will actively
monitor and evaluate implementation of the Government programmes and
initiatives. The Planning Ministry of the then Government was of the view that
“with central plan expenditure of the order of Rs 5.75 lakh crore was being
channelized per year for development, it was absolutely necessary that there
is concurrent, comprehensive, credible and reliable evaluation”.
This step mainly focuses on strategies to spread awareness about and use of
evaluation as a tool for enhancing result from policies and programmes of
good governance. So it was time to consider developing a National Evaluation
Policy that would provide direction to Monitoring and Evaluation (M & E)
activities in the country, laying stress upon quality standards and sound
ethical procedures and provide for appropriate institutional mechanisms. NITI
Aayog would therefore mean:
• A group of people with authority entrusted by the government to

formulate/regulate policies concerning transforming India.
• It is a commission to assist government in both social and economic
issues.
• It is an institute of think tank with experts in it.
• It is a body to actively monitor and evaluate implementation of
government programmes and initiatives.
1.2.5.2 Organizational framework
The organizational framework of NITI Aayog includes:

i. The Prime Minister as the Chairperson
ii. Vice-Chairperson
iii. Two fulltime Members
iv. Two part-time Members from leading universities/relevant institutions
in an ex-officio capacity and on rotation basis
v. Ex-officio Members: Maximum of four members of the Union Council of
Ministers to be nominated by the Prime Minister
vi. Chief Executive Officer (CEO)- To be appointed by the Prime Minister
for a fixed tenure, in the rank of Secretary to the Government of India
35
vii. Special Invitees: Experts, specialists and practitioners with relevant
domain knowledge will be called as special invitees, to be nominated by
the Prime Minister
viii. Secretariat as deemed necessary for its functioning.
It may be observed from the above that lot of flexible options for supporting
NITI Aayog have been built in the organizational structure by way of various
experts on full time or part time basis and from Government as well as private
sector to enable it to function truly as a ‘Think Tank’.
1.2.5.3 Aims and Objectives of NITI Aayog:
The following are the important aims and objectives of NITI Aayog:
• To evolve a shared vision of national development priorities, sectors and

strategies with the active involvement of States.
• To foster cooperative federalism through structured support initiatives
and mechanisms with the States on a continuous basis, recognizing
that strong States make a strong nation.
• To develop mechanisms to formulate credible plans at the village level
and aggregate these progressively at higher levels of government.
• To ensure, on areas that are specifically referred to it, that the interests
of national security are incorporated in economic strategy and policy.
• To pay special attention to the sections of our society that may be at
risk of not benefiting adequately from economic progress.
• To design strategic and long term policy and programme frameworks
and initiatives, and monitor their progress and their efficacy. The
lessons learnt through monitoring and feedback will be used for making
innovative improvements, including necessary mid-course corrections.
• To provide advice and encourage partnerships between key
stakeholders and national and international like-minded Think tanks,
as well as educational and policy research institutions.
• To create a knowledge, innovation and entrepreneurial support system
through a collaborative community of national and international
experts, practitioners and other partners.
• To offer a platform for resolution of inter-sectoral and inter
departmental issues in order to accelerate the implementation of the
development agenda.
• To maintain a state-of-the-art Resource Centre, be a repository of
research on good governance and best practices in sustainable and
equitable development as well as help their dissemination to stake-
holders.
• To actively monitor and evaluate the implementation of programmes
and initiatives, including the identification of the needed resources so
as to strengthen the probability of success and scope of delivery.
• To focus on technology upgradation and capacity building for
implementation of programmes and initiatives.
36
• To undertake other activities as may be necessary in order to further
the execution of the national development agenda, and the objectives
mentioned above.
1.2.5.4 Features and functions of NITI Aayog
NITI Aayog is developing itself as a State-of-the-art Resource Centre, with the

necessary resources, knowledge and skills, that will enable it to act with
speed, promote research and innovation, provide strategic policy vision for the
government, and deal with contingent issues.
NITI Aayog’s entire gamut of activities can be divided into four main heads:
i. Design Policy & Programme Framework

ii. Foster Cooperative Federalism
iii. Monitoring & Evaluation
iv. Act as a resource centre, ‘Think Tank’ and Knowledge & Innovation
Hub
These functions are captured in Figure 2.1.
Figure 2.1: Functions of NITI Aayog
1.2.5.3 Verticals of NITI Aayog
The mandate and activities of NITI Aayog are implemented through 23

verticals listed below:
37
1) Agriculture
2) Health
3) Women & Child Development
4) Governance & Research
5) HRD
6) Skill Development & Employment
7) Rural Development
8) Sustainable Development Goals
9) Energy
10) Managing Urbanization
11) Industry
12) Infrastructure
13) Financial Resources
14) Natural Resources & Environment
15) Science & Tech
16) State Coordination & Decentralized Planning (SC&DP)
17) Social Justice & Empowerment
18) Land & Water Resources
19) Data management & Analysis
20) Public-Private Partnerships
21) Project Appraisal and Management Division (PAMD)
22) Development Monitoring and Evaluation Office
23) National Institute of Labour Economics Research and Development
(NILERD)
1.2.5.4 Important documents of NITI Aayog
The system of Five Year Plans was discontinued after NITI Aayog replaced
Planning Commission in 2015. The 12th Five Year Plan for 2012 to 2017 was
the last five year plan of India and was completed in 2017. With this, the five
year plans have become a thing of past. It was already announced that there
will be no more five year plans. It was in the background of the feeling that
with an increasingly open and liberalized economy, we needed to rethink the
tools and approaches to conceptualizing the development process. The
proposed shift from Five Year Plans represents an important step in this
direction. In August, 2017, NITI Aayog came up with new ideas of planning
for future development of India. The core idea is that India has still not
abandoned the process of planning and the country still has planned
development in action. However, the process of planning is different- the first
major difference is that instead of a single five year plan, the country will have
three plans spread over three different time periods, as mentioned below:
38
• First is a “Three Year Action Agenda” which states the tasks and
targets to be accomplished in next three years’ time frame.
• Second is a “Seven year Strategy” which lays the roadmap of
development for next seven years dividing those goals and objectives
into two parts.
• Third and final is a 15 year “Vision” that encompasses overall goals
and objectives of the country for next 15 years.
1.2.5.4.1 Three Year Action Agenda: Salient Features
The document titled “India – Three Year Action Agenda 2017-18 to 2019-20
was the first document of NITI Aayog and was brought out in August 2017. It
offered ambitious proposals for policy changes within a relatively short
period6. The main components of this document were as under:
The three year action agenda is touted to be the first step towards attaining
the envisioned outcomes by 2031-32. The document is divided into 7 parts
with 24 chapters. The key points from this document are as follows:
Part I: Medium-Term Expenditure Framework (MTEF)
This part of the document analyses the forecast of the revenue of the
government and then proposes a sector wise expenditure allocation for three
years. It also proposes reducing fiscal deficit to 3% by 2018-19 and revenue
deficit to 0.9% of the GDP by 2019-207.
Part II: Economic Transformations in Major Sectors
The Part II dealt with agriculture, industry and services.
A. Agriculture: Doubling Farmers’ income by 2022
For India to flourish, its farmers and the farm economy must prosper.
It is against this background that the Prime Minister has called for
doubling farmers’ incomes by 2022. To achieve this goal, the Action
Agenda outlines a strong programme for agricultural transformation. It
includes several measures to raise farm productivity, bring
remunerative prices to farmers, put farmers’ land to productive uses
and improve the implementation of relief measures. The action agenda
seeks to double farmers’ income by several means including reform in
6
The detailed document can be seen at NITI Aayog website
https://niti.gov.in/writereaddata/files/coop/IndiaActionAgenda.pdf
7
Fiscal Deficit = Total income of the government (Revenue receipts + recovery of loans + other receipts) - Total
expenditure of the government (capital and revenue expenditure) and Revenue Deficit= Revenue Receipt-
Revenue Expenditure. A deficit occurs when expenditure is more than income.
39
APMCs; raising productivity through enhanced irrigation; faster seed
replacement rates; precision agriculture; making Minimum support
Price (MSP) system more effective; and a shift to high value
commodities, horticulture, animal husbandry, fisheries etc.
B. Trade, Industry and Services: Creating Well-Paid Job

The document highlights that contrary to the common perception the
growth in India has not been “jobless growth” and that the
unemployment rate has consistently remained between 5 to 8% over
the three decades- which is not alarming. The document argues that
not the unemployment but more serious problem in India is severe
underemployment as the workers are overwhelmingly stuck in low-
productivity, low-wage jobs. Therefore, the document states that
creation of high-productivity, high-wage jobs is the need of the hour.
For this purpose the model followed in countries such as South Korea,
Taiwan, Singapore and China, i.e., of creation of large organized sector
firms need to be followed for “Make in India” campaign.
Part III: Regional Development

This part focuses on urban, rural and regional development, the key
challenges being faced and specific action plans for bringing the positive
change. It also highlighted need to achieve balanced growth across the
country including areas with special needs like North Eastern region, coastal
areas, islands, North Himalayan states and desert and drought prone areas,
etc.
Part IV: Growth Enablers

Part IV discusses how to enhance the contribution of a number of “growth
enablers” which include infrastructure, digital connectivity, Public Private
Partnerships (PPPs), energy, science and technology and creation of an
effective innovation ecosystem.
Part V: Government
This Part considers issues related to the government such as governance,
taxation, competition and regulation; government’s role in favour of public
services and away from manufacturing. It also recommends reforms in the
civil service, and electoral process and actions to eliminate corruption and
black money. It also includes suggestions for strengthening federalism and
bringing states to the forefront of reform agenda.
Part VI: Social Sectors

Part VI of the Action Agenda relates to addressing the needs of all members
of society, for inclusive growth of the country. For this purpose, matters
relating to education, skill development, health and issues of specific groups
such as Scheduled Castes, Scheduled Tribes, women, children, differently
abled and senior citizens, need to be addressed.
40
Part VII: Sustainability
The last part of the document deals with environmental sustainability
including the high levels of air pollution, black carbon pollution indoors from
the use of biomass fuels in cooking, massive volumes of solid waste in urban
areas and deforestation and such other related matters as also the action
points to address them.
The documents concludes by stating that only by working together towards

common national goals can the Centre and states meet India’s development
challenges. “Maximum Governance and Minimum Government”, and
“Competitive and Cooperative Federalism” are critical to achieving the full
potential and creating a modern India, which brings prosperity to all citizens.
1.2.5.4.2 Seven Year Strategy and 15 Year Vision
It was expected that the NITI Aayog will come up with Seven Year Strategy
and 15 Year Vision as a medium term and long term plan besides the 3 year
action plan as the short term plan.
In this regard it is pertinent to mention the vision of the Prime Minister about
India which is presented in Figure 2.2 below:
Figure 2.2: Hon’ble Prime Minister’s Vision of India
41
As per the presentation made by Dr. Arvind Panagariya in 2017, the highlights
of the 15 year plan for the period 2016-17 to 2031-32 -“The Vision, Strategy
and Action Agenda” are as under:
• Drawing inspiration from the Prime Minister’s Vision, by 2031-32 we

must transform India into a prosperous, highly educated, healthy,
secure, corruption free, energy abundant, environmentally clean and
globally influential nation.
• The “New India” awaits:
o Housing with toilets, LPG (cooking gas), electricity and digital

connectivity for all
o Access to two wheelers or cars, air conditioning and other goods

for nearly all
o A fully literate population with universal access to healthcare
o A much larger and modern network of roads, railways, waterways

and air connectivity
o A clean India: Clean air, water, clean cities and villages
• In 15 years, India aims to get triple the size of its economy; it’s GDP has
to grow from Rs137 lakh Crore in 2015-16 (at 2015-16 prices) to Rs 469
lakh Crore in 2031-32. Per capita income is also slated to increase 3
times from Rs 1.06 lakh in 2015-16 to Rs 3.15 lakh in 2031-32.
• By 2031, India’s urban population is expected to increase by 22 crores
from 37.7 crore in 2011 to 60 crore in 2031. Taking a clue from China’s
long-term urban development agenda, the vision documents lays
emphasis on urban development.
• With GST in place and “one nation, one aspiration, one determination”
philosophy, the states’ role in overall development of the country is to
rise exponentially.
It is learnt that in May, 2017, NITI Decided that the two documents (7 year
and 15 year) will be combined into one and it is under preparation at the time
of preparing this material (June 2021) to again bring out a comprehensive
roadmap to accelerate the economic growth. The readers are requested to look
for the same on the NITI Aayog website for detailed information.
1.2.5.4.3 ‘Strategy for New India @ 75’
NITI Aayog has brought out another important document named ‘Strategy for
New India @ 75’ to articulate the vision for an important milestone in India’s
timeline in 2022 when India celebrates the 75th anniversary of its
42
independence. The document captures following three key messages from the
Prime Minister:
i. First, development must become a mass movement, in which

every Indian recognizes his/ her role and also experiences the
tangible benefits accruing to him/her in the form of better ease
of living.
ii. Second, development strategy should help achieve broad-based

economic growth to ensure balanced development across all
regions and states and across sectors.
iii. Third, the strategy when implemented, will bridge the gap
between public and private sector performance. The Prime
Minister has focused on putting in place a ‘development state’ in
place of the ‘soft state’ that existed earlier. The focus areas in this
context are efficient delivery of public services, rooting out
corruption and black economy, formalizing the economy and
expanding the tax base, improving the ease of doing business,
nursing the stressed commercial banking sector back to a healthy
state, and stopping leakages through direct benefit transfers and
widespread use of the JAM trinity (JAM = Jan Dhan bank
account, Aadhar and Mobile).
The document has identified 41 different areas for focused attention to

achieve India’s true potential. The list of these areas is available on the website
of NITI Aayog (provided as annexure 1.2.1).
The document mentioned that by 2022, the ‘New India’ will provide a solid
foundation for clean, inclusive, sustained and sustainable growth for the next
three decades. The ‘Strategy for New India @ 75’ reflects preparedness to make
this transition. Its recommendations are practical and detailed to facilitate
time-bound implementation. All levels of government must work together to
achieve the vision of New India. Working together as ‘Team India’ will ensure
prosperity for all while protecting our environment and promoting the
emergence of an innovative eco-system, propelling India to the front ranks of
the global economy.
1.2.6 Let us sum up
This chapter helps you to understand the contribution of economic planning

in the development of the country over the years. The journey of the country
can be broadly divided in two phases- phase I – from the year 1950 till 2015
when the planning was carried out by Planning Commission and from 2015
when NITI Aayog replaced Planning Commission. The Planning Commission
43
had diligently prepared 12 Five Year Plans and NITI Aayog, within a short
period of has brought out highly acclaimed plans of 3 years and ‘Strategy for
New India @ 75’ to prepare ‘New India’ for the next journey. India has
achieved great heights but has a long journey to go to achieve the Prime
Ministers’ Vision of ‘Prosperity and no poverty’. The planning process now
steered by NITI Aayog is expected to help the country achieve that vision.
1.2.7 Keywords
Five Year Plans, Planning Commission, Pradhan Mantri Krishi Sichai Yojana
(PMKSY)Integrated Watershed Management Programme (IWMP), Pradhan
Mantri Awas Yojna-Grameen (PMAY-G), Mahatma Gandhi National Social
Assistance Programme (NSAP), National Rural Employment Guarantee Act
(NREGA), Minor Irrigation, National Land Records Modernization Programme
(NLRMP), Communication, Education, Rural Development, National
Institution for Transforming India (NITI) Aayog, Doubling of Farmers Income,
‘Strategy for New India @ 75’.
State True or False
1. One of the items in the vision of Prime Minister states that “India should
have Prosperity, not Poverty”
2. Doubling of the farmers income has to be achieved by the year 2022.
3. Training of Rural Youth for Self-Employment (TRYSEM) was started on
15th August 2011.
4. The National Social Assistance Program (NSAP) was launched with the
aim to provide social assistance benefit to poor households in the case
of old age, death of primary breadwinner and maternity.
5. The introduction of Development of Woman and Children in Rural Areas
(DWCRA) had provided opportunities for development of women and
children in the rural areas.
6. The role of Planning Commission is to work with NITI Aayog.
Key to questions asked
1. True 2. True 3. False 4. True 5. True 6. False
1.2.9 Terminal/ Multi-Choice Questions
1. Who used to prepare the Five Year Plans before NITI Aayog was formed
?
44
a. Planning Department
b. The Prime Minister of India
c. Planning Commission
d. Respective State Governments
2. When was first Five Year Plan started?
a. 1947
b. 1950
c. 1948
d. 1951
3. What was the period of the last Five Year Plan?
a. 1951-56
b. 2000-2005
c. 2020-2025
d. 2012-2017
4. How many Five Year Plans were prepared in India before NITI Aayog?
a. 10
b. 11
c. 12
d. 15
5. The role of Planning Commission is replaced by
a. UPSC
b. NITI Aayog
c. PMO
6. What is full form of NITI in NITI Aayog?
a. National Institution for Transforming India

b. National Initiative for Transforming India
c. Notional Institute for Transforming India
d. Northern Institute for Travel in India
7. Who is the Chairman of NITI Aayog
a. The President of India
b. The Prime Minister of India
c. The Minister of Planning Govt of India
45
d. The Finance Minister of India
8. What was the need of setting up of NITI Aayog?
a. Centralised planning is no more working for India

b. States need to have greater say and participation in planning
c. Both ‘a’ and ‘b’
d. None of ‘a’ and ‘b’
9. In which year NITI Aayog was set up?
a. The year 2012

b. The year 2014
c. The Year 2015
d. The Year 2017
10. MNREGA Stands for :

a. Mahatma Gandhi National & Regional Employment Generation
Act
b. Mahatma Gandhi National Rural Employment Guarantee Act
c. Mahatma Gandhi Natural Resource Engagement Grants Act
d. Mahatma Gandhi National Resource Employment Guarantee Act
11. MNREGA assures:
a. Full employment for each citizen
b. 100 day work for each rural household
c. 200 days employment for each family
d. Food for work for each poor
12. SGSY stands for:
a. Swarojgar Generation Scheme for Youth
b. Self-employement Generation Scheme for Youth
c. Swarnjayanti Gram Swarozgar Yojana
d. Self-help Gram Swarozgar Yojana
13. SGSY aimed at:
a. Poverty alleviation by cash disbursement
b. Providing income generating assets to poor
c. Poverty eradication by providing assured employment
d. Educating the poor
14. During the Eleventh Plan period, the three area development
programs, namely, Integrated Wasteland Development Program,
Drought Prone Area Program and Desert Development Program have
been integrated and consolidated into a single program called
a. Integrated Watershed, Drought Area Management Program
(IWDMP).
b. Integrated Watershed Management Program (IWMP)
c. Integrated Watershed, Desert Development Management Program
(IWDDMP).
46
d. Integrated Watershed, Drought and Desert Development
Management Program (IWDDDMP)
15. Rural Landless Employment Guarantee Program (RLEGP) was
launched during the
a. 5th Five Year Plan
b. 6th Five Year plan
c. 9th Five Year Plan
d. 10th Five Year Plan
16. As per the 15 Year Vision prepared by NITI Aayog the per capita
income in our country is expected to reach Rs_______ by 2031-32?
a. Rs 1.05 lakh
b. Rs 2.10 lakh
c. Rs 3.15 lakh
d. Rs 4.20 lakh
17. The District Plan covers
a. Social welfare extension projects
b. Development of co-operatives
c. Village panchayats
d. All of these
18. The primary objective of the scheme is to provide guaranteed

work for 100 days for any rural household wishing to have such
employment. Identify the scheme.
b. Mahatma Gandhi National Rural Employment Guarantee Act

(MGNREGA)
c. National Social Assistance Programme (NSAP)
d. Indira Awaas Yojana (IAY)
e. None of these
19. “JAM Trinity” stands for :
a. Three varieties of Jams exported by India
47
b. Jan Dhan, Aadhar and Mobile
c. Jam And Mobile
d. Joint Action for Mobility
20. Why the year 2022 is important in India’s journey as a country?
a. It is an unique year as ‘2’ digit appears 3 times in 2022
b. India will celebrate 75 years of independence in 2022
c. India will become important internationally.
d. COVID19 is expected to be eradicated
Answers to Terminal/Multiple Choice questions
01(c) 02 (d) 03(d) 04 (c) 05(b) 06 (a) 07(b) 08 (c) 09(c) 10 (b) 11(b) 12 (c)
13(b) 14 (b) 15 (b) 16(c) 17(d) 18(a) 19(b) 20 (b)
Datt and Sundharam (2015) Indian Economy
NITI Aayog website: https://niti.gov.in
RBI website : https://www.rbi.org.in/
NABARD website : www.nabard.org
48
ANNEXURE 1.2.1
List of 41 Focus Areas in the document ‘Strategy for New India @ 75’ of
NITI Aayog
Drivers
1. Growth
2. Employment and Labour Reforms
3. Technology and Innovation
4. Industry
5. Doubling Farmers’ Income (I): Modernizing Agriculture
6. Doubling Farmers’ Income (II): Policy & Governance
7. Doubling Farmers’ Income (III): Value Chain & Rural Infrastructure
8. Financial Inclusion
9. Housing for All
10. Travel, Tourism and Hospitality
11. Minerals
Infrastructure
12. Energy
13. Surface Transport
14. Railways
15. Civil Aviation
16. Ports, Shipping and Inland Waterways
17. Logistics
18. Digital Connectivity
19. Smart Cities for Urban Transformation
20. Swachh Bharat Mission
21. Water Resources
22. Sustainable Environment
49
Inclusion
23. School Education
24. Higher Education
25. Teacher Education and Training
26. Skill Development
27. Public Health Management and Action
28. Comprehensive Primary Health Care
29. Human Resources for Health
30. Universal Health Coverage
31. Nutrition 146
32. Gender
33. Senior Citizens, Persons with Disability and Transgender Persons
34. Scheduled Castes (SCs), Scheduled Tribes (STs), Other Backward Classes
(OBCs), Other Tribal Groups and Minorities Governance
35. Balanced Regional Development: Transforming Aspirational Districts
36. The North-East Region 37. Legal, Judicial and Police Reforms
38. Civil Services Reforms
39. Modernizing City Governance for Urban Transformation
40. Optimizing the Use of Land Resources
41. Data Led Governance and Policy Making
*****
50
1.3 Lesson No.3 Contribution of Agriculture, MSMEs and Service
Sector to Indian Economy
1.3.1 Objective
1.3.2 Introduction
1.3.3 Agriculture
1.3.3.1 Importance of Agriculture
1.3.3.2 Share in National Income
1.3.3.3 Sources of employment
1.3.3.4 Provision of food grains
1.3.3.5 Supplier of raw material for industrial sector
1.3.3.6 Market for industrial products
1.3.3.7 Earner of foreign exchange
1.3.3.8 Significance for trade and tourism
1.3.3.9 Source of revenue for the Government
1.3.3.10 Other aspects
1.3.3.11 Certain challenges
1.3.4 Micro, Small and Medium Enterprises (MSMEs)
1.3.4.1 Introduction
1.3.4.2 Role and importance
1.3.4.3 MSME’s contribution to the economy
1.3.4.4 Problems of MSMEs
1.3.4.5 Focus of Government
1.3.4.6 Focus of banks
1.3.4.7 Rating of MSMEs
1.3.4.8 Cluster initiative
1.3.4.9 Key challenges
1.3.5 Service Sector: Introduction
1.3.5.1 Service industries
1.3.5.2 Health and education
1.3.5.3 Information technology
1.3.5.4 Retail
51
1.3.5.5 Banking and Insurance
1.3.6 Other sectors
1.3.7 Let Us Sum Up
1.3.8 Keywords
1.3.9 Check your progress questions
1.3.11References for further reading
52
1.3 Contribution of Agriculture, MSMEs and Service Sector to Indian
Economy
1.3.1 Objectives
The objective of this lesson is to understand the importance of Agriculture,

Micro, Small and Medium Enterprises and Service sector and their
contribution for the economy’s development.
1.3.2 Introduction
Agriculture plays a significant role in the growth of socio-economic sector and

the development of human civilization in India. Agriculture is the back bone
of the Indian economy. Despite major emphasis on industrial development
over the decades and declining share in the GDP of the country, agriculture
continues to occupy an important place in our economy.
1.3.3 Agriculture
1.3.3.1 Importance of Agriculture
Agriculture, the very source of survival for the human kind, includes a
comprehensive range of raw and finished products under the classification of
plants, animals and other life forms. Human kind embraces this sector not
only because it helps the common man with daily food but also due to the fact
that a large chunk of the world’s population is dependent on agriculture as
their source of survival and livelihood.
1.3.3.2 Share in National Income
The share of agriculture in the total Indian GDP has been gradually
decreasing and it has declined from 59.0% in 1950-51 to a mere 14.65% in
2019-20. In absolute sense the GDP from agriculture has increased but the
development of the secondary and tertiary sectors have happened at a faster
pace and therefore, those two sectors have increased their share in the GDP
and the share of agriculture has declined.
1.3.3.3 Source of Employment
At the time of India’s independence, 75% of the population was engaged in

agriculture. Even in more recent times, over 50% population (to be precise
54.6% in 20118) continue to depend on agriculture for livelihood. Thus,
agriculture and allied activities continue to be a major source of employment
in the country. In the rural and semi-urban places, it occupies prime position
8
GOI(2019) Agricultural Statistics at a Glance 2019, Table 2.3
53
as far as agriculture employment is concerned. There is however concern over
under employment in the sector.
1.3.3.4 Provision of Food Grains for food security
Agriculture in India has been carefully developed such that it plays an

important role in food security of the country by meeting almost the entire
food needs of the people. The production of food grains has been increasing
on account of various initiatives taken in the field of agriculture by the
Government from time to time. This has enabled the country to overcome the
problems of food grain shortages. The country is self-sufficient in food grains
and no longer depends on import of food grains unless situation demands on
account of natural calamities. Food security is an important achievement due
to planned development efforts (including green revolution) and the
contribution of farming community.
1.3.3.5 Supply of raw materials to industrial sector
Agriculture plays an important role in industrial development. Many

industries like cotton industry, jute industry, sugar industry, food processing
industries, etc. depend on agriculture for their raw material requirements.
1.3.3.6 Market for industrial products
Rural areas provide markets for a large number of industrial products. Since
about two thirds of India lives in rural areas, there is a large rural purchasing
power which has created a significant demand for all types of industrial
products. Green revolution has considerably increased the purchasing power
of the farmers. In the recent years, demand for various products like soaps,
detergents, clothes, cycles, scooters, radios, television, torches, lead batteries,
etc. have witnessed a marked increase in rural areas. Likewise, the demand
for a variety of agricultural inputs/equipments like chemical fertilizers,
tractors, pump-sets, sprinkler/ drip, pipes, pesticides etc. has increased
sharply. This has stimulated the development of industries producing these
products. A good agricultural production, thus stimulates a virtuous cycle of
economic growth.
1.3.3.7 Earner of Foreign Exchange
Agriculture plays an important role in Indian economy as an earner of foreign

exchange through exports of agricultural commodities like tea, cotton, coffee,
jute, fruits, vegetables, spices, tobacco, sugar, oil, cashew kernels, etc. Export
of agricultural products accounts for about 15% of the export earnings of the
country.
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1.3.3.8 Significance for Trade and Transport
Agriculture helps in the development of tertiary (or service) sector. Various

means of transport like roadways (trucks, mini-trucks etc.) and railways get
good business from the movement of agricultural commodities and raw
materials. Similarly, other services like banking, insurance, trade and
advisory services related to agriculture, telecommunications, warehousing
and cold storage etc. are also fully or partly dependent on agriculture. A
significant part of internal trade constitutes mainly of agricultural products.
1.3.3.9 Source of Revenue for the Government
Though the direct contribution of agricultural taxes to the central and state
governments is not significant (as agricultural incomes are tax exempt and
most of the manufactured products attract concessional or no GST), they do
play a role in terms of land revenue, irrigation charges, taxes imposed on the
commodities purchased by the cultivators, etc. The Central Govt. also earns
revenue from export duties on agricultural production. Freight charges of
Indian Railways for carrying agricultural product generate huge revenue to
the central exchequer.
1.3.3.10 Other Aspects
India ranks second worldwide in farm output. Agriculture and allied sectors
like forestry, logging and fishing contribute significantly for the GDP, and play
a significant role in the overall socio-economic development of India. However,
our productivity is quite low as compared to the best in the world; for example
the average productivity of paddy is 3848 Kg per Ha in India while the same
in China is 6917 Kg per Ha. The low agricultural productivity in India is
mainly a result of the following factors:
• Illiteracy, general socio-economic backwardness, slow progress in

implementing land reforms and inadequate or inefficient finance and
marketing services for farm produce.
• Adoption of modern agricultural practices and use of technology are
inadequate, hampered by ignorance, high costs and impracticality in
the case of small land holdings.
• Irrigation facilities are inadequate. The gross sown area has increased
marginally over the past two decades. Still in many areas farmers
depend on rainfall. A good monsoon results in a robust growth for the
economy as a whole, while a poor monsoon leads to a sluggish growth.
Currently, the sector in India is passing through the golden era of
modernization and therefore is playing a great role in today’s economy. The
major achievement is food security. This sector has provided something for
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everyone involved in the economic development, from a manufacturer to a
supplier and to a local vendor.
If one talks particularly about the suppliers associated with this sector- being
a part of the ‘Supply chain’, they have played a very critical role. Agro Products
Suppliers are performing business across the globe with the supply chain of
agricultural products including fertilizers, pesticides, animal feeds & extracts,
vegetable oil, irrigation equipment’s, machines & appliances, fruits & juices,
edible products etc. With the growth of technology, marketplace for every
supplier has become easy and has enabled them to perform business more
effectively.
Considering the importance of agriculture in India, the Government of India

has, over the years, made efforts to modernize agriculture. Government has
given importance to establishment of Indian Council of Agricultural Research
(ICAR), state agricultural universities, specialized institutions dedicated to
certain crops or species, organization of veterinary services and animal
breeding centers, horticulture development, research and development in the
field of meteorology and weather forecast. Apart from this, improving the rural
infrastructure and provision of finance for agriculture has been given priority
so that it can lead to rural and agriculture development.
1.3.3.11 Certain Challenges
The contribution of Agriculture sector to the GDP has been declining which is
a cause of worry. Some of the challenges being faced are:
• Indian agriculture is still dependent on monsoon

• Limited availability of irrigation
• Small land holding due to fragmentation
• Inadequate Storage facilities
• Lack of marketing arrangements
• Non- availability of quality seeds and other inputs
• Disguised unemployment in agriculture
Overcoming these constraints call for concerted efforts by one and all.
Continuous collective support and help are required for the Agricultural
sector from the concerned authorities.
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1.3.3 Micro, Small and Medium Enterprises
1.3.4.1 Introduction
The Micro, Small and Medium Enterprises (MSMEs) play a pivotal role in the
economic and social development of the country, often acting as a base for
entrepreneurship. They also play a key role in the development of the economy
with their effective, efficient, flexible and innovative entrepreneurial spirit.
The MSME sector contributes significantly to the country’s manufacturing

output, employment and exports and is credited with generating the highest
employment growth as well as accounting for a major share of industrial
production and exports.
MSMEs have been globally considered as an engine of economic growth and

as key instruments for promoting equitable development. The major
advantage of the sector is its employment potential at low capital cost. The
labor intensity of the MSME sector is much higher than that of large
enterprises. MSMEs are responsible for generating the high rates of
employment growth and account for sizable share of industrial production
and exports.
The MSME sector in India is highly heterogeneous in terms of the size of the
enterprises, variety of products and services and levels of technology. The
sector not only plays a critical role in providing employment opportunities at
comparatively lower capital cost than large industries but also helps in
industrialization of rural and backward areas, reducing regional imbalances
and assuring more equitable distribution of national income and wealth.
MSMEs complement large industries as ancillary units and contribute
enormously to the socioeconomic development of the country.
‘Micro, Small and Medium Enterprises Development Act, 2006’ (MSMED Act,
2006) has been enacted in India and this has replaced the word ‘Industry’
with the word ‘Enterprise’. The enterprises’ in this Act were classified into
micro, small and medium based on investment in plant and machinery.
Based on their activities, these enterprises were further categorized as
manufacturing and service.
Union Ministry of Micro, Small and Medium Enterprises, GoI, brought

amendment in the definition and criteria of MSMEs with effect from 1st July,
2020. Also, a new composite formula of classification for manufacturing and
service units has been notified. Now, there is no difference between
manufacturing and service sectors. Also, a new criterion of turnover is added.
57
• The definition of Micro manufacturing and services units has been
increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover.
• The limit of small unit has been increased to Rs. 10 Crore of investment
and Rs 50 Crore of turnover.
• The limit of medium unit has been increased to Rs. 50 Crore of
investment and Rs. 250 Crore of turnover.
1.3.4.2 Role and Importance of MSMEs
MSMEs play a major role in the country's economic development through

their contribution in:
i. Rural industrialization, rural development and decentralization of

industries;
ii. Creation of employment opportunities, balanced economic growth
and more equitable income distribution;
iii. Use of indigenous resources;
iv. Earning of foreign exchange (forex) resources;
v. Creation of backward and forward linkages with existing industries
and entrepreneurial development.
vi. Setting up of new industries in the countryside and providing gainful
employment.
vii. Effectively increase the local content or the value added in final
goods that are processed and marketed by large manufacturing
firms.
viii. Skillfully maximizing the use of scarce capital resources. They are
able to partner with large firms by supplying locally available raw
materials in unprocessed or semi-processed forms.
ix. Act as the bridge for the development of entrepreneurial skills and
innovation.
x. Play an important part in the provision of services in the community
and can make an important contribution to regional development
programs.
xi. By manufacturing locally, the dependence on imports from foreign
countries is reduced and thus the precious foreign exchange is
saved.
1.3.4.3 MSMEs' Contribution to the Economy
In India, the MSMEs play a pivotal role in the overall industrial economy of
the country by accounting for more than 80% of the total number of industrial
enterprises and producing over 8000 value-added products. It is estimated
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that in terms of value, the sector accounts for 45% of the manufacturing
output and 40% of the total export of the country and employs around 6 crore
people. Further, in recent years, the MSME sector has consistently registered
higher growth rate compared to the overall industrial sector. The major
advantage of the sector is its employment potential at low capital cost.
1.3.4.4 Problems of MSMEs
Despite constituting more than 80 % of the total number of industrial

enterprises and supporting industrial development, many MSMEs in India
have problems such as sub-optimal scale of operation, technological
obsolescence, supply chain inefficiencies, increasing domestic and global
competition, fund shortages, difficulty in getting bank support, change in
manufacturing strategies and turbulent & uncertain market scenario.
1.3.4.5 Focus of the Government
Recognizing the importance of this sector, the Govt. has been increasing its
financial support to meet the requirement of the sector. This aid helps in
technology upgradation and addressing the financial gaps. Government of
India launched the Micro Units Development and Refinance Agency Ltd
(MUDRA) in April 2015 for refinancing MFIs that are engaged in the business
of lending to micro and small business entities.
1.3.4.6 Role of Banks
Banks in India are expected to meet the financial requirements of MSMEs.

Yet a large number of micro and small enterprises are not covered by bank
loans. MSMEs find bank procedures difficult to comprehend. Hence many
MSMEs borrow from other sources like Non-Banking Finance Companies,
MFIs etc. Lot of effort has been made by the Government, the RBI and other
stakeholders in the recent past, including setting up of MUDRA to help the
MSME entrepreneurs to access affordable credit from banking system. As a
result, the credit by banking system to MSMEs is going up.
1.3.4.7 Rating of MSMEs
In spite of the increasing avenues of funding for MSMEs, credit penetration in

this sector is still low. The primary reasons for this are insufficient credit
information on MSMEs, low market credibility of MSMEs and constraints in
analysis. To tackle this problem, the SME Rating Agency of India (SMERA)
was launched in the year 2005 by SIDBI in association with Dun & Bradstreet
(D&B), Credit Information Bureau (India) Ltd and leading public and private
sector banks.
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1.3.4.8 Cluster Initiative
The concept of cluster development offers new insights into the promotion and
supporting the MSMEs. A ‘cluster’ may be defined as a local agglomeration of
enterprises (mainly MSMEs) which produce and sell similar or a range of
related and complementary products and services. Example: A localized
leather industry, including leather tanning units, leather finishing units,
leather goods producers, leather garment manufacturers, designers, sub-
contractors, merchant buyers and exporters. It is estimated that there are
about 400 MSME clusters in the country. Examples of MSME cluster are
‘Locks cluster’ of Aligarh, UP and ‘Cashew Processing cluster’ at Sindhudurg,
Maharashtra.
1.3.4.9 Key Challenges
Key challenges faced by the MSME sector are as under:
a. Lack of markets at remunerative prices

b. Very high competition
c. Limited access to equity capital
d. Low technology levels and lack of access to modern technology
e. Lack of availability of adequate and timely credit
f. High cost of credit
g. Collateral requirements
h. Procurement of raw material at a competitive cost
i. Problems of storage, designing, packaging and product display
j. Lack of access to global markets
k. Inadequate infrastructure facilities, including power, water, roads,
etc.
l. Lack of skilled manpower for manufacturing, services, marketing,
etc
m. Multiplicity of labor laws, taxation laws and other laws and
complicated procedures associated with compliance of such laws.
Despite various challenges it has been facing, the MSME sector has shown
admirable innovation, adaptability and resilience to survive the recent
economic downturn and recession.
A dynamic global economic scenario has thrown up various opportunities and

challenges to the MSME sector in India. Numerous opportunities have opened
up for this sector to enhance productivity and look at new national and
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international markets. These opportunities compel the MSMEs to upgrade
their competencies to contend with competition since obsolescence is rapid
with new products being launched at an incredible pace. MSMEs contribute
towards creation of wealth, employment, and income generation, both in rural
and urban areas, thus, ensuring a more equitable income distribution. They
also provide the economy with a continuous supply of ideas, skills, and
innovations necessary to promote competition and the efficient allocation of
scarce resources.
1.3.4 Service Sector: Introduction
Of late, India has opened the doors for the service sector (tertiary sector) to
grow fast. This has resulted in rapid increase in the wide variety of services
being offered as per the needs of a developing economy like India and
resultant increase in share of services in India’s GDP from 28.0% in the year
1950-51 to 62.94% in 2019-20.
1.3.4.1 Service Industries
The service industry forms a backbone of social and economic development of

the country and any region within the country. It has emerged as the largest
and fastest growing sector in the world economy making higher contributions
to the global output and employment. The share of Services in the World GDP
is estimated to be 63% in 2017 as against the share of agriculture at 6.4%
and Industries at 30.6%9. The growth rate of service sector has been higher
than that of agriculture and manufacturing sectors which has resulted in
increase in its share. It is a large and dynamic part of the Indian economy
both in terms of employment potential and contribution to national income.
It covers a wide range of activities, such as trading, transportation,
information technology, communication, real estate and business, financial
(Banking & Insurance) services, as well as community, social and personal
services. The retail business, travel industry, banking and insurance offer
very good scope for employment as well as earnings. Service industries are
necessary for the sustenance and growth of primary sector as well as
secondary sector (industries).
1.3.4.2 Health & Education
Among others, importance is being provided to health and education in our

country. They are one of the largest and most challenging sectors and hold a
key to the country's overall progress. A strong and well-defined health care
sector helps to build a healthy and productive workforce as well as to stabilize
9
https://statisticstimes.com
61
population. Importance of health care sector has been brought into focus in
an unprecedented manner in the pandemic of COVID19 since March 2020.
The Ministry of Health and Family Welfare, GoI is responsible for

implementation of various programmes in the areas of health and family
welfare, prevention and control of major communicable diseases as well as
promotion of traditional and indigenous systems of medicines. Accordingly, it
has been implementing measures like National health policy, National Rural
Health Mission (NRHM), conducting surveys and studies, etc.
Education strongly influences improvement in health, hygiene and

demographic profile. The Ministry of Human Resource Development, GoI is
involved in eradicating illiteracy from the country. It is concerned with
universalization of elementary education (through ‘Right to Education’),
achieving full adult literacy, laying down of National Policy on Education,
meeting needs of secondary and higher education for all, etc. India has
achieved impressive demographic transition owing to the decline in birth rate,
death rate, fertility and infant mortality rates. The literacy levels have also
risen. The opening up of the economy on account of Liberalization,
Privatization and Globalization (LPG) has paved way for rapid changes in the
service industry. Hence, India has been witnessing a transition from
agriculture-based economy to a knowledge-based economy. The knowledge
economy creates, disseminates, and uses knowledge to enhance its growth
and development.
1.3.4.3 Information Technology (IT)
The contribution of the Information Technology (IT) to the economic

development has been immense over the years. The launching of Business
Process Outsourcing (BPO) on account of the inbuilt advantages India has, in
fact opened up the doors for employment for many. Besides providing
confidence to such employees, their higher salaries have helped to have better
and increased purchasing power. This has definitely resulted in the economic
development of the country. Further, the IT sector has helped the
establishment of many enterprises due to which, many engineers as well as
technologists have been able to gain employment. This industry has been
contributing for great employment opportunities which were not there some
decades ago. The IT and IT-enabled services (ITeS) industries are responsible
for continuous avenues for employment. A large number of Indian software
companies have acquired international quality certification. Several policies
have also been framed on the key issues of IT infrastructure, electronic
governance as well as IT education.
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1.3.4.4 Retail
Retail sector has been one of the fastest growing service sectors, both in terms
of turnover and employment. There are two broad categories of retail- the
‘unorganized retail’ comprising of the retail outlets owned by individuals or
families and ‘organized retail’, established as large format outlets under a
brand by corporates mostly in malls etc (for example ‘Big Bazar’ or ‘D Mart’).
Now the organized sector has started the ‘online retail’ in a big way (for
example ‘Big basket’, ‘Jio Mart’, ‘Amazon’, etc.). Many domestic and global
players have been investing in the retail segment and are making all efforts to
further expand the sector.
1.3.4.5 Banking & Insurance
Banking and insurance are basically service oriented industries. Over the
decades, our banking system has grown with huge network of branches and
the latest technological support. As of March 2021, India has more than
150,000 branches and a little over 2.15 lakh ATMs10. The banks are now
offering varied services to variety of customers across the country. Their
services are not only essential but also vital. Banks in India have shown high
resilience in the wake of the global financial crisis of 2008 and the ongoing
COVID Pandemic. It is however a fact that a large section of the Indian
population is still not financially included.
Insurance sector includes life insurance, general insurance (insurance of

assets, vehicles, health, etc.) and agricultural insurance (crop insurance and
insurance of other agricultural and allied assets) has witnessed growth after
the private players have been permitted to function. The private sector was
also given scope for foreign participation. On account of this, the country
gained by way of FDI, foreign expertise in the field and also growth in the
business of insurance.
1.3.4.6 Other Sectors
To supplement the achievements and meet the shortfalls in all the sub-
sectors of the industry, travel and tourism sector has to be developed in a
sustainable manner. Being one of the largest industries in terms of gross
revenue and foreign exchange earnings, it stimulates growth and expansion
in other economic sectors like agriculture, horticulture, poultry, handicrafts,
transportation, construction, etc.. It is a major contributor to the national
integration process as well as preserver of natural and cultural environments.
The Ministry of Tourism, GoI has been undertaking several policy measures
10
RBI website: https://rbi.org.in
63
so as to boost the sector such as the announcement of the National Tourism
Policy.
Service Sector is needed for the continuous growth of the economy. If the
respective industries in the Service Sector field are offered the required,
support by all the concerned, the Service Sector’s contribution would increase
and further make way for more employment opportunities.
1.3.4 Let us sum up
Any economy to sustain requires the support of various sectors. For centuries,
agriculture remained the major source of employment opportunity provider
and producer of food products. Though there has been a shift from agriculture
on account of various developments and compulsions, agriculture still
continues to occupy an important position in our country.
Economic development of the country has to be in tune with global changes.

This is one of the main reasons for the development of Micro, Small and
Medium Enterprises segment. This sector has a major role in economic
development. Several steps have been taken to make this sector robust. The
service sector has been gaining importance and its share in the country’s GDP
has been rising.
1.3.5 Keywords
Agriculture Sector, MSME, Cluster approach, Challenges, Employment,

Rural, Tourism, Global, Rating Agency, Business Process Outsourcing,
Service Sector.
State True or False
1. The share of agriculture sector in the economy has been declining and
is around 15% now (2019-20)
2. Agriculture provides markets for a sizable number of industrial

products.
3. BPO sector, on account of the inbuilt advantages provided large scale

employment opportunities in our country.
4. Getting skilled workers to work on the agricultural field is becoming

increasingly difficult
5. Implementing National Rural Health Mission (NRHM) in different

States, is being carried out by the Ministry of Finance.
64
6. With regard to Agriculture, as irrigation facilities are inadequate, in
many areas farmers are highly dependent on rainfall in the Monsoon
season.
7. To encourage banks to finance for agriculture and MSME, these

activities are included in Priority Sector Lending.
01. True 02. True 03. True 04. True 05. False 06. True 07. True
1.3.10 Multiple Choice Questions
1. Over the years, the share of agriculture in Indian economy (GDP) is?
a. Increasing
b. Constant
c. Decreasing
d. Fluctuating
2. The share of agriculture in employment was approximately ___% of the

population:
a. 100%
b. 75%
c. 50%
d. 25%
3. Importance of agriculture to the country is mainly because of the

following reasons?
a. Agriculture sector provides food security to the country
b. Agriculture sector continues to provide employment to over 50%

population
c. Both (a) and (b)
4. Key challenges faced by the MSME sector
a. Lack of availability of adequate and timely credit
b. High cost of credit
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c. Limited access to equity capital
d. All of these
5. Identify which is not part of Service Sector
a. Tourism
b. Insurance
c. Small Industry
d. Retail
6. Cluster approach is followed in
a. NBFCs
b. MSMEs
c. NGOs
d. All of them
7. The major challenges faced by agriculture sector are:
a. Low productivity
b. Inability to adopt modern agricultural practices
c. Inadequate irrigation facilities
d. All of the above
8. Importance of MSME sector to the country is mainly because of the

following reasons?
a. MSME sector contributes significantly to the manufacturing output

of the country
b. MSME sector continues to provide employment to large number of

people
c. Both (a) and (b)
9. BPO in the context of service sector means?
a. British Petroleum Order
b. Business Process Outsourcing
66
c. Banking Process Overview
Key to terminal/Multiple Choice questions:
01 - (c ) 02 - (c) 03 - (c ) 04- (d) 05 - (c ) 06(b) 07 - (d ) 08-

(c) 9 - (b )
RBI Website: https://rbi.org.in
NABARD website: www.nabard.org
Datt and Sundharam (2015) Indian Economy
https://statisticstimes.com
Vijayakumar, A (2008) Services Sector in India, New Century Publication

Manish Dubey (2011) Problems of Agricultural Credit in India, Eastern Book
Corporation
67
Lesson No. 4 Developments in Indian Economy
1.4.1 Objectives
1.4.2 Introduction
1.4.3 Impact of Liberalization, Privatization and Globalization
1.4.4 Reform Measures
1.4.5 Financial Sector Reforms
1.4.6 Let Us Sum Up
1.4.7 Keywords
1.4.8 Check Your Progress - Questions
68
1.4.1 Objectives
The objective of this lesson is to understand the economic development and

impact of the Liberalization, Privatization and Globalization (LPG) and the
need for them in the changed environment.
1.4.2 Introduction
Indian economy had experienced major policy changes in early 1990s. The
new economic reforms, popularly known as, Liberalization, Privatization and
Globalization (LPG model) aimed at making the Indian economy a fast growing
one and becoming globally competitive. The series of reforms undertaken with
respect to industrial sector, trade as well as financial sector aimed at making
the economy more efficient.
1.4.3 Impact of Liberalization, Privatization and Globalization
With the onset of reforms to liberalize the Indian economy in July 1991, a new
chapter dawned for India and its huge population. This period of economic
transition had a tremendous impact on the overall economic development of
almost all major sectors of the economy. Besides, it also marked the advent
of the real integration of the Indian economy into the global economy.
To initiate the process of reforms, Govt. of India was required to take certain
bold initiatives and as such this led to opening up of the doors for foreign
investments and other measures.
Globalization refers to the process of opening up of world trade, development

of advanced means of communication, internationalization of financial
markets, etc. The term globalization refers to the integration of economies of
the world through uninhibited trade and financial flows, as also through
mutual exchange of technology and knowledge.
With regards to India, this implies opening up the economy to foreign direct
investment by providing facilities to foreign companies to invest in different
fields of economic activities in India.
Globalization in India has allowed companies to increase their base of

operations, expand their workforce with minimal investments, and provide
new services to a broad range of consumers.
The process of globalization has been an integral part of the recent economic
progress made by India. Globalization has played a major role in export-led
growth, leading to the enlargement of the job market in India.
One of the major forces of globalization in India has been in the growth of
outsourced IT and business process outsourcing (BPO) services. The last few
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years have seen an increase in the number of skilled professionals in India
employed by both local and foreign companies to service customers in the US
and Europe in particular. Taking advantage of India’s lower cost but educated
and English-speaking work force and utilizing global communications
technologies such as ‘Voice-Over Internet Protocol’ (VOIP), email and internet,
international companies have been able to lower their cost base by
establishing outsourced knowledge-worker operations in India. Further, the
time zone advantage has also been tapped to the maximum level to derive
benefits. As the new Indian middle class has developed around the wealth
that the IT industries have brought to the country, a new consumer base
developed. International companies are also expanding their operations in
India to service this massive growth opportunity.
Globalization in India has been advantageous for companies that have

ventured in the Indian market. By simply increasing their base of operations,
expanding their workforce with minimal investments, and providing services
to a broad range of consumers, large companies entering the Indian market
have opened up many profitable opportunities.
1.4.4 Reform Measures
Indian economy was in deep crisis in July 1991, when foreign currency
reserves had plummeted to almost $1 billion; inflation had gone up to an
annual rate of 17 percent; fiscal deficit was very high and had become
unsustainable; foreign investors and NRIs had lost confidence in Indian
economy. Capital was flying out and the country was close to defaulting on
loans. Along with these bottlenecks at home, many unforeseeable changes
swept the economies of nations in Western and Eastern Europe, South East
Asia, Latin America and elsewhere, around the same time. There were
economic compulsions at home and abroad that called for a complete
overhauling of our economic policies and programs.
Major measures initiated as a part of the liberalization and globalization

strategy in the early nineties included the following:
a. Devaluation of Indian Rupee: The first step towards globalization was

taken in 1991, with the announcement of the devaluation of Indian
currency by 20 percent (in two steps of 9% on 01 July 1991 and further
11% on 03 July 1991) against major currencies in the international
foreign exchange market. In fact, this measure was taken in order to
resolve the balance of payment crisis.
b. Disinvestment: In order to make the process of globalization smooth,
privatization and liberalization policies move along as well. Under the
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privatization scheme, most of the public sector undertakings have
been/ are being disinvested.
c. The Industrial Licensing Regime: The country took a conscious
decision to de-license many of the industrial activities. This paved way
for increasing the confidence of private sector within the country and
foreign participants. Such a liberalized approach helped development
in manufacturing, financial and service sectors. At present, only very
few industries are under compulsory licensing mainly on account of
environmental safety and strategic considerations. A significantly
amended location policy in tune with the liberalized licensing policy is
in place. No industrial approval is required from the government for
locations not falling within 25 Kms. of the periphery of cities having a
population of more than one million.
d. Foreign Direct Investment (FDI): Permitting foreign participation in
investment activities is considered to be one of the right steps taken.
This liberalized approach resulted in inflow of foreign funds in a large
measure and opened up the economic development. A liberal and
transparent foreign investment regime has been put in place where
most activities are opened to foreign investment on automatic route
without any limit on the extent of foreign ownership. Some of the recent
initiatives taken to further liberalize the FDI regime include opening up
of sectors such as Insurance (up to 49%-now upto 74 %); Defence-
100% (Automatic up to 49% and Government Route beyond 49%),
development of integrated townships (up to 100%); defense industry (up
to 26%); tea plantation (up to 100% subject to divestment of 26% within
five years to FDI); enhancement of FDI limits in private sector banking,
allowing FDI up to 100% under the automatic route for most
manufacturing activities in SEZs; opening up B2B e-commerce;
electronic mail and voice mail to 100% foreign investment subject to
26% divestment condition; etc. The Government has also strengthened
investment facilitation measures through Foreign Investment
Implementation Authority (FIIA).
1.4.5 Financial Sector Reforms
As a part of LPG, major reforms were introduced covering banking, insurance

and capital markets. Various financial sector reforms were initiated based on
the report of the ‘Narashimham Committee’ (headed by Shri M Narasimham),
which was submitted in 1992. The committee recommended, for the first time,
the Prudential Norms for banks in India as propounded by the Bank for
International Settlements (BIS). The prudential norms were regarding income
recognition, capital adequacy, assets classification, provisioning, etc.,
popularly known as ‘Basel norms’, named after the ‘Basel’ town in
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Switzerland where this BIS is located. These concepts took time to digest, and
the Reserve Bank of India (RBI) played a stellar role in bringing them in a
calibrated manner so that the system was not disrupted. Thus with the
reforms, the banks and Insurance companies have been given more freedom
to do business but are more closely regulated than in the past.
In the meantime, the phenomenal growth of information technology has

shrunk space and time and reduced the cost of moving information, goods
and capital across the globe. Globalization has brought unprecedented
opportunities for human development for all, in developing as well as
developed countries.
Though at present India appears to be dominant in some fields of development

as in IT, government should take immediate steps to continue the reform
process, to increase agricultural production and create additional
employment opportunities in the rural areas, to reduce the growing inequality
between urban and rural areas. Steps should be taken for early linking of the
rivers, especially in the south-bound ones, for supply of much-needed water
for irrigation.
The liberalization measures taken and introduced made way for better global
participation in the various economic sectors of our country. Setting up of
automobile manufacturing units, participation in banking, collaborations
with foreign insurance companies, opening up of the insurance sector for
private players, development in aviation sector, huge impact in the IT field
and telecommunications have been possible mainly on account of
Liberalization, Privatization and Globalization in our country.
1.4.6 Goods & Services Tax (GST)
1.4.6.1 What is GST? How does it work?
GST is one indirect tax for the whole nation, making India one unified
common market. GST is a single tax on the supply of goods and services, right
from the manufacturer to the consumer. In GST System, there is a provision
of ‘Credits of input taxes’ paid at each stage will be available in the subsequent
stage of value addition, which makes GST essentially a tax only on value
addition at each stage. To elaborate, in manufacturing process, the company
(say Company X) purchases some items from a supplier company (Say
Company Y). When the supplier company Y sells the component to the
Company X, it charges GST (say ₹1000/-). If the GST Liability on the final
product for Company X is say ₹2500, it can get the ‘input credit’ of ₹1000
already paid by Company Y and thus it has to effectively pay only ₹2500-
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1000= ₹1500. The final consumer will thus bear only the GST charged by the
last dealer in the supply chain, with set-off benefits at all the previous stages.
1.4.6.2 What are the benefits of GST?
The benefits of GST can be summarized as under:

• For business and industry
Easy compliance: A robust and comprehensive IT system are the foundation
of the GST regime in India. Therefore, all tax payer services such as
registrations, returns, payments, etc. are available to the taxpayers online,
which makes compliance easy and transparent.
Uniformity of tax rates and structures: GST ensures that indirect tax rates
and structures are common across the country, thereby increasing certainty
and ease of doing business. In other words, GST makes doing business in the
country tax neutral, irrespective of the choice of place of doing business.
Removal of cascading: A system of seamless tax-credits throughout the value-

chain, and across boundaries of States, ensures that there is minimal
cascading of taxes. This reduces hidden costs of doing business.
Improved competitiveness: Reduction in transaction costs of doing business

eventually leads to an improved competitiveness for the trade and industry.
Gain to manufacturers and exporters: The subsuming of major Central and

State taxes in GST, complete and comprehensive set-off of input goods and
services and phasing out of Central Sales Tax (CST) reduce the cost of locally
manufactured goods and services. This increases the competitiveness of
Indian goods and services in the international market and give boost to Indian
exports. The uniformity in tax rates and procedures across the country will
also go a long way in reducing the compliance cost.
• For Central and State Governments

Easy to administer: Multiple indirect taxes at the Central and State levels are
being replaced by GST. Backed with a robust end-to-end IT system, GST
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would be simpler and easier to administer than all other indirect taxes of the
Centre and State levied so far.
Better controls on leakage: GST will result in better tax compliance due to a
robust IT infrastructure. Due to the seamless transfer of input tax credit from
one stage to another in the chain of value addition, there is an in-built
mechanism in the design of GST that would incentivize tax compliance by
traders.
Higher revenue efficiency: GST is expected to decrease the cost of collection
of tax revenues of the Government, and will therefore, lead to higher revenue
efficiency.
• For the consumer
Single and transparent tax proportionate to the value of goods and
services: Due to multiple indirect taxes being levied by the Centre and State,
with incomplete or no input tax credits available at progressive stages of value
addition, the cost of most goods and services in the country were laden with
many hidden taxes. Under GST, there is only one tax from the manufacturer
to the consumer, leading to transparency of taxes paid to the final consumer.
Relief in overall tax burden: Because of efficiency gains and prevention of

leakages, the overall tax burden on most commodities has come down,
benefitting consumers.
1.4.6.3 Which taxes at the Centre and State level has been subsumed
into GST?
At the Central level, the following taxes has been subsumed:
i. Central Excise Duty,

ii. Additional Excise Duty,
iii. Service Tax,
iv. Additional Customs Duty commonly known as Countervailing Duty,
v. Special Additional Duty of Customs.
At the State level, the following taxes has been subsumed:
i. Subsuming of State Value Added Tax/Sales Tax,

ii. Entertainment Tax (other than the tax levied by the local bodies),
Central Sales Tax (levied by the Centre and collected by the States),
i. Octroi and Entry tax,
ii. Purchase Tax,
iii. Luxury tax,
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iv. Taxes on lottery, betting and gambling.
1.4.6.4 What are the major chronological events that have led to the
introduction of GST?
GST was introduced in the country after a 13 year long journey since it was
first discussed in the report of the Kelkar Task Force on indirect taxes. A brief
chronology outlining the major milestones on the proposal for introduction of
GST in India is as follows:
i. In 2003, the Kelkar Task Force on indirect tax had suggested a
comprehensive Goods and Services Tax (GST) based on VAT principle.
ii. A proposal to introduce a National level Goods and Services Tax (GST)
by April 1, 2010 was first mooted in the Budget Speech for the financial
year 2006-07.
iii. Since the proposal involved reform/ restructuring of not only indirect
taxes levied by the Centre but also the States, the responsibility of
preparing a Design and Road Map for the implementation of GST was
assigned to the Empowered Committee of State Finance Ministers (EC).
iv. Based on inputs from Govt. of India and States, the EC released its First
Discussion Paper on Goods and Services Tax in India in November,
2009.
v. In order to take the GST related work further, a Joint Working Group
consisting of officers from Central as well as State Government was
constituted in September, 2009.
vi. In order to amend the Constitution to enable introduction of GST, the
Constitution (115th Amendment) Bill was introduced in the Lok Sabha
in March 2011. As per the prescribed procedure, the Bill was referred
to the Standing Committee on Finance of the Parliament for
examination and report.
vii. Meanwhile, in pursuance of the decision taken in a meeting between
the Union Finance Minister and the Empowered Committee of State
Finance Ministers on 8th November, 2012, a ‘Committee on GST
Design’, consisting of the officials of the Government of India, State
Governments and the Empowered Committee was constituted.
viii. This Committee did a detailed discussion on GST design including the
Constitution (115th) Amendment Bill and submitted its report in
January, 2013. Based on this Report, the EC recommended certain
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changes in the Constitution Amendment Bill in their meeting at
Bhubaneswar in January 2013.
ix. The Empowered Committee in the Bhubaneswar meeting also decided
to constitute three committees of officers to discuss and report on
various aspects of GST as follows:-
(a) Committee on Place of Supply Rules and Revenue Neutral Rates;
(b) Committee on dual control, threshold and exemptions;
(c) Committee on IGST and GST on imports.
x. The Parliamentary Standing Committee submitted its Report in August,

2013 to the Lok Sabha. The recommendations of the Empowered
Committee and the Parliamentary Standing Committee were examined
in the Ministry in consultation with the Legislative Department. Most of
the recommendations made by the Empowered Committee and the
Parliamentary Standing Committee were accepted and the draft
Amendment Bill was suitably revised.
xi. The final draft Constitutional Amendment Bill incorporating the
changes were sent to the Empowered Committee for consideration in
September 2013.
xii. The Empowered Committee once again made certain recommendations
on the Bill after its meeting in Shillong in November 2013. Certain
recommendations of the Empowered Committee were incorporated in
the draft Constitution (115th Amendment) Bill. The revised draft was
sent for consideration of the Empowered Committee in March, 2014.
xiii. The 115th Constitutional (Amendment) Bill, 2011, for the introduction
of GST introduced in the Lok Sabha in March 2011 lapsed with the
dissolution of the 15th Lok Sabha.
xiv. In June 2014, the draft Constitution Amendment Bill was sent to the
Empowered Committee after approval of the new Government.
xv. Based on a broad consensus reached with the Empowered Committee
on the contours of the Bill, the Cabinet on 17 Dec.2014 approved the
proposal for introduction of a Bill in the Parliament for amending the
Constitution of India to facilitate the introduction of Goods and Services
Tax (GST) in the country. The Bill was introduced in the Lok Sabha on
19 Dec.2014, and was passed by the Lok Sabha on 06 May 2015. It was
then referred to the Select Committee of Rajya Sabha, which submitted
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its report on 22 July 2015. Finally GST Act was passed on 29th March
2017 and it has been made applicable w.e.f 01 July 2017.
1.4.6.5 How GST is administered in India?
Keeping in mind the federal structure of India, there are two components of
GST – Central GST (CGST) and State GST (SGST). Both Centre and States
simultaneously levy GST across the value chain. Tax is levied on every supply
of goods and services. The input tax credit of CGST is available for discharging
the CGST liability on the output at each stage. Similarly, the credit of SGST
paid on inputs is allowed for paying the SGST on output. No cross utilization
of credit is permitted.
1.4.6.6 How is a particular transaction of goods and services being

taxed simultaneously under Central GST (CGST) and State GST (SGST)?
The Central GST and the State GST are levied simultaneously on every
transaction of supply of goods and services except on exempted goods and
services, goods which are outside the purview of GST and the transactions
which are below the prescribed threshold limits. Further, both are to be levied
on the same price or value unlike State VAT which is levied on the value of
the goods inclusive of Central Excise. A diagrammatic representation of the
working of the Dual GST model within a State is shown in Figure 1.4.1 below.
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Figure 1.4.1: GST within State
1.4.6.7 Will cross utilization of credits between goods and services be

allowed under GST regime?
Cross utilization of credit of CGST between goods and services would be

allowed. Similarly, the facility of cross utilization of credit will be available in
case of SGST. However, the cross utilization of CGST and SGST would not be
allowed except in the case of inter-State supply of goods and services under
the IGST model which is explained in answer to the next question.
1.4.6.8 How are Inter-State Transactions of Goods and Services

taxed under GST in terms of IGST method?
In case of inter-State transactions, the Centre levies and collects the

Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods
and services under Article 269A (1) of the Constitution. The IGST is roughly
equal to CGST plus SGST. The IGST mechanism has been designed to ensure
seamless flow of input tax credit from one State to another. The inter-State
seller would pay IGST on the sale of his goods to the Central Government after
adjusting credit of IGST, CGST and SGST on his purchases (in that order).
The exporting State would transfer to the Centre the credit of SGST used in
payment of IGST. The importing dealer would claim credit of IGST while
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discharging his output tax liability (both CGST and SGST) in his own State.
The Centre would transfer to the importing State the credit of IGST used in
payment of SGST. Since GST is a destination-based tax, all SGST on the final
product would ordinarily accrue to the consuming State.
A diagrammatic representation of the working of the IGST model for inter-
State transactions is shown in Figure 1.4.2 below.
Figure 1.4.2: Working of IGST
1.4.6.9 How IT is used for the implementation of GST?
For the implementation of GST in the country, the Central and State
Governments have jointly registered “Goods and Services Tax Network”
(GSTN) as a not-for-profit, non-Government Company to provide shared IT
infrastructure and services to Central and State Governments, tax payers and
other stakeholders. It manages the entire IT system of the GST portal, which
is the mother database for GST. This portal is being used by the government
to track every financial transaction, and provides taxpayers with all services
– from registration to filing taxes and maintaining all tax details. The key
objectives of GSTN are to provide a standard and uniform interface to the
taxpayers, and shared infrastructure and services to Central and State/UT
governments. GSTN has developed a comprehensive IT infrastructure
including the common GST portal providing frontend services of registration,
returns and payments to all taxpayers, as well as the backend IT modules for
certain States that include processing of returns, registrations, audits,
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assessments, appeals, etc. All States, accounting authorities, RBI and banks,
are also preparing their IT infrastructure for the administration of GST.
There is no manual filing of returns under GST. All mis-matched returns
would be auto-generated, and there would be no need for manual
interventions. Most returns would be self-assessed.
1.4.6.10 How will imports be taxed under GST?
The Additional Duty of Excise or Countervailing Duty (CVD) and the Special
Additional Duty or SAD hitherto being levied on imports, have been subsumed
under GST. As per explanation to clause (1) of article 269A of the Constitution,
IGST would be levied on all imports into the India. Unlike in the previous
regime, the States where imported goods are consumed would gain their share
from this IGST paid on imported goods.
1.4.6.11 What were the major features of the Constitution

(122nd Amendment) Bill, 2014 regarding GST?
The salient features of the Bill are as follows:

i. The amendment introduced a national Goods and Services Tax (GST) in
India from 1 July 2017. It replaces all indirect taxes levied on goods and
services by the Indian Central and state governments.
ii. Conferring simultaneous power upon the Parliament and the State
Legislatures to make laws governing GST;
iii. Subsuming of various Central indirect taxes and levies such as Central
Excise Duty, Additional Excise Duties, Service Tax, Additional Customs
Duty commonly known as Countervailing Duty, and Special Additional
Duty of Customs;
iv. Subsuming of State Value Added Tax/Sales Tax, Entertainment Tax
(other than the tax levied by the local bodies), Central Sales Tax (levied
by the Centre and collected by the States), Octroi and Entry tax,
Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling;
v. Dispensing with the concept of ‘declared goods of special importance’
under the Constitution;
vi. Levy of Integrated Goods and Services Tax on inter-State transactions
of goods and services;
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vii. GST to be levied on all goods and services, except alcoholic liquor for
human consumption. Petroleum and petroleum products shall be
subject to the levy of GST on a later date notified on the
recommendation of the Goods and Services Tax Council;
viii. Compensation to the States for loss of revenue arising on account of
implementation of the Goods and Services Tax for a period of five years;
ix. Creation of Goods and Services Tax Council to examine issues relating
to goods and services tax and make recommendations to the Union and
the States on parameters like rates, taxes, cesses and surcharges to be
subsumed, exemption list and threshold limits, Model GST laws, etc.
The Council shall function under the Chairmanship of the Union
Finance Minister and will have all the State Governments as Members.
1.4.6.12 What are the major features of the registration procedures

under GST?
The major features of the registration procedures under GST are as follows:
i. Existing dealers: Existing VAT/Central excise/Service Tax payers
would not have to apply afresh for registration under GST. Automatic
PAN based registration number would be generated.
• New dealers: Single application to be filed online for registration under
GST. The registration number will be PAN based and will serve the purpose
for Centre and State. Unified application to both tax authorities. Each dealer
to be given unique ID called Goods and Services Taxpayer Identification
Number (GSTIN). Deemed approval within three days. Post registration
verification in risk based cases only.
1.4.6.13 What are the major features of the returns filing procedures
under GST?
The major features of the proposed returns filing procedures under GST are
as follows:
i. Common return would serve both Centre and State Government.
ii. There are eight forms provided for in the GST business processes for
filing for returns. Most of the average tax payers use only four forms for
filing their returns. These are return for supplies, return for purchases,
monthly returns and annual return.
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iii. Small taxpayers: Small taxpayers who have opted composition scheme
have to file return on quarterly basis.
iv. Filing of returns has to be completely online. All taxes can also be paid
online.
1.4.6.13 What are the major features of the payment procedures under
GST?
The major features of the payments procedures under GST are as follows:
i. Electronic payment process- no generation of paper at any stage
ii. Single point interface for challan generation- through “GSTN” GST
Network
iii. Ease of payment – payment can be made through online banking,
Credit Card/Debit Card, NEFT/RTGS and through cheque/cash at the
bank
iv. Common challan form with auto-population features
v. Use of single challan and single payment instrument
vi. Common set of authorized banks
vii. Common Accounting Codes
Note: The above details are for reference purpose only. C-PEC does not claim the
Authencity of the source material. For additional details, readers are advised to refer
to the Government of India Website of GST www.gst.gov.in and Central Board of
Excise and Customs ( http://www.cbec.gov.in)
1.4.7 Let us sum up
As the entire world has become a global village, globalization is inevitable. A

stage has come where the global support cannot be avoided. Liberalization,
Privatization and Globalization have helped our country to move ahead. GST
as a single tax at national level will also help in this regard. The liberalization
measures and public-private partnership in areas like infrastructure have
also contributed to the economic growth of the country.
1.4.8 Keywords
Liberalization, Privatization, Globalization, Foreign Direct Investment,

Financial Sector Reforms, Insurance, Banking, Foreign Investment
Implementation Authority (FIIA), GST, GSTIN, GSTN, Disinvestment, Balance
of Payments, Devaluation
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State True or False
1. Globalization in India has allowed companies to increase their base of

operations, expand their workforce with minimal investments, and
provide new services to a broad range of consumers.
2. At present, FDI allowed in the Insurance sector is up to 49%
3. LPG measures have increased employment opportunities for the youth.
4. The LPG has come in the way of overall development in our country.
5. At present, only very few industries are under compulsory licensing

mainly on accounting of environmental safety and strategic
considerations.
6. GST has simplified the tax system in India and reduced prices for the
consumers.
Key to Multiple Choice questions
01. True 02. False 03. True 04. False 05. True 06. True
1.4.10 Terminal/ Multiple Choice questions
1. LPG in the context of economic development means?
a. Liquefied Petroleum Gas
b. Liberalization, Privatization and Globalization
c. Light, Powerful and Glorious
d. None of these
2. FDI in the context of economic development means?
a. Forest Development Institute
b. Foreign Development Initiative
c. Foreign Direct Investment
d. Forest Development Initiative
3. Expansion of GST is?
a. General State Tax
b. Government State Tax
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c. Goods and Services Tariff
d. Goods and Services Tax
4. The post Liberalization and Privatization era witnessed quantum jump

in the fields of
a. Motor vehicle manufacturing
b. Banking
c. Insurance
d. All of these
5. What is true statement about GST?
a. GST is one tax for the whole nation making India one unified market.
b. GST will discontinue multiple taxation hence reducing tax burden on

the consumer
c. Both (a) and (b)
6. In the beginning of 1990s measures were taken to overcome the crisis

of
a. Payments to be made
b. Balance of Payments
c. Excess Payment position
d. None of these
7. GST has been made applicable in the country from ___?
a. 15 August 1951
b. 02 October 1991
c. 01 July 2017
d. 01 Jan 2021
8. When the LPG measures for economic development were started in 1991,
who was the Prime Minister and Finance Minister?
a. Shri Narasimha Rao (PM) and Dr Man Mohan Singh (FM)
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b. Shri Atal Bihari Vajpeyi (PM) and Dr Man Mohan Singh (FM)
c. Shri Narasimha Rao (PM) and Shri P Chidambaram FM
9. What are the main advantages of GST?
a. It will reduce the cost of local goods and services leading to increased
competitiveness of Indian products in the international market and give
boost to Indian exports
b. It will control the tax leakage and will result in better tax compliance
c. Both (a) and (b)
Key to terminal/Multiple Choice questions
01. (b) 02. (c) 03. (d) 04. (d) 05. (c) 06. (b)
07. (c) 08. (a) 09. (c)
Ravi Prakash Yadav (Editor), Ragini Deep (Editor), Puja Roy (Editor) (2009)
Globalization and the Indian Economy, New Century Publication
Pramod Rao & Anil Varma (2007) Globalization: Indian Financial Sector
Reforms, ICFAI
GoI website for GST: www.gst.gov.in
85
Unit 2: Indian Financial System
2.1 Lesson No. 1 Introduction to Indian Financial System
2.1.1 Objective
2.1.2 Introduction
2.1.3 Financial System
2.1.4 Financial Markets
2.1.5 Financial Intermediation
2.1.6 Financial Instruments
2.1.7 Money Market
2.1.8 Capital Market
2.1.9 Debt Market
2.1.10 Mutual Funds
2.1.11 Insurance
2.1.12 Let Us Sum Up
2.1.13 Keywords
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2.1.1 Objective
The objective of this lesson is to understand the various aspects of the

financial system in India and their role.
2.1.2 Introduction
Every country should possess a well-developed financial system for its

economic development. Financial System consists of financial markets,
financial intermediation and financial instruments or financial products. The
conversion of ‘Savings’ into ‘Investment and Consumption’ is mainly done
through the Financial System.
The financial system also includes central bank of the country, commercial
banks, non-banking financial companies (NBFCs), stock exchanges, primary
dealers, financial institutions, insurance units, mutual funds and so on.
Financial institutions are known as market intermediaries. With more and

more awareness, there has been an increase in the number of investors
adopting different modes of investments. This has resulted in more demand
for various financial instruments than the traditional bank deposits or post
office savings.
2.1.3 Financial System
There are a set of people with surplus funds and there are those with a
deficit. A financial system or financial sector functions as an intermediary
and facilitates the flow of funds from the areas of surplus to the areas of
deficit.
The word "system", in the term "financial system", implies a set of complex
and closely connected institutions, agents, practices, markets, transactions,
claims, and liabilities in the economy. The financial system is concerned
about money, credit and finance. These three terms are closely related, yet
somewhat different from each other. Indian financial system consists of
financial markets, financial instruments and financial intermediation.
2.1.4 Financial Markets
A financial market can be defined as the market in which financial assets are
created or transferred. As against a real transaction that involves exchange of
money for real goods and/ or services, a financial transaction involves
creation or transfer of a financial asset. Financial assets or financial
instruments represent a claim to the payment of a sum of money sometime
in the future and /or periodic payment in the form of interest or dividend.
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2.1.4.1 Money Market- The money market is a wholesale debt market for
low-risk, highly-liquid, short-term instruments. Funds are available in this
market for periods ranging from a single day up to a year. This market is
dominated mostly by government, banks and financial institutions. This
includes Call, Notice Money and Term Money Market.
2.1.4.2 Capital Market - The capital market is designed to finance the long-
term investments. This market deals in equities, bonds and other
instruments. An efficient capital market with adequate depth is essential in a
developing economy like India.
2.1.4.3 Forex Market - The Forex market deals with various currencies and
requirements which are met by exchange of currencies of different
countries. Depending on the applicable exchange rate, the transfer of funds
takes place in this market. This is one of the most developed and integrated
market across the globe.
2.1.4.4 Credit Market - Credit market is a place where banks, FIs and NBFCs
purvey short, medium and long-term loans to corporate and individuals.
2.1.5 Financial Intermediation
Having designed the instrument, the issuer should then ensure that these
financial assets reach the ultimate investors. When the borrower of funds
approaches the financial market to raise funds, mere issue of securities will
not serve the purpose. Adequate information of the issue, issuer and the
security should be passed on. There should be a proper channel within the
financial system to ensure such transfer. To serve this purpose, financial
intermediaries came into existence.
Financial intermediation in the organized sector is conducted by a wide range

of institutions functioning under the overall surveillance of Reserve Bank of
India. Banks are the most prominent institutions in this regard.
2.1.6 Financial Instruments
2.1.6.1 Money Market Instruments
The money market can be defined as a market for short-term money and
financial assets that are near substitutes for money. The term ‘short-term’
means generally a period up to one year and ‘near substitutes to money’ is
used to denote any financial asset which can be quickly converted into money
with minimum transaction cost.
Some of the important money market instruments are:
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i. Call/Notice Money
ii. Treasury Bills
iii. Term Money
iv. Certificate of Deposit
v. Commercial Papers
2.1.6.1.1 Call /Notice-Money Market
Call/ notice money market is a ‘market’ in which banks borrow money for
their short term needs of liquidity or to meet their statutory reserve ratio
requirements. It is called ‘call’ because the money is returnable on call. Here,
the money is borrowed or lent on demand for a very short period- mostly one
day or ‘overnight’. When money is borrowed or lent for a day, it is known as
call (Overnight) money. Intervening holidays and/or Sunday are excluded for
this purpose. Thus money, borrowed on a day and repaid on the next working
day, (irrespective of the number of intervening holidays) is "Call Money". When
money is borrowed or lent for more than a day and up to 14 days, it is "Notice
Money". No collateral security is required to cover these transactions.
2.1.6.1.2 Inter-Bank Term Money
Inter-bank market for deposits of maturity beyond 14 days is referred to as

the term money market. The entry restrictions are the same as those for
Call/Notice Money except that, as per existing regulations, the specified
entities are not allowed to lend beyond 14 days.
2.1.6.1.3 Treasury Bills
Treasury Bills are short term (up to one year) borrowing instruments of the
Union Government. It is a promise by the Government to pay a stated sum
after expiry of the stated period from the date of issue (91/182/364 days i.e.
less than one year). These are issued at a discount to the face value, and on
maturity, the face value is paid to the holder. The rate of discount and the
corresponding issue price are determined at each auction. These auctions are
conducted by RBI on behalf of the Central Government.
2.1.6.1.4 Certificate of Deposits (CD)
Certificate of Deposits (CD) is a negotiable money market instrument, issued

in dematerialized form or as a Usance Promissory Note, for funds deposited
at a bank or other eligible financial institution for a specified time period.
Guidelines for issue of CDs are presently governed by various directives
issued by Reserve Bank of India, as amended from time to time. CDs can be
issued by:
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a. Scheduled commercial banks excluding Regional Rural Banks (RRBs)
and Local Area Banks (LABs); and
b. Select all-India Financial Institutions that have been permitted by RBI
to raise short-term resources within the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on their requirements.
CDs issued by banks should have a maturity of not less than seven days and
not more than one year. Financial Institutions can issue CDs for a period
between 01 year and up to 03 years. CDs normally offer a higher rate of return
than Bank term deposit. CDs are rated by approved rating agencies like
CARE, ICRA, CRISIL, FITCH, etc; increasing their tradability in secondary
market. They are issued in denominations of Rs. One Lakh and in the
multiples of Rs. One Lakh thereafter.
2.1.6.1.5 Commercial Paper (CP)
A CP is a short term security, 7 days to 365 days, issued by a corporate entity,

other than a bank, at a discount to the face value. One can invest in CPs
starting from a minimum of Rs. 5 lakh (face value) and multiples thereof. CPs
are rated by approved rating agencies like CARE, ICRA, CRISIL or FITCH. CPs
generally provide a rate of return, higher than the fixed deposits and CDs.
Banks deal in investment grade CPs only. CPs can be traded in the secondary
market, depending upon demand. An element of credit risk is associated with
CPs.
A CP is a note in evidence of the debt obligation of the issuer. On issuing a

CP, the debt obligation is transformed into an instrument. CP is thus an
unsecured promissory note privately placed with investors at a discount rate
to face value determined by market forces. CP is freely negotiable by
endorsement and delivery.
A company shall be eligible to issue CP subject to the following conditions:
a. The tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs. 4 crore;
b. The working capital (fund-based) limit of the company from the
banking system is not less than Rs. 4 crore and
c. The borrowal account of the company is classified as a Standard
Asset by the financing bank/s.
d. The minimum credit rating shall be P-2 of CRISIL or such equivalent
rating by other agencies.
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2.1.6.2 Capital Market Instruments
The capital market generally consists of the following long term period (more
than one year) financial instruments:
• In the equity segment: equity shares, preference shares,

convertible preference shares, non-convertible preference shares
etc.,
• In the debt segment debentures: zero coupon bonds, deep

discount bonds etc.
2.1.6.2.1 Hybrid Instruments
Hybrid instruments have both the features of equity and debt. Examples are
convertible debentures, warrants etc. where initially the instrument is a debt
instrument but the amount can be converted to equity shares on pre-decided
terms.
2.1.6.2.2 Money Market
Till the mid-1980s, the Indian money market was having very few
instruments. The market was heavily regulated with regard to participants
and interest rates. In view of the recommendations of the committee to review
the working of the monetary system (Chairman Prof. Sukhamoy Chakravarty,
1985) and the working group on the money market (Chairman Shri N. Vagul,
1988), a number of measures were adopted by RBI to widen and deepen the
money market through institution building and instrument development. The
Discount and Finance House of India Ltd., (DFHI), was jointly set up by RBI,
public sector banks and financial institutions. DFHI commenced operations
in April, 1988 to deal in short term money market instruments. The main
objective was to improve liquidity.
Over a period, a number of initiatives have been taken. Introduction of

Liquidity Adjustment Facility (LAF), Collateralized Borrowing and Lending
Obligation (CBLO) through the Clearing Corporation of India (CCIL) and
expansion of repo market outside the LAF provided scope for banks and non-
bank participants to trade into a pure inter-bank market. Development of
technology infrastructure helped introduce Negotiated Dealing System (NDS),
Real Time Gross Settlement (RTGS) and Centralized Funds Management
System (CFMS).
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2.1.6.2.3 Call Money
The money market is a market for short-term financial assets that are close
substitutes of money. These market instruments are considered to be liquid
and can be converted quickly at low cost and provide an avenue for earning
on one side and make available the funds for the needy on the other side. The
call/notice money market forms an important segment of the Indian money
market. Under call money market, funds are transacted on overnight basis
and under notice money market for the period of 2 days and 14 days.
Some of the terms used in the money market and their meanings are
• Call Money – deals in overnight funds

• Notice money – deals in funds for 2 – 14 days
• Fortnight – the period from Saturday to the second following Friday,
both days inclusive
• Bank- Banking Company, State Bank of India, a Co-operative Bank
• Primary Dealer – a financial institution which holds a valid letter of
authorization as Primary Dealer issued by the Reserve Bank
• Owned Funds – the aggregate of such funds as appropriately disclosed
in the latest balance sheet of the entity.
Participants
Participants in call / notice money market include banks, Primary Dealers

(PDs), development finance institutions, insurance companies and select
mutual funds. Banks and PDs can operate both as borrowers and lenders in
the market. Non- bank institutions can act as lenders only.
Prudent Limit
The Narasimham Committee (1998) recommended that call / notice money

markets in India should be made purely an inter-bank market. RBI initiated
steps to phase out other institutions in a gradual manner. No new non-bank
institutions are permitted to operate i.e., lend in the call / notice money
market with effect from May 5, 2001.
Interest Rate and others
Eligible participants are free to decide on interest rates in call / notice money
market. Thus it is market driven and need based.
To have proper monitoring of an entity’s operations in call / notice money

market, the daily return needs to be submitted to the Monetary Policy
Department, Reserve Bank of India, Central Office, Mumbai.
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It is also mandatory for all Negotiated Dealing System (NDS) members to
report all their call/ notice money market deals on NDS. Deals should be
reported within 15 minutes on NDS, irrespective of the size of the deal or
whether the counter party is a member of the NDS or not.
Repo and Reverse Repos
Repos- Repo is a type of transaction in which a money market participant

raises funds by selling securities and simultaneously agreeing to
‘repurchase’ the same (hence the term is ‘repo’) after a specified time, generally
at a specified price, which typically includes interest at an agreed upon rate.
The minimum period of Repos is fixed at 1 day and the maximum period is
limited to 14 days. In India, Repo rates are determined on the basis of
expected call money rates during a reverse mark-up period.
The amount of interest earned on funds invested in a Repo is arrived at as

follows:
Interest earned = Funds Invested X Repo Rate X Number of Days / 365
Example: Rs 2 Crore 8 days investment at 4% would earn an interest return

of Rs. 17530 (20000000 X 0.04 X 8/365 = Rs. 17530)
Some of the important aspects of REPO
A SLR surplus and CRR deficit bank can use the repo deals as a convenient
way of adjusting SLR/ CRR positions simultaneously. The Repo is a
convenient instrument for Asset –Liability Management (ALM).
Repo rate is the rate at which the RBI lends short-term money to the banks.
When the repo rate increases, borrowing from RBI becomes more expensive.
When RBI wants to make borrowing for the banks more expensive repo rate
is increased. Now this policy rate has become an important rate announced
by RBI periodically and is viewed as a signal from RBI by the market. At
present the repo rate is 5.40% as announced by RBI on 30 September 202211.
Reverse Repo rate is the rate at which banks park their short-term excess
liquidity with the RBI. RBI uses this tool depending upon requirements.
Reverse repo helps such banks to use their idle money for earning. Increase
in the reverse repo rate offers an opportunity for the banks to earn better. As
a result banks prefer to keep their money with the RBI and money from the
11
https://www.rbi.org.in/
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market is squeezed out. At present the repo rate is 5.90% as announced by
RBI on 30 September 202212.
2.1.6.3 Capital Market
Capital Market deals with equities (shares) and long term debts. In the
Primary capital market, the securities are made available for the first time. In
the secondary market, the securities and shares are bought and sold on a
daily basis.
2.1.6.3.1 Primary Market
As per the provisions of the Indian Companies Act, a public limited company
has to offer its shares to public supported by a ‘Prospectus’ wherein necessary
information about the company is provided. All legal formalities relating to the
prospectus should be complied with. Securities Exchange Board of India
(SEBI) has issued detailed guidelines concerning disclosures by companies
issuing securities to public. The shares (security), issued for the first time to
the public by a new company are known as Initial Public Offer (IPO). These
new shares can be priced through the book building process or by a fixed
price method. In the fixed price method, the company decides the price in
consultation with the investment banker based on the feedback obtained by
the investment banker from various investors. This process is informal in
nature. Investment bankers, Mutual Funds, Insurance Companies, etc
underwrite the IPO. Underwriting commitments means that in case the issue
is not subscribed at the recommended price, then such underwriters would
take the unsubscribed portion to their books subject to the terms and
conditions of the underwriting agreements.
In the case of book building method, the issuer in consultation with the
investment banker, sets a price band at which the issuer and the lead placing
agent are comfortable that the issue will go through. The investors then put
their bids of various quantities at different prices. The price at which the issue
is fully subscribed is then fixed as the issue price and all the investors bidding
at this price or a higher price are allotted the appropriate quantities of shares.
2.1.6.3.2 Secondary Market
Secondary market is the real active market. In India there are only two such
stock exchanges viz. National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE). In these exchanges, share transactions take place in
volumes, in digital mode. Depending upon the various developments
internally and globally, the fluctuations take place in the secondary market
12
https://www.rbi.org.in/
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on an ongoing basis. The sentiment of the investors always gets reflected in
the secondary market. Stock Exchanges in India require recognition under
the Securities Contract Regulation Act (SCRA). The Act empowers the
Government to oversee the following:
a. Recognition of Stock Exchanges

b. Supervision of recognized Stock Exchanges
c. Listing of Securities on the Stock Exchanges
d. Regulation of Contracts in Securities
e. Transfer of Securities
Securities Exchange Board of India (SEBI), established by the Government of
India in 1988, has the main function of regulating the Indian securities
market so as to ensure that the interests of investors are protected. Under the
terms and conditions of the stock exchange listing agreement, the governing
body of the stock exchange is empowered to suspend trading in a listed
security due to breach of any provision of the listing agreement. SEBI has
been issuing rules and regulations setting out the norms for registration of
stock brokers. The regulation prescribes code of conduct and rules for fair
treatment of investors by brokers.
2.1.6.3.3 Equity Market
Indian equity market is among the 10 biggest equity markets in the world. As
mentioned earlier, in India, there are only two stock exchanges viz. National
Stock Exchange (NSE) and Bombay Stock Exchange (BSE) where equity can
be traded. The BSE has been in existence since 1875. The NSE, on the other
hand, was founded in 1992 and started trading in 1994. However, both the
exchanges follow the same trading mechanism, trading hours and settlement
process. NSE was the first fully automated exchanger, providing electronic
clearing and settlement.
SEBI has made it compulsory for exchanges to ensure that most of the actively
traded securities are delivered in electronic form. Hence, now almost all the
securities are dealt in dematerialized or ‘demat’ form. Demat trading has
considerably reduced the risk of trading on the exchange.
In 1995, the Government of India promulgated the Depository Ordinance to

provide framework for the establishment of depositories to record ownership
details and effect transfer of ownership in book entry form, thus leading to
the process of dematerialization of share certificates.
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The National Securities Depository Ltd (NSDL) was set up in 1996. The
Bombay Stock Exchange with the help of the institutions has also set up the
Central Securities Depository Ltd. (CSDL).
2.1.6.4 Debt Market
The debt market consists of two segments, the government securities market
and the corporate debt market. The debt market in India is amongst the
largest in Asia. It includes Government securities, the largest component, and
the bonds issued by public sector undertakings, other Government bodies,
financial institutions, banks and companies.
Debt instruments are obligations of issuer of such instruments as regards

certain future cash flows representing interest and principal, which the issuer
would pay to the legal owner of the instruments. Generally debt instruments
represent agreements to receive certain cash flows as per the terms contained
within the agreement. They can also be said to be tradable form of loans.
Debt instruments include Bonds, Debentures, Commercial Papers, Certificate

of Deposits, Government Securities (G-Secs), etc.
2.1.6.4.1 Debt Market Instruments
2.1.6.4.2 Government Securities
Government Securities Market (G-Secs Market) consists of Central and State

Government securities. Loans are being taken by these Governments. It is
also the most dominant category in the Indian debt market.
Government Securities or ‘G-Secs’ are the securities or debt instruments

issued by the government to borrow money for meeting expenditure needs or
investments. G-Secs are issued by the Reserve Bank of India on behalf of the
Government of India or state governments. The Government Securities Act,
2006 became effective from 1 st December, 2007. The issue of government
securities and their servicing is attended to by RBI through the Public Debt
Offices (PDOs), branches of SBI and its associate banks and the district
treasuries. The dated government securities have a period of 1 year to 30
years. These are sovereign instruments (with government guarantee) generally
bearing a fixed rate of interest with interest payable semi-annually and
principal as per schedule. The Government securities market known as the
Gilt Edged Securities market primarily trades in securities issued by the
Central and State Governments and Semi Government. These securities are
mainly subscribed by the banks to meet their statutory reserve needs but
individuals from common public and other private entities can also subscribe,
subject to certain conditions.
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2.1.6.4.3 Bond Market
The instruments in the bond market consist of bonds and debentures issued
by financial institutions, public sector undertakings and corporates.
2.1.6.4.3.1 Corporate Bonds
These are issued by public sector undertakings and private corporations for
a wide range of tenors normally up to 15 years, though some have issued
perpetual bonds also. These bonds have a higher risk of default.
2.1.6.4.3.2 Debentures
A debenture is a debt instrument issued by companies for borrowing funds.

Thus the debenture holders are creditors of the company. These instruments
are either ‘secured’ (having backing of specific security) or ‘unsecured’ (not
backed by any specific security). The company pays interest at agreed terms
to the investors.
2.1.6.4.3.3 Convertible / Non- Convertible Debenture
Companies issue securities referred to as convertible debentures which get

converted into equity shares at a later date, (pre fixed or to be fixed price) at
the option of the debenture holder. Non-Convertible Debentures (NCD) are
redeemed on the date of maturity. Corporates also issue NCDs with
detachable warrant.
2.1.6.4.4 Mutual Funds (MFs)
Mutual Funds are financial intermediaries being managed by professionals,

according to the fund’s investment objective. Mutual Funds provide common
investors a platform to invest indirectly in a basket of financial assets /
securities like equity shares, debentures, money market, debt market
instruments, etc.
Mutual Funds give certain benefits such as:
• Diversification of risk: As the Mutual Fund is large in size, it offers

diversification by investing in varied companies and/or securities from
different industries. This may be very difficult for an individual investor.
• Liquidity: The Mutual Funds offer investors liquidity in the form of
ability to redeem or sell partly/ fully at times.
• Economies of Scale: As the Mutual Funds are bigger players than
common investors, they pay lower brokerage / commission. They are in
a better position to get better prices on big transaction lots.
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• Professional guidance: Mutual Funds employ professionals to manage
the funds. Their experience and exposure help to spread the
investments and thereby reduce the possible risk. Further they keep
track of happenings in the markets so that they are in a better position
to make appropriate decisions about the investments. For an ordinary
investor, time factor, huge investment factor, lack of experience and
decision taking may not be always available at appropriate junctures.
2.1.6.4.5 Insurance
Insurance is of two types. (1) Life Insurance and (2) Non- Life or General
Insurance. Insurance business is a contract, mainly based on the principles
of insurance. Following are the important principles of insurance:
a. Utmost good faith: Both the parties in an insurance contract should

act in good faith towards each other and provide clear and concise
information related to the contract.
b. Insurable interest: The individual (insured) must have an insurable

interest in the subject matter i.e., it must provide some financial gain
to the insured and also lead to a financial loss if there is any damage,
destruction or loss.
c. Contribution: Contribution principle applies when the insured takes

more than one insurance policy for the same subject matter. This
principle is just a corollary of the principle of indemnity. As per this
principle, the insured company are liable to pay only their own
contribution and they have right to recover back the excess money paid
from other insurer.
d. Indemnity: This means that the insurance is done only for the
coverage of the loss; hence insured should not make any profit from the
insurance contract. In other words, the insured should be compensated
the amount equal to the actual loss and not the amount exceeding the
loss.
e. Subrogation: Subrogation gives the right to the insurance company
to claim the amount of loss from the third-party responsible for the
same.
f. Principle of Loss minimization: It means that the insured person
should take all the necessary steps to control and reduce the losses. It
is his duty and responsibility.
g. Principle of Causa Proxima (Nearest Cause): This means that when
a loss is caused by more than one causes, then the nearest or the
closest cause should be taken into consideration to decide the liability
of the insurer.
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Different types of policies are offered for different purposes by the insurance
companies. For many years, Life Insurance business was vested with only the
Life Insurance Corporation of India (Public Sector) and the General insurance
was confined with four Public Sector insurance companies viz., The National
Insurance Company Ltd, The United India Insurance Company Ltd, The New
India Assurance Company Ltd and The Oriental Insurance Company Ltd.
The liberalization in the field of insurance opened the doors for private sector
insurance business in both Life and Non-Life. This has led to number of
private sector insurance companies entering the industry.
Different types of products are available such as endowment, whole life,

medical, non-medical, with or without profit policies, additional benefit
policies, money back, group insurance, key men insurance policy and so on.
Property policy, fire, marine, stock, and theft insurance are some examples of
general insurance policies.
Co-operative Banks can do the business as allowed in the Banking Regulation

Act, 1949 (AACS) and as permitted by the RBI. RBI has permitted the Co-
operative banks to enter into the insurance business with ‘referral
arrangements’ with the insurance company or as a ‘corporate agent’ of the
insurance company.
The term ‘bancassurance’ came from the terms ‘bank’ and ‘insurance’.
Bancassurance means selling insurance product through banks. Bank and
insurance company come up in a partnership wherein the bank sells the
insurance products. In this, the role of banks is only to market and sell the
insurance products. Banks cannot take the responsibility of underwriting i.e.,
commitment for insurance payment and its settlement and payment.
Banks’ main business being accepting deposits and lending, there is a lot of
scope for the banks to deal with insurance business. In fact, banks have their
own assets and they need to be protected with proper and adequate insurance
coverage. They have a number of customers both depositors and borrowers.
Further, banks do obtain appropriate securities while lending. Those
security/assets need insurance coverage and protection. There are huge
opportunities for banks in marketing and selling insurance products.
Besides, over the years, banks are dealing with number of customers. They
offer variety of banking products. Obviously, when a bank offers additional
products like insurance, mutual funds, etc., it will be in a better position to
convince its customers. This brings additional source of revenue for the banks
as well.
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Banks with Referral Arrangement with Insurance companies
Here, bank only refers the business to the insurance company with whom it
has tie-up arrangements. For this, the bank gets commission from the
insurance company but they do not have any insurance liability.
Bank having Corporate Agency for Insurance
Under the corporate agency of insurance business, the bank does the work
till the issuance of the policy. The bank contacts the party interested in taking
an insurance policy, collects all the details and arranges to issue the policy
on behalf of the insurance company. The responsibility of claim settlement is
with the insurance company. Bank will be responsible as agent of the
insurance company, if the negligence is proved while issuing the policy.
Crop insurance
To provide financial support to the farmers in the event of failure of crops as

a result of natural calamities, Crop Insurance Scheme was introduced in the
country with effect from Kharif, 1985. Agriculture Insurance Company of
India Limited (AIC) was established by Government of India in 2002-03 for
implementation of agricultural insurance schemes. The crop insurance was
carried out initially by the four public sector insurance companies. But over
the years, the scheme has become quite popular and with the opening of the
sector to the private players, private insurance agencies are also involved in
the scheme. As per the information available, around 4 crore farmers have
been covered under the current scheme known as “Pradhan Mantri Fasal
Bima Yojana” (PMFBY)13.
Insurance as a part of financial inclusion
Life insurance and health insurance have been included as part of financial
inclusion efforts as the penetration of insurance in India is quite low. For this
purpose, simple insurance products have been introduced at a nominal
premium. Two such schemes in this regard are as under:
i. Pradhan Mantri Suraksha Bima Yojana (PMSBY)
The Scheme is available to people in the age group of 18 to 70 years with a

bank account, who give their consent to join / enable auto-debit on or before
31st May for the coverage period 1st June to 31st May on an annual renewal
basis. The risk coverage under the scheme is Rs.2 lakh for accidental death
and full disability and Rs. 1 lakh for partial disability. The premium of Rs. 12
13
https://pmfby.gov.in/ext/rpt/ssfr_17
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per annum is to be deducted from the account holder’s bank account through
‘auto-debit’ facility in one installment.
ii. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
Under this scheme, the life cover of Rs. 2 lakh is available in case of death
due to any reason for a nominal premium of Rs 330 per year. The PMJJBY
is available to people in the age group of 18 to 50 years having a bank account
who give their consent to join / enable auto-debit.
Regulatory Authority for Insurance
Insurance business does not come under the purview of RBI. The regulator
for the Insurance sector is Insurance Regulatory and Development Authority
of India (IRDAI). The charges of insurance premium and commission to be
passed on to the banks by the insurance companies are the issues, which
come under IRDAI jurisdiction. IRDAI Head Office is at Hyderabad.
2.1.6.5 Let us sum up
Financial system is one of the important support systems for any economic
development. A well-developed banking and financial sector extends support
for the smooth functioning of many other sectors. Besides banks, Money
Market, Capital Market, Mutual Funds and Insurance companies are
important components of ‘financial system’. All of them will have to be active
so that the benefits could be derived by one and all and it could help in
economic development of the country.
2.1.6.6 Keywords
Money Market, Capital Market, Debt instruments, equity, shares,

debentures, call money, Commercial Paper, Certificate of Deposit, Primary
Market, /Secondary Market, Mutual Fund, Life Insurance, Non-Life
Insurance, RBI, NSE, SEBI, IRDAI, PMFBY.
2.1.7 Check your progress -questions
State True or False:
1. A financial market can be defined as the market in which financial

assets are created or transferred.
2. A reduction in the SLR by the RBI will reduce credit flow into the system
3. The debt market consists of two segments, the government securities

market and the corporate debt market.
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4. Convertible debenture holder can never become the share holder at a
later date.
5. Under Pradhan Mantri Suraksha Bima Yojana (PMSBY) life insurance

coverage of Rs 2 lakh in case of accidental death is available for a
small premium amount of Rs 12/- per year.
6. Repo rate is the rate at which the RBI lends short-term money to the
banks.
7. Reserve Bank of India is the regulator of stock exchanges.
8. Agriculture Insurance Company of India Limited (AIC) has been formed

by GoI for implementation of agricultural insurance schemes.
01. True 02. False 03. True 04. False 05. True 06. True 07. False
08. True
2.1.8 Terminal/ Multiple Choice Questions
1. Financial market in any country comprises of:
a. Money Market
b. Forex Market
c. Capital Market
d. All the above
2. What is correct statement about ‘Call/ Notice Money’ market?
a. Here money is lent for very short period (mostly one day)
b. Under this facility mostly the banks borrow for meeting statutory or
urgent liquidity needs
c. Both (a) and (b)
d. None of the above.
3. Treasury bills (T Bills) are issued by:
a. Scheduled commercial banks
b. Regional Rural Banks
c. Government of India
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d. Multi-National Companies.
4. Certificate of Deposits can be issued by
a. Scheduled commercial banks
b. Regional Rural Banks
c. Local Area Banks
d. Multi- National Company.
5. RTGS full form is :
a. Real Time Gross Settlement
b. Realistic Term Generation Scheme
c. Regional Transfer and Gross Settlement
6. The regulator of stock exchanges in the country is:
a. RBI
b. NABARD
c. SEBI
d. Government of India
7. The main stock exchange(s) in the country is/ are:
a. Bombay Stock Exchange
b. National Stock Exchange
c. Both (a) and (b)
8. What is ‘G-Sec’?
a. G-Sec means Government Securities- debt instruments
b. These are sovereign instruments with the highest security of payment

of interest and principal
c. Banks invest in these instruments as they qualify for SLR
d. All the above
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9. A public limited company is coming out with an Initial Public Offer (IPO)
and a person obtains his/her shares by applying.
a. In Primary Market
b. Secondary Market
c. Money Market
d. None of these
10. Debenture holder is considered as the
a. Owner of the company
b. Creditor of the company
c. Member of the company
d. Debtor of the company
Key to terminal/ Multiple Choice Questions
01. (d) 02. (c) 03. (c) 04. (a) 05. (a) 06. (c) 07. (c) 08.
(d) 09. (a) 10. (b)
IIBF (Indian Institute for Banking and Finance) (2008) - Principles & Practices
of Banking – IIBF, Mumbai
IIBF Bank Financial Management – IIBF, Mumbai
Co-operative Banking – IIBF, Mumbai
Siddhartha Saha (2017) India’s Financial System and Markets, Published by

Tata McGraw Hill
RBI Website: https://rbi.org.in
IRDAI Website: https://www.irdai.gov.in
SEBI Website: https://www.sebi.gov.in
104
2.2 Lesson No. 2 Reserve Bank of India & NABARD
2.2.1 Objectives
2.2.2 Introduction
2.2.3 Role & Functions of RBI
2.2.4 Developmental and Promotional Functions of RBI
2.2.5 Regulatory and Supervisory Functions of Reserve Bank of India

2.2.6 NABARD
2.2.6.1 Genesis and Historical Background
2.2.6.2 Vision, Mission, Role and Functions
2.2.6.3 Activities of NABARD
2.2.7 Let Us Sum Up
2.2.8 Keywords
2.2.9 Check Your Progress -questions
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2.2.1 Objectives
The objectives of this lesson are to understand
• The importance of Reserve Bank of India

• Importance of NABARD in the financial system
• Their role and functions.
2.2.2 Introduction
Every system needs an apex body to ensure smooth functioning. As far as

banking is concerned in our country, Reserve Bank of India (RBI) has the
Apex Bank status. This is the Central Banking authority of the Indian
Financial System. RBI was established to function as the Central Bank of the
country in the year 1935 as per RBI Act of 1934. Its functions include:
"..to regulate the issue of Bank Notes and keeping of reserves

with a view to securing monetary stability in India and generally
to operate the currency and credit system of the country to its
advantage.”
Reserve Bank has significant powers and duties to perform including

maintaining monetary and financial stability, developing and maintaining
stable payment system, promoting and developing financial infrastructure
and regulating or controlling the financial institutions. It also ensures that
proper guidance and support are being extended to the banks to enable them
to function effectively.
2.2.3 Role & Functions of RBI
(i) Monetary authority: The monetary authority refers to the use of

instruments under the control of RBI to regulate the availability, cost
and use of money and credit. Its main objectives are:
• Maintaining price stability
• Ensuring financial stability
• Ensuring adequate flow of credit to the productive sectors of the

economy to support economic growth.
The RBI uses the following measures to have proper control and monitoring.
a. Cash Reserve Ratio: RBI requires banks to maintain a certain

amount of cash in reserve as a percentage of their deposits, known
as Cash Reserve Ratio (CRR), to ensure that banks have sufficient
liquidity (cash) to cover customers’ withdrawals. Depending upon
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the need, RBI either increases this ratio or reduces. As of
September 2022 the CRR is 4.5%14.
b. Statutory Liquidity Ratio: Statutory Liquidity Ratio (SLR) refers to

the amount that the banks are required to maintain in the form of
cash, or gold or govt. approved securities before providing credit to
the customers. SLR aims to restrict the expansion of bank credit;
for the investment by banks in Government securities and to ensure
solvency of banks. The SLR is not maintained with the RBI, but with
banks themselves. As of September 2022 the SLR is 18.0%.
CRR and SLR are the traditional tools used by RBI as monetary
instruments for controlling money flow or liquidity and credit flow
in the economy. They also help in protecting the banking system
from sudden unforeseen risks.
c. Bank Rate: It is the rate at which RBI is ready to buy or rediscount

bills of exchange or other commercial papers. If the Bank Rate is
high, it implies that the access to central bank money is costlier.
Bank Rate broadly reflects the cost of funds in the medium term. As
of September 2022, the Bank Rate is 5.65%.
d. Open Market Operations (OMO): OMO means the buying and

selling of securities in the market by the Central Bank, from/to the
public and banks, on its own account. RBI employs OMO for
liquidity management purposes. It could either inject liquidity or
withdraw liquidity depending upon market conditions. ‘Liquidity
Adjustment Facility’ (LAF) and Repo operations are conducted as
part of OMO.
• Liquidity Adjustment Facility (LAF): LAF was introduced in the

year 2000 to act as a liquidity adjustment mechanism and to
transmit interest rate signals. LAF is a tool used in monetary policy
which allows banks to borrow money against government
securities as collateral through repurchase agreements. This
agreement allows banks to respond to liquidity pressures and is
used by Government to assure basic stability in the financial
markets. LAF helps banks in resolving short term cash shortages
during periods of economic instability or from any other form of
stress. Banks use eligible securities as collateral to meet their
short term requirements and remain stable.
14
All the rates mentioned are taken from RBI Website (https://rbi.org.in) in June 2021. Please refer to the
website for latest information.
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• Repo / Reverse Repo (Repurchase facility): Under LAF scheme,
‘Repo auctions’ (meaning repurchase) are conducted by RBI for
absorption of liquidity and ‘Reverse repo auctions’ are conducted
for injection of liquidity or lending to banks. These auctions are
conducted on a daily basis. The underlying mechanism involves
sale and repurchase of securities. When it sells securities, it
withdraws liquidity from the market and when it repurchases, it
injects liquidity into the system. Repo rate is the rate at which the
RBI lends short-term money to the banks (5.9% as on september
2022 ). Reverse Repo rate is the rate at which banks park their
short-term excess liquidity with the RBI (3.35% in sept. 2022).
These rates under the liquidity adjustments facility determine the
‘corridor’ for short term money market (interest rates). In turn,
this is expected to trigger movements in other segments of the
financial market and the real economy.
All these rates are subject to changes and cannot be constant. Various
factors influence RBI’s decision to change the rate of Repo, Reverse
Repo and Bank Rate from time to time.
(ii) Issue of Currency Notes: RBI has the sole right/ authority/
monopoly to issue currency notes except one rupee note. These
currency notes are legal tender issued by RBI. RBI has power not
only to issue and withdraw but even to exchange these currency
notes for other denominations. It issues these notes against the
security of gold bullion, foreign securities, rupee coins, exchange
bills and promissory notes and Government of India bonds. At
present, notes in India are issued in the denomination of ₹1, ₹2, ₹5,
₹10, ₹20, ₹50, ₹100, ₹200, ₹500 and Rs.2000. Barring ₹1, all other
notes are issued by RBI.
(iii) Banker’s Bank: RBI being the apex monetary institution, has
obligatory powers to guide, help and direct other commercial banks
in the country. RBI can control the volumes of banks reserves and
allow other banks to create credit in that proportion. As and when
banks need money they can approach RBI and as the ‘lender of the
last resort’, RBI extends its support to such banks to ensure smooth
functioning.
(iv) Banker to the Government: RBI, being the apex monetary body,
has to work as an agent of the Central and State Governments. It
performs various banking functions such as accepting deposits,
taxes and making payments on behalf of the government. It works
as a representative of the government even at the international level.
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It maintains government accounts and provides financial advice to
the government. It manages government public debts and maintains
foreign exchange reserves on behalf of the government. It provides
overdraft facility to the government, when it faces financial crunch,
(when the expected revenues are not generated) on a temporary basis
by extending Ways and Means Advances (WMA).
(v) Exchange Rate Management: It is an essential function of RBI. It

has to prepare domestic policies to maintain stability in the external
value of rupee. Also it needs to prepare and implement the foreign
exchange rate policy to help in attaining the exchange rate stability.
In order to maintain the exchange rate stability, demand and supply
of the foreign currency are to be brought closer to each other.
(vi) Credit Control Function: Banks in the country provide credit

according to the demand in the economy. Unchecked or unregulated
credit leads to inflationary cycles in the economy. On the other hand
if the credit is less than the required limit, then it affects the growth
of the economy. As a central bank of the nation, RBI has to look for
growth with price stability. It therefore regulates the credit creation
capacity of all the banks by using various credit control tools.
(vii) Supervisory Function: RBI has been given vast powers for
supervising the banking system in the country. It has powers to
issue licenses for setting up new banks, opening new branches, to
decide minimum reserves, to inspect functioning of banks and to
guide and direct the banks in India. It conducts periodical
inspections and audit of the banks in India.
2.2.3.1 Developmental and Promotional Functions of RBI
i. Development of the Financial System: The financial system

comprises of the financial institutions, financial markets and financial
instruments. A sound and efficient financial system is a precondition
for the rapid economic development of the nation. RBI has encouraged
establishment of main banking and non-banking institutions to cater
to the credit requirements of diverse sectors of the economy.
ii. Development of Agriculture and rural areas: RBI's major objectives

are to maintain price stability and maintain growth momentum,
especially employment generation. In this endeavour, agriculture plays
a critical role since agriculture is necessary for food security and is
source of livelihood of majority of rural population. Agricultural
commodities have a relatively significant weightage in price indices in
our country and also in anchoring inflation expectations. RBI plays an
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important role in developing agriculture and rural sector in the country
by incentivizing credit flow to agriculture and rural development
activities by way of its policies including establishment of focused banks
like Regional Rural Banks, Small Finance Banks, etc. It has given a
major boost to agriculture and rural development by setting up National
Bank for Agriculture and Rural Development (NABARD) in the year
1982.
iii. Provision of Industrial Finance: Rapid industrial growth is the key to

faster economic development. In this regard, the adequate and timely
availability of credit to small, medium and large industries is very
significant. RBI has been instrumental in setting up special financial
institutions (like IDBI, SIDBI) to cater to the credit needs of the sector.
iv. Provisions of Training: RBI provides essential training to the staff of

the banking industry. It has been instrumental in setting up the
bankers' training colleges at several places. College of Agricultural
Banking (CAB) at Pune is a highly reputed training institution of RBI.
v. Collection of Data: Being the apex monetary authority of the country,

the RBI collects, processes and disseminates statistical data on several
topics, which includes interest rate, inflation, savings, investments etc.
This data is useful for researchers and policy makers. The database of
RBI is available in public domain at its website
(https://www.rbi.org.in).
2.2.3.2 Regulatory and Supervisory Functions of R B I
Reserve Bank of India is the Central Bank of the country and hence is the
regulator and supervisory authority for the banks. It has authority to regulate
and administer the entire banking and financial system. Some of its
supervisory functions are:
i. Granting license to banks: RBI grants license to banks for carrying on

banking business. License is also given for opening new branches and
extension counters.
ii. Bank Inspection: To ensure whether the directions of RBI are followed
and the banks are doing their respective functions effectively, RBI
conducts inspections of banks from time to time. Inspections of
Regional Rural Banks and Rural Cooperative Banks, however are
conducted by NABARD.
iii. Control over Non-Banking Finance Companies (NBFCs): It is

mandatory that every NBFC should be registered with RBI to commence
or carry on any business as non-banking financial institution. The
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regulatory and supervisory objective of RBI, is to ensure healthy growth
of the financial companies and to ensure that these companies
function as a part of the financial system within the policy
framework, in such a manner that their existence and functioning do
not lead to systemic aberrations; and that the quality of surveillance
and supervision exercised by the Bank over the NBFCs is sustained by
keeping pace with the developments that take place in this sector of
the financial system.
iv. Implementation of the Deposit Insurance Scheme through DICGC:

RBI has set up the Deposit Insurance and Credit Guarantee
Corporation (DICGC) in 1978 in order to protect the deposits of small
depositors and protect banks from credit default. The DICGC closed its
credit guarantee function in 2003 and since then, only deposit
insurance is being offered. The basic scheme of insuring deposits of
DICGC was for Rs 1 lakh for the depositors which has been increased
to Rs 5 lakh during February 2020. The scheme is available to all those
banks which are registered with DICGC.
2.2.4 National Bank for Agriculture and Rural Development (NABARD)
2.2.4.1 Genesis and Historical Background
The importance of institutional credit in boosting rural economy has been

clear to the Government of India right from its early stages of planning.
Therefore, the Reserve Bank of India (RBI) at the advice of the Government of
India, constituted a Committee to Review the Arrangements For Institutional
Credit for Agriculture and Rural Development (CRAFICARD) to look into these
critical aspects. The Committee was formed on 30 March 1979, under the
Chairmanship of Shri B. Sivaraman, former member of Planning Commission,
Government of India. The Committee’s interim report, submitted on 28
November 1979, outlined the need for a new dedicated organisation for
providing undivided attention, forceful direction and pointed focus to credit
related issues linked with rural development. Its recommendation was
formation of a unique development financial institution which would address
these aspirations. Based on these recommendations, formation of National
Bank for Agriculture and Rural Development (NABARD) was approved by the
Parliament through Act 61 of 1981.
NABARD came into existence on 12 July 1982 by transferring the agricultural
credit functions of RBI and refinance functions of the then Agricultural
Refinance and Development Corporation (ARDC). It was dedicated to the
service of the nation by the then Prime Minister Smt. Indira Gandhi on 05
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November 1982. Consequent to the revision in the composition of share
capital between Government of India and RBI, NABARD today is fully owned
by Government of India. (NABARD, 2021)
2.2.4.2 Role and Functions
Role and Functions: NABARD has been set up as an apex Development

Bank with a mandate for facilitating credit flow for promotion and
development of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts. It also has the mandate to
support all other allied economic activities in rural areas, promote integrated
and sustainable rural development and secure prosperity of rural areas. In
discharging its role as a facilitator for rural prosperity, NABARD has been
entrusted with building an empowered and financially inclusive rural India
through specific roles and functions which can be categorized broadly into
three categories, Viz., Financial, Developmental and Supervision. These broad
areas can be elaborated as under:
• Financial:
o Promote the principles of “Development through credit” by
providing refinance to lending institutions in rural areas
o Supporting Government of India, state governments and
certain other institutions for infrastructure development
o Providing innovative solutions to the problems of rural India
either directly or through its subsidiaries or partner
institutions
• Developmental:
o Bringing about or promoting institutional development
o Acting as a coordinator in the operations of rural credit
institutions
o Extending support and help to the government, RBI and other
organizations in matters relating to rural development
o Offering capacity building, training, research, and
information/ data to banks, cooperatives and other
organizations and people working in the field of agriculture
and rural development
o Helping the state governments in agriculture and rural
development
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• Supervision:
o Acts as supervisor for rural cooperative banks and RRBs
2.2.4.3 Activities of NABARD
NABARD's activities can be broadly classified as under:
• Credit related
• Developmental and promotional activities including Institutional
Development and capacity building
• Supervisory
i. Credit related Activities
NABARD's credit related activities cover planning, dispensation and

monitoring of credit.
These activities involve:
• Framing policies and guidelines for rural financial institutions

• Providing credit facilities to eligible organizations
• Preparation of “Potential-Linked Credit plans” annually for all
districts of the country for identification of credit potential and “State
Focus Papers” at state level for guidance and helping all the banks
and various departments of state governments
• Monitoring the flow of ground level rural credit
NABARD doesn’t finance directly to the farmers or other individual
entrepreneurs but it supports financing banks by way of concessional /low
cost ‘Refinance facilities’ which help improve the liquidity and profitability of
the banks on a long term basis. The refinance facilities provided by NABARD
to the rural cooperatives can be grouped as under:
Types of Refinance Facilities

Agency Credit Facilities
(i) Short-term Co-operative • Short Term (Seasonal Agricultural
Structure (State Co-operative Operations) limit- for crop loans
Banks, District Central Co-
• The Short Term (Others) Limit- for
operative Banks, Primary
purposes other than crop loans –e.g.,
Agricultural Credit Societies)
stocking of fertilizers at primary
societies, artisans requirements etc.
• The Short term (Weavers) limit for
weavers coop. for production and
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marketing purposes including State
Handloom Development Corporations
• Medium-term (conversion) loans-
when crop losses occur due to
drought, floods, etc.
• Term loans for investment purposes-
like dairy, poultry, warehousing, cold
store etc.
• Financing working capital by State
Co-operative Banks
• Direct refinance to Cooperative Banks
(ii) Long-term Co-operative • Term loans for investment
Structure (State Co-operative purposes
Agriculture and Rural
Development Banks, • Pilot scheme for financing short
Primary Co-operative term loans in three states
Agriculture and Rural
Development Banks)
Besides the cooperative banks, refinance facilities are provided to Regional

Rural Banks and commercial banks also for agriculture and rural
development activities.
Rural Infrastructure Development
With the objective of assisting State Governments in the completion of ongoing

rural infrastructure projects and to take up new infrastructure projects, the
Rural Infrastructure Development Fund (RIDF) was set up with NABARD in
1995-96 with contributions from commercial banks by way of deposits. The
commercial banks which have shortfall in achieving Priority sector lending
target, are required to deposit the shortfall for RIDF with NABARD besides
some other eligible financial institutions. That becomes the resource pool for
providing concessional finance for rural infrastructure projects of the state
governments like rural roads, bridges, schools, health infrastructure etc. This
facility has helped all the state governments in financing projects of more than
Rs 3 lakh crores.
ii. Developmental and Promotional Activities including Institutional

Development and Capacity building
The activities include:
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• Capacity building of cooperative banks and Regional Rural Banks to
improve management, governance and business for sustainable
viability
• Helping cooperative banks and RRBs in adopting Core Banking
Solution (CBS) for bank operations. Besides CBS, support is
extended to cooperatives and RRBs for adoption of technology for
financial inclusion and financial literacy.
• Entering into MoU with State Governments and cooperative banks
specifying their respective obligations to improve the affairs of the
banks in a stipulated timeframe.
• Helping RRBs and the sponsor banks to enter into MoUs specifying
their respective obligations to improve the affairs of the RRBs in a
stipulated timeframe.
• Facilitate preparation of Development Actions Plans (DAPs) for the
coop banks and RRBs and monitoring implementation of
development action plans of banks and fulfillment of obligations
under MoUs.
• Providing Organisation Development Intervention (ODI) to
cooperative banks and RRBs.
• Helping cooperatives in improving capacity of training institutions of
cooperatives by accreditation with CPEC (Centre for Professional
excellence in Cooperatives) at BIRD Lucknow. Besides this, faculty
development and other trainings for faculty and staff of cooperatives
are also conducted/ sponsored.
• Providing financial support for the training institutes of cooperative
banks.
• Providing training for senior and middle level executives of
commercial banks, Regional Rural Banks and cooperative banks.
• Providing financial assistance to cooperative banks for building
improved management information system, computerization of
operations and development of human resources.
• Supporting Self Help Group (SHG) movement since 1992 and
helping crores of poor women through this movement.
• Supporting Farmer Producer Organisation (FPO) movement by
promotional and financial support.
• Provide consultancy services in the field of agriculture and rural
development and other related matters in or outside India, on such
terms and against such remuneration, as may be agreed upon.
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• Helping Government of India and state governments in
implementing schemes where subsidy is routed through banks.
• NABARD also plays a role in Climate Change projects as it is
National Implementing Entity for 3 important funds- ‘Adaptation
Fund’ and ‘Green Climate Fund’ of the United Nations Framework
Convention on Climate Change (UNFCCC) and National Adaptation
Fund for Climate Change (NAFCC) of India
• Generally providing support, guidance and help in all the matters of
agriculture and rural development to major stakeholders.
Supervision related activities
• Undertakes inspection of RRBs and Cooperative Banks (other than

urban/primary cooperative banks) under the provisions of Banking
Regulation Act, 1949.
• Undertakes inspection of State Cooperative Agriculture and Rural
Development Banks (SCARDBs) and apex non-credit cooperative
societies on a voluntary basis.
• Undertakes portfolio inspections, systems study, besides off-site
surveillance of Cooperative Banks and RRBs.
• Provides recommendations to RBI on issue of licenses to Cooperative
Banks, opening of new branches by State Cooperative Banks and
RRBs.
• Administering Credit Monitoring Arrangements (CMA) in State
Cooperative Banks and DCCBs.
It may be seen from the above that NABARD performs a wide variety of roles
and functions and has a very important role to play in the Indian economy.
2.2.5 Let us sum up
As the Central Bank of the country, Reserve Bank of India, among other
aspects, ensures smooth functioning of banking system in the country. As a
regulator having vast powers, RBI guides and directs the banks and financial
institutions. It has control on the credit availability in the system, money
supply and monetary position. RBI also oversees the overall functioning of
banking in the country.
NABARD is another important apex development finance institution dedicated

for the cause of agriculture and rural development. Its vast activities classified
in three categories of financial, developmental and supervisory activities have
helped the development of agriculture and rural sector in several ways.
NABARD ensures the appropriate flow of credit to priority sector.
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2.2.6 Keywords
Reserve Bank of India, CRR, SLR, Bank Rate, Repo and Reverse Repo Rates,
Functions, Role, NABARD, Refinance, Regulator, CRAFICARD, Investment
Credit, Bank Inspection , cooperative bank, RRBs, Development Action Plan
State True or False
1. CRAFICARD was associated with Reserve Bank of India
2. NABARD was established in the year 1982
3. RBI was established in the year 1947
4. Reserve Bank of India is the Central Bank of the country and regulator
of all the banks.
5. NABARD undertakes portfolio inspections, systems study, besides off-

site surveillance of cooperative banks and Regional Rural Banks (RRBs)
6. RBI prepares, on annual basis, rural credit plans for all districts in the
country; these plans form the base for annual credit plans of all rural
financial institutions
7. The RBI controls credit flow in the economy through SLR
01. False 02. True 03. False 04. True 05. True 06. False 07. True
2.2.8 Terminal/Multiple Choice Questions
01. The main functions of RBI are:
a. To regulate the issue of Bank Notes
b. Securing monetary stability of the country
c. Both (a) and (b)
02. What is correct statement with regard to CRR?
a. Full form of CRR is Cash Reserve Ratio
b. The purpose of CRR is to ensure that banks have sufficient liquidity

(cash) to cover customers’ withdrawals
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c. At present the CRR is around 4.5% (as of September 2022)
d. All of the above
03. What is correct statement with regard to SLR?
a. Full form of SLR is Statutory Liquidity Ratio
b. Increase in SLR aims to increase bank credit
c. Both (a) and (b)
04. Repo/ Reverse Repo facility by RBI means?
a. Repo rate is the rate at which the RBI lends short-term money to the
banks
b. Reverse Repo rate is the rate at which banks park their short-term
excess liquidity with the RBI
c. Both (a) and (b)
05. Which if the following is/are true regarding RBI?
a. Bankers Bank
b. Lender of the Last Resort
c. Banker to the Government
d. All of the above
06. Identify the incorrect one with regard to currency note (denomination)
issued by the Reserve Bank of India
a. Rs10
b. Rs 20
c. Rs250
d. Rs.500
07. NABARD was established in the year ____?
a. 1947
b. 1991
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c. 1982
d. 1951
08. NABARD was formed based on the recommendation of which committee?
a. Vaidyanathan Committee (Task Force on Revival of Cooperative

Credit Structure)
b. Sivaraman Committee (CRAFICARD- ‘Committee, to Review the

Arrangements for Institutional Credit for Agriculture and Rural
Development’)
c. Gorwala Committee (All India Rural Credit Survey Committee)
d. Khusro Committee (Agricultural Credit Review Committee)
09. NABARD’s role and functions are:
a. Providing refinance support to banks for agriculture, small-scale

industries and village industries
b. Acts as supervisor for rural cooperative banks and RRBs
c. Both (a) and (b)
10. How NABARD Refinance helps the banks?
a. It is at concessional rate hence improves profitability of the banks
b. It provides liquidity (resources) to banks for loan business
c. Both (a) and (b)
10. What is correct about RIDF ?
a. RIDF stands for ‘Rural Infrastructure Development Fund’
b. If a commercial bank is not able to meet the Priority Sector, it can

deposit the amount of shortfall in RIDF
c. Both (a) and (b)
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Key to terminal questions
01. (c) 02. (d) 03. (a) 04. (c) 05. (d) 06. (c) 07. (c) 08. (b) 09. (c)
10 c) 11. (c)
RBI web site: https://www.rbi.org.in
NABARD web site: https://www.nabard.org
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2.3 Lesson No. 3 Banking Industry
2.3.1 Objectives
2.3.2 Introduction
2.3.3 Types of Banks
2.3.3.1 Scheduled Banks
2.3.3.2 Non Scheduled Banks
2.3.3.3 Commercial Banks
2.3.3.4 Cooperative Banks
2.3.3.5 Other Cooperative Credit Institutions- PACS and ARDBs
2.3.3.6 Concluding comment about cooperatives
2.3.3.7 Regional Rural Banks
2.3.3.8 Payments Bank
2.3.3.9 Small Finance Banks
2.3.3.10 Development Banks

2.3.4 Priority Sector
2.3.4.1 Introduction and historical context
2.3.4.2 RBI Guidelines on Targets/Sub Targets of Priority Sector Lending

2.3.5 Monitoring of Priority Sector Lending targets
2.3.6 Non-achievement of Priority Sector targets
Let Us Sum Up
2.3.8 Keywords
2.3.9 Check Your Progress-questions
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2.3.1 Objectives
Objectives of this lesson are to understand
• The various types of banks in our banking system and their importance.
• The significance of Priority Sector Lending and
• Different types of Development Financial Institutions.
2.3.2 Introduction
Banking industry plays an important role in the development of the nation.

For rapid economic progress a robust financial sector is important. Banking
in India has a long history. The first bank, ‘Bank of Hindustan’ was
established in India in the year 1770. State Bank of India, the largest bank in
India, also has a long history as it originated as the Bank of Calcutta in 1806
and after several changes became State Bank of India in 1955.
Cooperatives- As far as cooperative banking is concerned, though the

Cooperative Societies Act was passed in 1904, the earliest known cooperative
credit union of India – called ‘Anyonya Sahakari Mandali’ was established in
1889 in the province of Baroda (Now Vadodara, Gujarat).
Indian Banking System has grown over the years, especially post
nationalization. The banking units are spread across the length and breadth
of the country. Subsequent developments witnessed the growth of private
sector banks. The structure of banking in the country is depicted in Figure
2.3.1.
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Figure 2.3.1: Structure of Banking in India
Reserve Bank of India
Scheduled Banks Non Scheduled Banks
Commercial Banks Cooperative Banks
Public Sector
Urban Cooperative Banks
Banks
Private Sector
Banks, SFB, Rural Cooperative Banks (State Coop Banks & DCCBs)
Payment Banks
Regional Rural Banks,
Foreign Banks
2.3.3 Types of Banks
The banking industry consists of the central bank viz., Reserve Bank of India,
commercial banks, including Regional Rural Banks (RRBs), and recently
started Small Finance Banks (SFBs) and Payment Banks and co-operative
banks. Development banks like NABARD, SIDBI, National Housing Bank
(NHB) and Export Import Bank of India (EXIM bank) also function to take care
of certain specific functions. Commercial and Co-operative banks are
classified into Scheduled and Non-scheduled banks.
2.3.3.1 Scheduled Banks
The ‘Second schedule’ of the RBI Act, 1934 contains a list of banks known as
‘Scheduled Banks’. A scheduled bank should have paid up capital and
reserves as prescribed by the Act. As per Sec 42 (6) of the RBI Act, 1934, the
required amount is Rs. 5 lakh. Today, the minimum capital required to start
a new bank is Rs. 500 crores. The ‘scheduled bank’ status would be available
only when the banking business is managed in a manner which, in the
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opinion of Reserve Bank of India, is not detrimental to the interests of its
depositors.
The scheduled banks are required to maintain Cash Reserve Ratio and
Statutory Liquidity Ratio, as prescribed from time to time, as per the
provisions of the Reserve Bank of India Act and the Banking Regulation Act.
Being under the direct control of RBI, they are entitled to receive refinance
form the Reserve Bank of India. They can have currency chest facility and
can, become a member and participate in, the clearing transactions. They are
required to submit various returns and statements as directed by Reserve
Bank of India, which helps RBI to have information about the functioning of
such banks. State Bank of India, nationalized banks, private sector
commercial banks, RRBs and many co-operative banks have scheduled
banks’ status.
2.3.3.2 Non-Scheduled Banks
Those banks which are not included in the second schedule of the Reserve
Bank of India Act are known as ‘Non-Scheduled Banks’. They are not entitled
to facilities like refinance and rediscounting of bills from RBI. They do not
enjoy the privileges that are available to the scheduled banks.
Notwithstanding this limitation, they can carry out banking activities like
deposit and advances etc., subject to certain terms and conditions. A number
of urban co-operative banks and the District Central Cooperative Banks figure
in this category.
2.3.3.3 Commercial Banks
Commercial bank network is well developed and well-connected in our

country. These banks offer all types of banking facilities to the general public
and others. The main business of banks is to accept deposits and utilize them
for the purpose of lending and/or investments. The banks also offer variety of
other secondary functions, including collection of negotiable instruments
(mainly cheques), offering safe deposit locker facility, remittance facilities,
issuing of Bank Guarantees, opening of Letters of Credit, providing Executor
& Trustee services and so on. Many banks have set up subsidiaries for specific
activities like housing finance, insurance, credit card, share trading, etc.
These banks have been providing various types of other facilities such as
Automated Teller Machines (ATM), ATM card cum Debit cards, Credit Cards,
e-banking, bill payments, cross-selling of insurance and mutual fund
products, etc. Commercial banks offer variety of deposit products and engage
themselves in giving loans and advances to number of borrowers. With the
introduction of Core Banking Solution (CBS), the banks are in a position to
offer banking facilities across the country from any branch.
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These banks provide credit facilities for manufacturing, trading and other
business activities. Besides, consumer loans, educational loans, housing
finance, finance for vehicles etc., are also provided to individuals. These banks
also extend credit support for agriculture and rural developmental activities,
services to Non-Resident Indians and Trade Finance.
2.3.3.4 Co-operative Banks
Cooperative banks are unique institutions which are owned by people who
are owners (shareholders) as well as customers of the bank. These banks are
registered under Cooperative Societies Act of the state where they operate or
Multistate Cooperative Act- if they operate in more than one state. However,
to function as a bank, they have to obtain a license from RBI. Thus they are
governed by two authorities – the cooperation department and the RBI- this
is called ‘Dual Control’, which puts certain limitations on these banks. The
co-operative banks are managed by the Board of Directors on the principles
of co-operation, self-help and mutual help. They function as per rule of ‘one-
member- one vote’. On the basis of the business they are engaged in, the
cooperative banks can be broadly classified as Rural Cooperative Banks and
Urban Cooperative Banks.
(i) Rural Cooperative Banks: Rural Cooperative Banks have the

main mandate of providing banking facilities (especially loans) to
farmers and other rural people. The Rural Cooperative Banks have
different structure in different states. It is called 3 tier- with State
Cooperative Banks (StCB) at state level, District Central Cooperative
Banks (DCCB) at district level and Primary Agricultural Cooperative
Societies (PACS) are at village level. This is the most common
structure. But in some states, cooperatives have two tier structure,
where DCCBs do not exist15. State Cooperative Banks have branches
across the state to deal with PACS. The third category of structure
is called ‘Unitary’ where the StCB is only existing and there are no
DCCBs or PACS and the StCB directly deals with the customers
through its branches.
But the most important part of Rural Cooperative credit structure

is the Primary Agricultural Cooperative Societies (PACS) which work
at the village level and provide all the banking (loans and deposits)
15
In Kerala the structure has been changed in 2020 from 3 tier to 2 tier with the merger of 13 DCCBs into State
Cooperative Bank – named “Kerala Bank”. One DCCB- Mallapuram DCCB has however not merged with the
Kerala Bank.
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as well as other services like fertilizer, pesticide supply, public
distribution system, consumer store etc..
The Rural Cooperative Banks’ structure is vast across the country

with 33 StCBs, 363 DCCBs and 95995 PACS. (NAFSCOB, 2021)
At one point of time, the cooperatives were the major provider of

agricultural credit. These banks have witnessed lot of adverse
developments over the years and their share in agricultural credit
has drastically declined. The NABARD Annual report has mentioned
that the share of cooperative banks in agricultural credit was 39.5%
in the year 1999-2000, which has declined to 10.9% over 20 years
in 2019-20 (NABARD, 2020). The cooperative banks need to plan out
strategies for improving their share.
(ii) Urban Cooperative banks: There were 1544 Urban Cooperative

Banks (UCB) in the country in 2019. However, the number is
declining gradually over the years. It was 1926 in 2004. The UCBs
fall in two categories – the majority are registered under the State
Coop Society Acts of their respective state and a few are registered
under ‘Multi-state cooperative Act’. The break up of single state and
multi-state UCBs is presented in Table 2.3.1.
Table 2.3.1: Number of single state and multi-state UCBs
Category Scheduled UCBs Non-scheduled UCBs Total

Single state 20 1466 1486
Multi-state 34 24 58
Total 54 1490 1544
It may be seen from the Table 2.3.1 that most of the UCBs operate in a single
state. In fact, many of the UCBs operate as a single branch bank. Multi-State
Urban Co-operative Banks offer almost all the services being made available
by the major commercial banks.
2.3.3. 5 Other cooperative credit institutions- PACS and ARDBs
The discussion on cooperative banks will not be complete without a mention

of at least 2 categories of Cooperative credit institutions – Primary Agricultural
Credit Societies (PACS) and the Long-Term Coop Credit structure comprising
of Agriculture and Rural Development Banks (ARDBs). Both these institutions
are not ‘banks’ as they are not licensed by RBI but they play an important
role in rural credit.
(i) PACS: PACS are the grass-root level institutions working as extended
arm of the DCCBs and are ideally suited to become ‘one stop shop’ for
all the needs of rural society. There are 95995 PACS in the country
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covering almost all the villages and on an average one PACS covers
around 6 villages. These PACS have a total membership of 13.05 crore
as on 2022- thus almost all the farmers are members of these
institutions. They deliver credit, supported by the DCCBs, StCBs and
NABARD and have several other businesses as per the needs of the
rural people of the area and capacity of the local management.
(ii) ARDBs: ARDBs, earlier called Land Mortgage Banks/ Land

Development Banks (LDB) are the constituent of long-term cooperative
credit structure (LTCCS) which are involved in financing investment
credit needs of the agriculture like purchase of irrigation pump or
construction of tubewell etc. and rural industries. They are authorized
to take land on mortgage as the security. There are two categories of
ARDBs- the State Cooperative Agriculture and Rural Development
Banks (SCARDBs) and Primary Cooperative Agriculture and Rural
Development Banks (PCARDBs). There are 13 SCARDBs and 601
PCARDBs in existence in the country.
1. Concluding comment about cooperatives
It is pertinent to mention that cooperative banks are a part of the vast and
powerful superstructure of cooperative institutions which are engaged in
various credit and non-credit activities like production, processing,
marketing, servicing, distribution and banking in India. Co-operative banks
have also been made an integral part of the institutional framework of
community development and extension activities/ services which are
assigned the important role of delivering the results of economic planning at
the grass root levels.
2. Regional Rural Banks (RRBs)

The Regional Rural Banks (RRBs) are public sector institutions, regionally
based, rural oriented and engaged in commercial banking. They were first
setup in 1975 under the Regional Rural Banks Ordinance, 1975. The
ordinance was later replaced by the Regional Rural Banks Act, 1976. They
have been set up under the Act of Parliament. The main objective is to develop
rural economy through promotion of agriculture, trade, commerce, industry
and extending credit, particularly to the small and marginal farmers,
agricultural laborers, artisans and small entrepreneurs.
Each RRB is sponsored by a commercial bank, which has to hold 35%

shareholding whereas the Central Government and the respective State
Governments should hold 50% and 15% respectively. RRB is managed by the
Board of Directors and the Chairman is appointed by the sponsor bank. The
sponsor bank is empowered to monitor the progress of the RRB by inspection,
internal audit and scrutiny and suggest corrective measures.
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These institutions offer banking services with credit dispensation being
focused on the small and marginal farmers. At their peak, there were 196
RRBs in the country but for improving their performance, many of them have
been amalgamated through three rounds of restructuring and at present,
there are 43 RRBs in the country (GoI, 2021)16. The RRBs have emerged as
strong institutions after the amalgamation.
3. Payments Bank
Payments Banks are a new category of banks which are basically meant for
payments and remittances and not full-fledged banking. These banks came
in existence based on the recommendation of the “Committee on
Comprehensive Financial Services for Small Businesses and Low Income
Households”, headed by Shri Nachiket Mor. The report was submitted in 2014
and after accepting the recommendations, RBI invited applications for
payments Bank licenses in 2014 itself.
Payments Banks differ from normal ‘universal banks’ in several ways. They
can’t (i) accept deposits above Rs.1.00 lakh from one customer, (ii) issue credit
cards, (iii) open accounts of NRI and (iv) give any type of loan to its customers
or otherwise. They have to invest 75% of their demand deposits in Government
Securities. The objective of establishing Payments Bank in the country was to
further financial inclusion by providing Small Saving Accounts and
payments/remittance services to migrant labourers, low income households,
small business and other unorganized sectors using digital technologies.
The first Payments Bank license was given by RBI to Airtel Payments Bank
on April 11, 2016. Of the 7 payments banks that were given license to run the
business, Fino Payments Bank, India Post Payments Bank and Airtel
Payments Bank have started full-fledged operations. One Payment bank, viz.,
Aditya Birla Payments Bank has already closed its operations. Thus, as on
June 2021, there are 6 Payment Banks in the country.
4. Small Finance Banks

Small Financing Banks (SFBs) are the new categories of banks which came in
existence after RBI announced guidelines in 2016. The objectives of setting
up of small finance banks was to further financial inclusion by the following:
(i) Provision of savings vehicles primarily to unserved and underserved

sections of the population and
16
GoI Dept of Financial Services website : https://financialservices.gov.in/list-rrbs-functioning-country
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(ii) Supply of credit to small business units, small and marginal farmers,
micro and small industries and other un-organized sector entities
through high technology, low cost operations.
These banks are required to lend 75% of adjusted net bank credit to priority
sector and 50% of their loan portfolio should contain loan below Rs.25.00
lakh.
Existing non-banking financial companies (NBFC), micro finance institutions

(MFI), UCBs and local area banks (LAB) were allowed to become small finance
banks.
The Jalandhar-based Capital Local Area Bank Ltd (CLABL), under a new
name “Capital Small Finance Bank Limited” became the India's first small
Finance bank (SFB) on April 13, 2016. Presently there are 11 small finance
banks in the country. AU Small Finance bank, Jana Small Finance Bank,
Equitas Small Finance Bank are some of the small Finance Banks.
5. Development Banks
The functioning and support of the commercial banks, co-operative banks
and RRBs alone cannot serve the purpose of an efficient financial system.
While these banks predominantly take care of the financial needs of their
borrowers on a short term credit basis requirements, there needs to be
specialized and specific institutions to provide medium and long term
finances. This requires separate attention and huge funds outflow. Hence
there is a need to have development financial institutions in the financial
system.
Development banks are mainly engaged in supporting the developmental

activities by extending term finances on medium and long term basis.
Development banks were set up during the planning period in India. Their
emergence and growth have been a corollary to the adoption of a planned
economic development. NABARD is among various development banks which
also include Industrial Finance Corporation of India (IFCI), erstwhile
Industrial Credit and Investment Corporation of India (ICICI), erstwhile
Industrial Development Bank of India (IDBI), Small Industries Development
Bank of India (SIDBI), Export and Import Bank of India (EXIM Bank), National
Housing Bank (NHB), State Financial Corporations (SFCs) and Investment
Banks. These development banks which are essentially long term lending
institutions, play an important role in the development of the economy. It is
noteworthy that ICICI and IDBI have been transformed into commercial
banks. A mention about MUDRA ‘Bank’ needs to be made here. Micro Units
Development and Refinance Agency (MUDRA) Bank is a new institution
created in 2015 – though it is not classified as ‘a financial institution’, but it
129
is playing an important role by supporting small and micro-entrepreneurs.
The main development banks / institutions are discussed briefly below
(NABARD is not mentioned here as NABARD has already been discussed in
detail earlier):
Industrial Finance Corporation of India (IFCI)
IFCI has been the first term-lending institution, set up in July 1948 by
Government of India, to provide medium and long-term finance to large
industrial concerns in the private sector (corporate sector). Finance is
provided for setting up new industrial projects as also for expansion,
diversification and modernization.
Until the establishment of ICICI in 1956 and IDBI in 1964, IFCI remained
solely responsible for implementation of the Government’s industrial policy
initiatives. It made a significant contribution to the modernization of Indian
industries, export promotion, import substitution, pollution control, energy
conservation and generation through commercially viable and market-friendly
initiatives. It can grant long term loans repayable up to 25 years. IFCI has
been playing an important role in the development of the country.
Industrial Credit and Investment Corporation of India (ICICI)
ICICI was set up in 1955 as a public limited company under the sponsorship
of the World Bank. It was set up to encourage and provide support to the
corporate sector in India by way of medium and long term loans, technical
and management services, underwriting services for the issue of shares and
debentures and generally helping the industries by providing diversified
financial services.
In October 2001, the Board of Directors of ICICI and ICICI Bank approved the
merger of ICICI with ICICI Bank. Consequent to the merger, the ICICI group's
financing and banking operations, both wholesale and retail, were integrated
in a single entity. ICICI Bank is a privately owned company now with no
participation by the government in its share capital. Partly owned by the
Indian private sector and, partly by the foreign institutions, it adopts the
universal banking concept and extends all types of banking services including
the role played by a development financial institution.
Industrial Development Bank of India (IDBI)
IDBI was set up in July 1964 as a wholly owned subsidiary of the RBI. Later
on, it was delinked from RBI and became an organization wholly owned by
the government. Considered as the apex institution in the field of industrial
finance, it also acted as a development financing agency, in addition to its
work of coordinating, supplementing and monitoring the operations of other
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term lending institutions. It provided comprehensive services including
technical and administrative assistance for the companies, conducting
market and investment research and surveys, discounting/ rediscounting
long-term bills and promissory notes, etc.
In response to the felt need and on commercial prudence, it was decided to
transform IDBI into a Bank from 2004 and since then it has been functioning
as a bank.
Small Industries Development Bank of India (SIDBI)
Small Industries Development Bank of India (SIDBI) was set up in April 1990
to provide financial and non-financial support to small scale industries. It is
the principal financial institution for the promotion, financing and
development of the Micro, Small and Medium Enterprise (MSME) sector and
for co-ordination of the functions of the institutions engaged in similar
activities.
SIDBI facilitates policy and institutional environment that encourages

provision of financial services to poor people in a responsible manner. It also
provides refinance to banks and State Finance Corporations (SFCs) and State
Industrial Development Corporations (SIDCs).
National Housing Bank (NHB)
NHB was established in July 1988 as an apex level housing finance institution
as a wholly owned subsidiary of the RBI. The primary objective is to promote
housing finance institutions, at local and regional levels, in the private and
public sectors. It refinances housing loans under its refinance schemes for
scheduled commercial banks, co-operative banks, housing finance companies
and co-operative housing finance societies.
State Financial Corporations (SFCs)
In order to provide medium and long term credit to industrial undertaking

falling outside the normal activities of commercial banks, a central Industrial
Finance Corporation of India (IFCI) was set up under the Industrial Finance
Corporations Act, 1948. The state governments wished that similar
corporations could be set up in their states to supplement the work of IFCI.
The intention was that the State corporations would confine to financing
medium and small scale industrial and would, as far as possible, consider
only such cases which were outside the purview of IFCI. Accordingly, State
Financial Corporations (SFCs) were set up under State Financial Corporations
Act, 1951. There are 18 SFCs of which 17 were set up under the SFCs Act
1951, while Tamil Nadu Industrial Investment Corporation Ltd., was
incorporated under the Companies Act, 1956 and functions as a SFC.
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SFCs play an important role in their own state in the development of small
and medium enterprises to bring regionally balanced growth in the economy.
They act as a catalyst in small scale industrial growth by providing complete
consultancy, advisory, investment appraisal services, etc. They obtain funds
through loans from RBI, the State Governments and SIDBI. They also enjoy
refinance facilities from SIDBI. The activities of SFCs are under the overall
control and supervision of RBI.
It may be seen from above that India has a wide institutional structure for
supporting various sectors of the economy.
2.3.4 Priority Sector lending
2.3.4.1 Introduction and historical context
The banking industry in our country has been entrusted with the
responsibility of supporting the developmental efforts which are priority for
the nation. These sectors and activities are termed as ‘priority sectors’. As
finance is a very crucial input for development, banks are expected to support
these ‘priority sectors’ with financial support in the form of credit. Priority
Sector Lending refers to lending to those sectors of the economy which may
not get timely and adequate credit in the absence of this special dispensation.
Prior to the nationalization of banks in 1969, the most important sector of the
economy at that point in time i.e. agriculture was in need of funds but it was
not receiving credit from the commercial banks. Thus, in July 1966, the “All
India Rural Credit Review Committee” appointed by RBI, recommended that
the commercial banks should play a complementary role in extending the
rural credit. Although, this Committee’s report used the term ‘Priority Sector’,
it was not officially made the policy till then by RBI. Nonetheless, this moment
can be traced as the origin of Priority Sector Lending (PSL) in India. In 1969
the nationalization of commercial banks started and Lead Bank Scheme was
also introduced in 1969, both of which also gave lot of thrust to this idea.
However, the definition for PSL was only formalised by RBI in 1972. The RBI’s
definition and coverage of Priority Sectors for the banks has been undergoing
changes to align these guidelines with emerging national priorities and to
bring sharper focus on inclusive developments. RBI issues the guidelines as
‘Master Directions for Priority Sector Lending’ in exercise of the powers
conferred by Sections 21 and 35A read with Section 56 of the Banking
Regulation Act, 1949, as it considers it necessary and expedient in the public
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interest. The important highlights of the latest classification as per the ‘Master
Directions’ of RBI as modified in April 2021 are presented below17:
2.3.4.2 RBI Guidelines on Priority Sector Lending - Targets and

Classification
(Updated as on 29 April 2021)
1. These guidelines are applicable to which banks?
These guidelines apply to every Commercial Bank ,including RRB, Small

Finance Bank (SFB), Local Area Bank and Primary (Urban) Co-operative
Bank (UCB) other than Salary Earners’ Bank, licensed to operate in India
by the RBI
2. What are the different categories under priority sector?
Priority Sector includes the following categories:
(i) Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others
3. What are the Targets and Sub-targets for banks under priority
sector?
The targets and sub-targets for banks under priority sector are as follows:
Domestic commercial Foreign Regional Rural Small

banks (excluding banks Banks (RRBs) Finance
Categories RRBs and SFBs) and with less Banks (SFBs)
Foreign banks with 20 than 20
branches and above branches
17
RBI Master Directions FIDD.CO.Plan.BC.5/04.09.01/2020-21 dated 04 Sept 2020 updated 29 April 2021. Here
we have presented only the highlights as considered sufficient for the course. For full details please refer to
this Master Direction.
133
Total 40 per cent of 40 per 75 per cent of 75 per cent
Priority Adjusted Net Bank cent of ANBC or of ANBC or
Sector Credit (ANBC) or ANBC or CEOBE CEOBE
Credit Equivalent
CEOBE, whichever is whichever is
Amount of Off-
Balance Sheet whichever higher. higher.
Exposure (CEOBE)18, is higher.
whichever is higher.
Agriculture Not 18 per cent of 18 per cent
# applicable ANBC or of ANBC or
18 per cent of ANBC CEOBE, CEOBE,
or CEOBE, whichever whichever is whichever is
is higher. Within the higher. Within higher.
18 percent target for the 18 percent Within the
agriculture, a target target for 18 percent
of 10 percent* is agriculture, a target for
prescribed for Small target of 10 agriculture,
and Marginal percent* is a target of
Farmers (SMF). prescribed for 10 percent*
SMF. is prescribed
for SMF.
Micro Not 7.5% of ANBC 7.5%of

Enterprises 7.5 percent of ANBC applicable or CEOBE, ANBC or
or CEOBE, whichever whichever is CEOBE,
is higher. higher. whichever is
higher.
Advances Not 15 % of ANBC 12 %# of

12 percent# of ANBC
to Weaker applicable or CEOBE, ANBC or
or CEOBE, whichever
Sections whichever is CEOBE,
is higher
higher whichever is
# * Revised targets for SMFs and Weaker Section will be implemented

in a phased manner as indicated below with # * marks
For UCBs the norms are as under
18
Exposure to off balance sheet items is not common among cooperative banks but in
commercial banks it may appear. These are certain transactions which don't appear on the
balance sheet hence are clubbed under off-balance sheet exposure. Eg- Letters of
undertaking, leasing assets, letters of credit etc
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Categories Primary Urban Cooperative Bank
Total 40 per cent of ANBC or CEOBE, whichever is higher, which
Priority shall stand increased to 75 per cent of ANBC or CEOBE,
Sector whichever is higher, with effect from March 31, 2024. UCBs
shall comply with the stipulated target as per the following
milestones
Existing March March March March

target 31, 2021 31, 2022 31, 2023 31, 2024
40% 45% 50% 60% 75%
Micro 7.5 % of ANBC or CEOBE, whichever is higher
Enterprises
Advances 12 per cent# of ANBC or CEOBE, whichever is higher

to Weaker
Sections
# * Revised targets for weaker sections will be implemented in a phased

manner as indicated below
Financial Year Small and Marginal Weaker Sections target
Farmers target $ ^
2020-21 8% 10%
2021-22 9% 11%
2022-23 9.5% 11.5%
2023-24 10% 12%
$ Not applicable for UCBs
4.What is Adjusted Net Bank Credit (ANBC)
For the purpose of priority sector lending, ANBC denotes the outstanding
Bank Credit in India and is computed as follows :
Bank Credit in India I

Bills Rediscounted with RBI and other approved Financial II
Institutions
Net Bank Credit (NBC) III(1-II)
Outstanding Deposits under RIDF and other eligible funds IV
with NABARD, NHB, SIDBI and MUDRA Ltd in lieu of non-
achievement of priority sector lending targets/sub-targets +
outstanding Prioiry Sector Lending Certificates (PSLCs)
Eligible amount for exemptions on issuance of long-term bonds V
for infrastructure and affordable housing
Advances extended in India against the incremental FCNR VI
(B)/NRE deposits, qualifying for exemption from CRR/SLR
requirements
135
Investments made by public sector banks in the VII
Recapitalization Bonds floated by Government of India
Other investments eligible to be treated as priority sector (e.g. VIII
investments in securitised assets)
Face Value of securities acquired and kept under HTM IX
category under the TLTRO 2.0 (Targeted Long-Term Repo
Operations 2.0) and SLF-MF (Special Liquidity Facility for
Mutual Funds) announced to provide liquidity for mitigating
COVID impact
Bonds/debentures in Non-SLR categories under HTM category X
For UCBs: investments made after August 30, 2007 in XI
permitted non SLR bonds held under ‘Held to Maturity’ (HTM)
category
ANBC (Other than UCBs) III + IV- (V+VI+VII) +VIII - IX + X
ANBC for UCBs III + IV - VI - IX + XI
In simple words the net bank credit is the loans outstanding on a particular
date.
5. What are the categories under ‘Agriculture’?
The activities covered under Agriculture are classified under three sub-
categories viz. Farm credit, Agriculture infrastructure and Ancillary
activities.
Farm Credit: It includes crop loans including plantations and horticulture

and loans for allied activities, medium and long term loans to farmers for
agriculture. Under ‘Agriculture’ a new purpose of ‘Loans up to ₹5 crore per
borrowing entity to FPOs/FPCs undertaking farming with assured
marketing of their produce’ has been included. Further, Loans up to ₹75
lakh against pledge/hypothecation of agricultural produce (including
warehouse receipts) for a period not exceeding 12 months against Negotiable
Warehouse Receipts) NWRs/ Electronic Negotiable Warehouse Receipts
(eNWRs) and up to ₹50 lakh against warehouse receipts other than
NWRs/eNWRs are included in ‘Agriculture’.
Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e.
groups of individual SMFs directly engaged in Agriculture and Allied
Activities is part of PSL.
While DCCBs are allowed to lend to cooperative of farmers, UCBs are not
permitted to lend to co-operatives of farmers.
Agriculture Infrastructure: Loans for agriculture infrastructure (e.g.,

storage facilities, tissue culture, etc.) will be subject to an aggregate
sanctioned limit of ₹100 crore per borrower from the banking system.
Ancillary Services: These include the following:
136
• Loans up to ₹5 crore to co-operative societies of farmers for purchase
of the produce of members (Not applicable to UCBs)
• Loans up to ₹50 crore to Start-ups, as per definition of Ministry of
Commerce and Industry, Govt. of India that are engaged in agriculture
and allied services
• Loans for Food and Agro-processing up to an aggregate sanctioned
limit of ₹100 crore per borrower from the banking system
6. Whether limits are prescribed for loans sanctioned to Micro, Small

and Medium Enterprises to be classified as priority sector?
For classification under priority sector, no limits are prescribed for bank
loans sanctioned to Micro, Small and Medium Enterprises engaged in the
manufacture or production of goods under any industry specified in the first
schedule to the Industries (Development and Regulation) Act, 1951 and as
notified by the Government from time to time. The manufacturing
enterprises are defined in terms of investment in plant and machinery under
MSMED Act 2006.
Bank loans to Micro, Small and Medium Enterprises engaged in providing

or rendering of services and defined in terms of investment in equipment
under MSMED Act, 2006, irrespective of loan limits, are eligible for
classification under priority sector, w.e.f. March 1, 2018.
All loans to units in the KVI sector are eligible for classification under the
subtarget of 7.5 percent prescribed for Micro Enterprises under priority
sector.
Loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce

and Industry, Govt. of India that confirm to the definition of MSME are
included in priority sector.
Overdraft to Pradhan Mantri Jan-Dhan Yojana (PMJDY) account holders as

per limits and conditions prescribed by Department of Financial Services,
Ministry of Finance from time to time, will qualify as achievement of the
target for lending to Micro Enterprises.
7. What is the applicable limit and purpose for social infrastructure

loans under priority sector?
Bank loans up to a limit of Rs 5 crore per borrower for building social

infrastructure for activities namely schools, health care facilities, drinking
water facilities and sanitation facilities (toilets and water facilities, etc) in
Tier II to Tier VI centres are eligible for classification under priority sector.
Bank credit to Micro Finance Institutions (MFI) extended for on-lending to

individuals/ members of SHGs/ JLGs for water and sanitation facilities is
137
also eligible for classification as priority sector loans under ‘Social
Infrastructure’ subject to certain criteria.
8. What is the applicable limit and purpose for loans for renewable
energy under priority sector?
Bank loans up to a limit of Rs 30 crore for purposes like solar based power
generators, biomass based power generators, wind mills, micro-hydel plants
and for non-conventional energy based public utilities viz. street lighting
systems, and remote village electrification are eligible to be classified under
priority sector loans under ‘Renewable Energy’. For individual households,
the loan limit is Rs 10 lakh per borrower.
9. What is the loan limit for education under priority sector?
Loans to individuals for educational purposes including vocational courses

upto ₹1 million irrespective of the sanctioned amount are eligible for
classification under priority sector.
10. What is the limit for housing loans under priority sector?
Loans to individuals up to Rs 35 lakh in metropolitan centres (with

population of ten lakh and above) and loans up to Rs 2.5 million in other
centres for purchase/construction of a dwelling unit per family, are eligible
to be considered as priority sector provided the overall cost of the dwelling
unit in the metropolitan centre and at other centres does not exceed Rs 45
lakh and Rs 30 lakh, respectively. Loans up to ₹10 lakh in metropolitan
centres and up to ₹6 lakh in other centres for repairs to damaged dwelling
units are also part of priority sector. Housing loans to banks’ own employees
are not eligible for classification under priority sector.
11. What is included under Weaker Sections under priority sector?
Priority sector loans to the following borrowers are eligible to be considered

under Weaker Sections category:-
No. Category
1. Small and Marginal Farmers
Artisans, village and cottage industries where individual credit

2.
limits do not exceed Rs 1 lakh
3. Beneficiaries under Government Sponsored Schemes such as

National Rural Livelihoods Mission (NRLM), National Urban
Livelihood Mission (NULM) and Self Employment Scheme for
Rehabilitation of Manual Scavengers (SRMS)
138
4. Scheduled Castes and Scheduled Tribes
5. Beneficiaries of Differential Rate of Interest (DRI) scheme
6. Self Help Groups
7. Distressed farmers indebted to non-institutional lenders
Distressed persons other than farmers, with loan amount not

8. exceeding Rs 1 lakh per borrower to prepay their debt to non-
institutional lenders
9. Individual women beneficiaries up to Rs 1 lakh per borrower
10. Persons with disabilities
11. Overdraft limit to PMJDY account holder upto Rs 10,000/-

with age limit of 18-65 years.
12. Minority communities as notified by Govt. of India
In States, where one of the minority communities notified is, in fact, in

majority, item (12) will cover only the other notified minorities. These States/
Union Territories are Jammu & Kashmir, Punjab, Meghalaya, Mizoram,
Nagaland and Lakshadweep.
12. Is bank credit to Micro Finance Institutions (MFIs) treated as

priority sector lending?
Bank credit to MFIs (NBFC-MFIs, societies, trusts, etc.) extended for on-
lending to individuals and also to members of SHGs/JLGs is eligible for
categorisation as priority sector advance under respective categories viz.,
Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure
and Others.
13. What ‘Other’ activities are eligible for classification under priority
sector lending?
a. Financing people with low income: Loans not exceeding ₹1.00 lakh per
borrower provided directly by banks to individuals and individual members
of SHG/JLG, provided the individual borrower’s household annual income
in rural areas does not exceed ₹1.00 lakh and for non-rural areas it does not
exceed ₹1.60 lakh, and loans not exceeding ₹2.00 lakh provided directly by
banks to SHG/JLG for activities other than agriculture or MSME, viz., loans
for meeting social needs, construction or repair of house
139
b. Loans to distressed persons [other than distressed farmers indebted to
non-institutional lenders] not exceeding ₹1.00 lakh per borrower to prepay
their debt to non-institutional lenders
c, Loans up to ₹50 crore to Start-ups, as per definition of Ministry of

Commerce and Industry, Govt. of India that are engaged in activities other
than Agriculture or MSME
14. What are Priority Sector Lending Certificates (PSLCs)?
Priority Sector Lending Certificates (PSLCs) are a mechanism to enable

banks to achieve the priority sector lending target and sub-targets by
purchase of these instruments in the event of shortfall. This also incentivizes
banks with surplus of PSL, as it allows them to ‘sell’ their excess
achievement over targets thereby enhancing lending to the categories under
priority sector. Under the PSLC mechanism, the seller sells fulfilment of
priority sector obligation and the buyer buys the obligation with no transfer
of risk or loan assets.
15. What are the instructions to Banks with regard to

acknowledgement of priority sector loan applications?
Banks should provide acknowledgement for loan applications received

under priority sector loan. A time limit is required to be prescribed by the
Bank Board within which the bank communicates its decision in writing to
the applicants.
16. What is the rate of interest for loans under priority sector?
The rate of interest on bank loans will be as per directives issued by the
Department of Banking Regulation of RBI, from time to time. Priority sector
guidelines do not lay down any preferential rate of interest for priority sector
loans.
17. Where are the latest instructions on Priority Sector Lending

available?
The latest instructions on Priority Sector Lending – Targets and

Classification have been issued vide RBI FIDD.CO.Plan.BC.5/04.09.01/2020-21
September 04, 2020 (updated as on 29 April 2021).
18. What is the effective date of removal of credit cap on MSME

(Services) for classification under priority sector?
RBI vide FIDD Circular dated March 1, 2018, clarified that the banks can
treat the entire outstanding portfolio of lending to MSMEs under priority
sector without any cap, from the date of the circular, i.e., March 1, 2018.
140
Monitoring of Priority Sector Lending targets
RBI monitors the PSL related target and achievement data on quarterly basis
through Financial Inclusion and Development Department (FIDD). In case of
RRBs, the data are monitored by NABARD.
Non-achievement of Priority Sector targets
Non-achievement of priority sector targets and sub-targets are being taken

into account by RBI while granting regulatory clearances/approvals for
various purposes. Hence it is very important for all the banks to achieve the
PSL targets.
Banks having any shortfall in lending to priority sector are allocated amounts
for contribution to the Rural Infrastructure Development Fund (RIDF)
established with NABARD and other funds with NABARD/NHB/SIDBI/
MUDRA Ltd., as decided by the Reserve Bank from time to time.
With effect from March 31, 2021, all UCBs (excluding those under all-
inclusive directions) are required to contribute the shortfall in lending to
priority sector to Rural Infrastructure Development Fund of NABARD and
other funds with NABARD/NHB/SIDBI/ MUDRA.
2.3.5 Let us sum up
Any economic development needs adequate financial support. This calls for
well-defined and professionally managed financial institutions support. In
this direction, banking system and financial institutions play an important
role. We have several kinds of banks such as Commercial banks, RRBs, SFBs,
Payment Banks, Co-operative banks (rural and urban cooperative banks). All
of them play their role in supporting the people, businesses and organisations
towards their daily needs of banking. These banks collect funds by way of
deposits and utilize them to lend or participate in investment activities. The
lending helps the people to access credit and in turn helps economic
development. In addition to the commercial and co-operative banks, the
development financial institutions such as NABARD, IFCI, ICICI, IDBI, SIDBI,
NHB, SFCs and MUDRA contribute towards the growth of financial system.
Priority sector concept has helped to a greater extent for many, especially the
poor, to get bank finance for various productive purposes. Since there is a
mandate for the banks to lend compulsorily towards agriculture and other
priority sector purposes, this has helped in rural development as well.
2.3.6 Keywords
Scheduled Banks, Commercial Banks, Rural Co-operative Banks, Urban

Cooperative Banks, Development Banks, Priority Sector Lending, Direct
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finance, Indirect finance, NHB, SIDBI, National Equity Fund, Self Employed
Professional, Micro Credit, Servic e Sector, Small Enterprise, Priority sector
lending, Adjusted Net Bank Credit (ANBC), RIDF, NABARD, RBI, SFB,
Payment Banks , Priority Sector Lending Certificates
State True or False
1. The Cooperative Credit Societies Act was passed by the Government in

the year 1904.
2. National Housing Bank (NHB) refinances long term loans to secure

machineries for factories
3. Educational loans up to certain limits are eligible to be treated as

Priority Sector loans
4. Overdraft provided to PMJDY account holders is classified as Priority

Sector advance.
5. Co-operative banks are managed by the Board of Directors on the

principles of co-operation, self-help and mutual help.
6. Lending to Micro Finance Institutions (MFIs) for on-lending to

agriculture to be treated as Priority Sector under Agriculture finance.
7. ‘Scheduled Bank’ means a bank which is included in ‘Second Schedule’

of RBI Act, 1934.
8. As per RBI guidelines on Priority Sector, minimum of 80% of

outstanding credit is to be financed to ‘Priority Sector’ by commercial
banks.
9. As per the revised RBI policy on Priority Sector, financing to ‘Farmer

Producer Organisations’ (FPOs) and ‘Start ups’ has also been included
in priority sector.
10. If a commercial bank can’t achieve priority sector lending target,

it can contribute to Rural Infrastructure Development Fund (RIDF) of
NABARD.
01. True 02. False 03. True 04. True 05. True 06.True 07.True 08.False
09. True 10. True
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1. Regional Rural Banks were first setup based on the Regional Rural
Banks Act passed in the year ____?
a. 1976.
b. 1947
c. 1991
d. 1951
2. In India, the Cooperative Credit Societies Act was passed in the year:
a. 2011
b. 1991
c. 1904
d. 1947
3. The banking system in India comprises of:
a. Public Sector Banks
b. Private Sector Banks
c. Cooperative Banks
d. All of the above
4. Which is / are the Development Bank/ Development Finance

Institutions in In India?
a. SIDBI
b. NABARD
c. National Housing Bank
d. All of the above
5. ATM in banking means:
a. Any Time Money
b. Automatic Teller Machine
c. Automated Teller Machine
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d. All Time Money
6. CBS in banking is:
a. Core Business Solution
b. Core Banking Solution
c. Centralized Banking Solution
d. Centralized Business Solution
7. ‘Dual control’ in cooperative banks in India means:
a. The Board of Directors and the Government control
b. State Government and Central Government control
c. Control by RBI and the Government (Registrar of Cooperative

Societies)
d. The Share Holders and the Government
8. As per ‘Priority Sector’ guidelines of RBI, all the commercial banks and
UCBs have to achieve a minimum of ____ % of outstanding credit.
a. 20%
b. 40%
c. 60%
d. 80%
9. What is true of cooperatives?
a. All cooperative banks are credit societies but all credit societies
are not banks
b. Among the Cooperative Banks, the UCBs are much larger in

number than Rural Cooperative Banks
c. Rural Cooperative Banks comprise of StCBs and DCCBs
d. All of the above
10. Which activity is included in ‘Priority Sector’?
a. Agriculture
b. Micro, Small and Medium Enterprises
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c. Financing of SHGs
d. All of the above
01. (a) 02. (c) 03. (d) 04. (d) 05. (c) 06. (b) 07. (c) 08. (b) 09. (d) 10. (d)
IIBF (2008) Principles and Practices of Banking, IIBF Mumbai
NABARD (2020) Annual Report
NABARD Website www.nabard.org
NAFSCOB, (2021) https://www.nafscob.org
RBI Master Circulars
RBI website RBI website: https://www.rbi.org.in/
RBI(1969) Report of All India Rural Credit Review Committee
Vijayaragavan Iyengar (2007) Introduction to Banking, Excel Books
145
2.4 Lesson No.4 : Non-Banking Financial Intermediaries
2.4.1 Objective
2.4.2 Introduction
2.4.3 Non-Banking Financial Companies (NBFCs)
2.4.3.1 Classification of NBFCs
2.4.3.2 Difference between NBFCs and Banks
2.4.3.3 NBFCs as agents for insurance
2.4.3.4 Important aspects of Regulatory Framework
2.4.4 Micro Finance Institutions (MFIs)

2.4.4.1 What is Microfinance
2.4.4.2 Institutional structure for supporting Microfinance
2.4.4.3 Foreign Investment

2.4.4.4 Borrowings
2.4.4.5 Interest Rates
2.4.4.6 Regulation & Supervision
2.4.4.7 Training/Capacity building on microfinance
2.4.5 Non-Government Organizations (NGOs)

2.4.6 Let Us Sum Up
2.4.7 Keywords
2.4.9. Terminal Questions
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2.4.1 Objective
The objective of this lesson is to understand the role of non-banking financial

intermediaries including Micro Finance Institutions.
2.4.2 Introduction
In view of the massive need of financial services by the different people in

entire length and breadth of India, the formal banking sector alone is not in
a position to cater to the needs of many in the country. The growing demand
for finance has paved the way for new type of financial intermediaries in the
system. These include Non-Banking Financial Companies (NBFCs), Micro
Finance Institutions (MFIs) and Non-Government Organizations (NGOs),
though the NGOs are mostly facilitating financial inclusion and not actually
giving loans.
2.4.3 Non- Banking Financial Companies (NBFCs)
Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956. In recent years there has been phenomenal growth in
number of NBFCs in the country. As on January 2021, there are around
10000 NBFCs in the country, of which only 89 have the RBI permission to
mobilise deposits from public. They offer a variety of financial services
including credit facilities, deposit services (if permitted by RBI), investment
services, insurance, underwriting of stocks and shares, chit fund business,
etc. However, it does not include any institution whose principal business
includes agriculture or industrial activity; purchase or sale of goods, or
providing any services and sale/purchase/construction of immovable
property.
A company which has financial activity as ‘principal business’ can be

registered as NBFC by RBI. For qualifying on this parameter, following two
criteria have to be fulfilled:
(i) The company’s financial assets should constitute more than 50 per
cent of the total assets and
(ii) Income from financial assets should constitute more than 50 per
cent of the gross income.
NBFCs are licensed and supervised by RBI and no NBFC can operate without
a valid license from RBI.
2.4.3.1 Classification of NBFCs: Based on the main business, the NBFCs

can be classified as the following major types:
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i. Hire Purchase Finance Company: These companies finance under ‘Hire
purchase’ arrangement for buying costly machinery or consumer goods,
where the buyer makes an initial down payment and pays the balance
plus interest in installments. Here, the hirer becomes the owner of the
asset/equipment after the last installment is paid.
ii. Investment Company: Making investments on behalf of the clients.
iii. Leasing Company: These companies finance equipment, vehicles, etc.

where the asset remains the property of the finance company (the
lessor) but the buyer (the lessee) pays the ‘lease rent’ and uses the asset.
Here, the lessee has the right to use the equipment and does not have
the option to purchase.
iv. Insurance Company: insuring life or assets.
v. Chit Funds Company: Operating ‘Chit funds’.
vi. Housing Finance Company: financing housing property

purchase/construction/ repair etc.
vii. Venture Capital Financing: financing start-ups and new ventures.
viii. Micro Finance Companies/Micro-Finance Institutions (MFIs): Helping

small borrowers through microfinance loans.
ix. Factoring Companies: These companies finance goods sellers by

‘factoring’ i.e., by discounting of invoices (receivables) by the seller of
goods.
x. Non-Banking Financial Company - Micro Finance Institution (NBFC-

MFI): NBFC-MFI is a non-deposit taking NBFC having microfinance as
the main business.
xi. Peer to Peer (P2P) Lending Platform: P2P platform facilitates the
matching of lenders with borrowers.
It is possible that a NBFC is involved in more than one or several activities.

The above list is the list of main businesses which are carried out by NBFCs.
2.4.3.2 Difference between NBFCs and Banks
NBFCs perform functions similar to that of banks as they give loans to the
borrowers and many of them can mobilise deposits from public. However the
NBFCs mobilise term deposits and are not permitted to accept demand
deposits. Secondly NBFCs are not a part of the payment and settlement
system and as such, an NBFC cannot issue cheques drawn on itself. Deposit
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insurance facility of the Deposit Insurance and Credit Guarantee Corporation
(DICGC) is not available for the depositors of NBFCs.
2.4.3.3 NBFCs as agents for insurance
NBFCs registered with the RBI may take part in the insurance agency
business on a fee basis and without risk participation. In a notification issued,
the RBI said such NBFCs should obtain permission from the Insurance
Regulatory and Development Authority (IRDA) and comply with IRDA
regulations for acting as a "composite corporate agent" with insurance
companies.
2.4.3.4 Important aspects of Regulatory Framework
i. Legal entity: All NBFCs are companies under Companies Act,

1956.
ii. RBI Registration: All NBFCs are required to have a certificate
of Registration from RBI. However, to obviate dual regulation,
certain categories of NBFCs which are regulated by other
regulators are exempted from the requirement of registration with
RBI viz. Venture Capital Fund/ Merchant Banking
companies/Stock broking companies registered with SEBI,
Insurance Company having registration with IRDA, Housing
Finance Companies regulated by National Housing Bank etc.
iii. Net Owned Funds (NOF): NBFCs with public deposits should
have a minimum Net Owned Funds (NOF) of Rs.25 lakh. The
minimum NOF condition has since been raised to Rs. 2 crore
since April 1999.
iv. Prudential Norms: The prudential norms regarding
classification of assets into standard, sub-standard, doubtful and
loss assets have been made applicable to NBFCs too. Similarly,
creation of provision for NPA is also applicable. NBFCs are
required to achieve capital adequacy of 15% (w e f March 31,
2012) and maintain liquid assets of 15% on public deposits.
v. Interest Rate Ceiling: RBI has deregulated interest rates to be
charged to borrowers by NBFCs (other than NBFC- MFI).
However, the NBFCs have to be transparent about the rate of
interest to be charged.
vi. Period of Deposit: The NBFC cannot accept public deposit for a
period less than a year and for a period exceeding 5 years.
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2.4.4 Micro Finance Institutions (MFIs)
As mentioned earlier, there are a number of financial institutions in the field

offering variety of financial services. As the traditional financial institutions
like banks are not in a position to cater to the needs of many, the need for
non-banking financial intermediaries assumes importance. Apart from
NBFCs, Micro Finance Institutions (MFIs) are also available to bridge the gap.
Microfinance institutions, commonly known as MFIs, offer financial services
(‘microfinance’) mainly to unbanked or underbanked people and those
belonging to the low income group. The legal identity of MFI could be in several
forms- viz., cooperative society, Section 8 not for Profit Company (previously
called as Section 25 not for Profit Company) or an NBFC or an NGO (registered
as a Society under Societies Registration Act or a Trust registered under Trust
Act).
2.4.4.1 What is Microfinance?
As the word ‘microfinance’ is a combination of two words- ‘micro’ meaning

small and ‘finance’ meaning to provide financial support by loan etc. Hence
‘microfinance’ means- small finance, mostly to poor people. The Report of the
Sub-Committee of the Central Board of Directors of Reserve Bank of India to
Study Issues and Concerns in the MFI Sector (Malegam Committee Report of
2011) defined ‘microfinance’ as follows: ‘Microfinance is an economic
development tool whose objective is to assist the poor to work their way out
of poverty. It covers a range of services which include, in addition to the
provision of credit, many other services such as savings, insurance, money
transfers, counseling, etc.’. Microcredit on the other hand deals with credit
alone, but it is the most prominent business constituent of ‘microfinance’.
The definition of ‘microfinance’ as given by RBI vide circular dated July 201519
while defining ‘qualifying assets’ of MFI is as under:
• The rural household annual income does not exceed Rs. 1, 00,000 or
urban and semi-urban household income does not exceed Rs. 1,
60,000/-.
• Loan amount does not exceed Rs. 60,000 in the first cycle and Rs. 1,
00,000 in subsequent cycles.
• Total indebtedness of the borrower does not exceed Rs.1,00,000
excluding loan, if any availed towards meeting education and medical
expenses,
• Tenure of the loan not to be less than 24 months for loan amount in
excess of Rs. 30,000 with prepayment without penalty;
19
RBI circular no DNBR (PD) CC.No.047/03.10.119/2015-16 July 1, 2015 updated on April 20, 2016
150
i. Loan to be extended without collateral;
The Indian Microfinance Sector has witnessed a phenomenal growth over the
past 20 years and is touching the lives of crores of poor and financially
excluded people. The number of institutions providing microfinance services
has gone up from a few to several hundreds. As on 31 March 2020, the
combined micro credit portfolio of 252 lenders has reached Rs 2,36,427 crore
through 1085 lakh active loans (Sadhan, 2020) which includes NABARD
supported Self Help Group – Bank Linkage Programme (SHG-BLP), Joint
Liability group (JLG), MFI supported programmes and other programmes.
2.4.4.2 Institutional structure for supporting Microfinance
The microfinance ‘movement’ of India has been supported by several

institutions like National Bank for Agriculture and Rural Development
(NABARD), Small Industries Development Bank of India (SIDBI) and Rashtriya
Mahila Kosh (RMK). Another major development was adoption of SHG
approach in a massive national programme named “Deen Dayal Antyodaya
Yojana - National Livelihoods Mission (DAY-NRLM)” which started in 2011.
At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative
banks provide microfinance services. The entire movement is possible due to
policy support from Government of India and RBI.
NABARD piloted an action research project in 1987 through an NGO called

MYRADA, to help the rural poor and make them use the financial facilities.
Necessary grant was provided for carrying out Research & Development. This
was the beginning of the SHG Bank linkage programme. Later, NABARD
launched a Pilot Project in partnership with Non-Governmental Organizations
(NGOs) for promoting and developing Self Help Groups (SHGs). The
experience gained in this regard helped in setting up of SHG-Bank Linkage
Program in 1996 as a normal banking activity of the banks with widespread
acceptance. RBI on its part gave all the encouragement to SHGs. The Self Help
Group Bank Linkage programme (SHG-BLP) is a landmark model initiated by
the NABARD in 1992 to deliver affordable door-step banking services and has
largely achieved the stated goals of financial inclusion. It is a home-grown
self-help movement with an objective of creating sustainable livelihood
opportunities for the rural poor. Started as a bank outreach programme,
SHG-BLP transcended itself into a holistic programme for building financial,
social, economic, and of late, technological capital in rural India. NABARD
has pioneered the SHG–bank linkage model which positions the SHGs as
financial intermediaries to enable the flow of bank loans to poor members
without physical collateral. The movement has emerged as the world‘s largest
as well as the fastest growing microfinance programme and most successful
network of women owned community based microfinance institution. The
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SHG–bank linkage model in India is now a major model of microcredit
globally.
As far as MFIs are concerned they follow different approaches for financing,
depending on the local circumstances and socio-cultural environment.
However, across the country, it has been proven that it is the group dynamics
and peer pressure that help MFIs and SHGs to lend and recover successfully
even in the absence of collaterals.
2.4.4.3 Foreign Investment
Government of India has liberalized Foreign investment (Foreign Direct

Investment- FDI) w.e.f., 2016 and now it has permitted foreign investment up
to 100% under the automatic route, in NBFCs including MFIs. Foreign
investment by way of equity is permitted in NBFCs subject to a minimum
investment of $5.0 lakh. In view of the minimum level of investment, only a
few NBFCs are reported to have been able to raise the foreign investment.
However, a large number of NGOs operating in the
development/empowerment of poor are receiving foreign fund, by way of
grants.
2.4.4.4 Borrowings
Initially, bulk of the funds required by MFIs for lending to their clients, were
met by institutions like NABARD, SIDBI and Rashtiya Mahila Kosh.
Reserve Bank of India permitted Commercial Banks and Regional Rural

Banks to extend credit facilities to MFIs since February 2000. To support the
growth of MFIs, these lending banks have operational freedom to fix certain
norms taking into account the ground level realities.
2.4.4.5 Interest Rates
Though there is a general deregulated environment as far as the interest rates

are concerned, many MFIs were charging higher rate of interest. This high
rate of interest and certain other practices led to crisis in microfinance in
general but was most pronounced in Andhra Pradesh in 2010 where 57
microcredit borrowers were reported to have committed suicide. This led to
several steps by RBI and the government. RBI appointed the Malegam
Committee to study the MFI regulatory environment in India. Its report
submitted in 2011, put an interest cap of 26% p.a. and margin cap of 12% on
such loans by MFIs. These recommendations brought much needed
transparency and orderliness to MFI business and were in force till 2014. The
guidelines have been modified wef 01 April 2014 which are as under:
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a) ‘Margin caps’ as defined by Malegam Committee may not exceed 10 per
cent for large MFIs (loans portfolios exceeding Rs.100 crore) and 12 per
cent for the others
b) Interest rates charged by an NBFC-MFI to its borrowers will be the lower

of the following:
• The cost of funds plus margin as indicated in para (i) above; or
• The average base rate of the five largest commercial banks by

assets multiplied by 2.75.
Thus if the cost of fund for an MFI with less than Rs 100 crore loan portfolio
is 13% then the interest rate charged can be 13%+ 12% margin= 25%. By the
other criteria, if the average base rate of 5 largest banks was 8% then 8X2.75=
22.0%. Thus 22%, being the lower of the two rates, will be the interest rate
charged to the borrower.
2.4.4.6 Regulation & Supervision
Most of the MFIs are not following any standard set of rules and regulations.
Each MFI designs its own products and follows certain processes. Since
uniformity is not there, transparency becomes an issue. Certain Committees
have gone into the aspects of the need for a system of regulation and
supervision of MFIs.
Shri. Y. H. Malegam Committee in 2011 recommended steps for development

and regulation of Microfinance sector including creation of a separate category
of NBFC-MFIs which has helped the Microfinance sector. The GoI has also
brought Micro Finance Institutions (Development and Regulation) Act, 2012
to “provide for development and regulation of the micro finance institutions
for the purpose of facilitating access to credit, thrift and other micro finance
services to the rural and urban poor and certain disadvantaged sections of
the people and promoting financial inclusion through such institutions and
for matters connected therewith or incidental thereto”. In terms of these
policies, all MFIs are currently regulated by RBI. These policy and regulatory
developments have helped in bringing orderliness and transparency to
microfinance sector.
2.4.4.7 Training/Capacity building on microfinance
NABARD either directly or through BIRD provides technical support in the

form of capacity building to staff of MFIs and also to bankers in appraisal of
MFIs for providing appropriate resource support. Besides that there are
several other institutions (e.g., Indian Institute of Banking and Finance (IIBF)
153
Mumbai; SaDhan, New Delhi) which are conducting training / capacity
building in the field of microfinance.
Non-Government Organizations (NGOs)
All developmental activities cannot be practically supported by the

government. This is due to various reasons, such as non-availability of
government machinery, lack of adequate funds, priority and emergency
matters to be attended, etc. Therefore, Non-Government Organizations
(NGOs) have tried to bridge the gap.
Origin of NGOs
Voluntary effort has always been an important part of our culture and social
tradition. These voluntary efforts get more organized accredited associations
or Voluntary Organisations, popularly called as NGOs. Their involvement
and participation in development has now been fully recognized. In recent
years, they have increased considerably, acquired greater importance and
significance and have initiated new experiments in the field of rural
development. According to data released by Central Bureau of Investigation
(CBI), the number of NGOs in the country is huge at 31 lakhs as on 201520.
These large number of NGOs organizations can play a crucial role in rural
development by supplementing government efforts as they are close to the
rural people. They have their roots in the people and can respond to the needs
and aspirations of the community more effectively.
Various Role and Functions of NGOs
The important roles of NGOs especially in the context of rural development

could be listed as under:
a. Catalyze rural population

b. Build models and experiment
c. Supplement government and banks efforts
d. Organizing rural poor
e. Educate the rural people
f. Provide training
g. Disseminate information
h. Mobilize resources
i. Promote rural leadership
20
Indian Express dated 01 August 2015.
154
j. Represent the rural people
k. Act as innovators
l. Solve the problems of people in general
NGOs contribution
The activities of NGOs in facilitating and making available credit to the low
income households are expected to increase in the coming years. Among other
aspects, companies nowadays are giving importance to Corporate Social
Responsibility (CSR). They take initiatives to support the poor. Under the CSR
programmes, a number of corporate houses are helping the society in a big
way. Several corporate houses are also engaged in Corporate Social
Responsibility activities for sustainable development. Bank's linkage with
such NGOs/Corporate houses operating in the area ensure that the
NGOs/Corporate houses provide the necessary 'credit plus' services and help
leverage bank credit for inclusive growth.
NGO MFIs
There are a large number of NGOs that have undertaken the task of financial
intermediation. Majority of these NGOs are registered as Trust or Society.
Many NGOs have also helped formation of SHGs under NABARD schemes and
to organize themselves into federations and these federations are registered
as Trusts or Societies. Many of these federations perform non-financial and
financial functions like social and capacity building activities, facilitate
training of SHGs, undertake internal audit and promote new groups.
2.4.5 Let us sum up
The Non-banking financial institutions like NBFCs, MFIs and NGOs have an
important role to play in the financial sector. NBFCs are providing financial
support in a big way over the years. NBFCs are currently regulated by Reserve
Bank under various provisions of the Reserve Bank of India Act.
MFIs also equally contribute to the development of the economy. Microfinance

institutions, also known as MFIs, offer financial services mainly to unbanked
and under-banked people and those belonging to the low income group and
thus helping in financial inclusion.
The NBFC and MFI sector has become a robust sector with huge investment,
business and impact on the lives of people. This has been made possible due
to combined efforts of policy makers like Government of India, RBI, NABARD,
SIDBI as well as the banks. Large number of NGOs are also contributing in
these efforts. The NBFCs and MFIs are attracting large number of borrowers
due to their customer centric innovative business strategies and are giving
155
tough competition to mainstream banks. However, this is helping the sector
in becoming more competitive and ultimately the people are reaping the
benefits for realizing their dreams and aspirations.
2.4.6 Keywords
NBFC, MFI, NABARD, RBI, Malegam Committee, microfinance, microcredit,

financial inclusion, SHG, NGO, Corporate Social Responsibility (CSR), Social
Mobilization, Rashtiya Mahila Kosh, Net Owned Funds (NOF), Appraisal
2.4.7 Check your Progress-Questions
State True or False
1. NBFCs are illegally carrying business of lending.
2. All NBFCs are allowed to mobilise deposits from public.
3. NBFCs offer a variety of financial services including providing loans.
4. NABARD launched a Pilot Project in 1991-92 in partnership with Non-

governmental Organizations (NGOs) for promoting and developing self-
help groups (SHGs).
5. Deposits of NBFCs are not insured with DICGC.
6. All NBFCs are not registered with RBI.
7. Foreign investment by way of equity is permitted in NBFC MFIs subject

to a minimum investment.
8. Microfinance is basically providing loans to poor people without

collateral security.
01. False 02.False 03. True 04. True 05. True 06. False 07. True
08. True
2.4.8 Terminal questions
1. When there are so many banks in the country, why should people go to
NBFCs for loans?
a. Banks are not able to meet all the needs of all the people
b. NBFCs are having services which are customer friendly
c. Both (a) and (b)
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2. NBFCs are required to achieve capital adequacy of 15% and maintain

liquid assets of 15% on public deposits
a. Correct
b. Not correct
c. Both 15% respectively
d. 5% and 10% respectively
3. Which is correct statement regarding deposit mobilisation by NBFCs?
a. NBFC cannot accept public deposit for a period less than a year and
for period exceeding 3 years.
a. All NBFCs are allowed to mobilise deposits from public
c. An NBFC has to obtain permission from RBI for deposit mobilisation
d. Both (a) and (b) are correct
4. Generally MFIs charge rate of interest on their lending
a. Equal to bank lending rates
b. Less than bank lending rates
c. Higher than bank lending rates
d. None of these
5. What are the components of microfinance as per its definition:
a. Loan to be provided to poor people- with income less than Rs 1 lakh

per year in rural areas and Rs 1.6 lakh per year in urban areas
b. Loan amount should not be more than Rs 60000 in first cycle and
Rs 1 lakh in subsequent cycles
c. Both (a) and (b)
d. None of these
6. Can a bank lend to MFIs or can MFI borrow from banks for
supplementing its resources?
a. Yes
b. No
157
c. Not certain
d. They are already flush with funds, hence don’t need to borrow.
7. P2P in the context of NBFCs means:
a. People to People lending
b. Peer to Peer lending
c. Person to Person lending
d. None of these
8. What is the status of regulation of NBFCs?
a. They are informal and are not regulated at all
b. Government of India regulates them
c. RBI is the regulator for NBFCs
Key to terminal questions:
01. (c) 02. (a) 03. (c) 04. (c) 05. (c) 06. (a) 07. (b) 08. (c)
2.4.9 References for Further reading
NABARD(2019) Status of Microfinance (report) , NABARD Mumbai

SaDhan (2020), Bharat Microfinance Report –2020, SaDhan New Delhi
RBI (2011) Report of the Sub-Committee of the Central Board of Directors of

Reserve Bank of India to Study Issues and Concerns in the MFI Sector
(Malegam Committee Report)
RBI Circulars through the website: https://www.rbi.org.in
S K Das; B P Nanda and J Rath (2008) Micro Finance and Rural

Development in India, New Century Publications
158
2.5 Lesson No.5: Financial Sector Reforms
2.5.1 Objectives
2.5.2 Financial Sector Reforms- Background
2.5.2.1 Committee on the Financial System - Narasimham Committee I –
(1991)
2.5.2.2 Committee on Banking Sector Reforms 1998 (Narasimham

Committee-II)
2.5.2.3 Role of RBI in reforms
2.5.2.4 Stronger Banking System by merger of banks
2.5.2.5 Non-Performing Assets
2.5.2.6 Capital adequacy and tightening of provisioning norms
2.5.2.7 Entry of Foreign Banks
2.5.2.8 Rural Sector Banks
2.5.3 Basel Committee

2.5.3.1 Basel I Accord
2.5.3.2 Basel II Accord
2.5.3.3 Basel III Norms
2.5.4 Let Us Sum Up

2.5.5 Keywords
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2.5.1 Objectives
• The importance of financial sector reforms and Narasimham

Committees’ recommendations.
• The implications of Basel Accords
2.5.2 Financial Sector Reforms- Background
India had suffered a major crisis during 1990-91 which was called the
“Balance of Payments crisis”- as the imports had increased without
corresponding increase in exports. The situation became a crisis as the Indian
foreign exchange reserves were reduced to a level which was just sufficient to
meet only three weeks' worth of imports. The government came close to
defaulting on its financial obligations. Under such circumstances, the
Government was left with no option except to mortgage the country's gold to
avoid defaulting on payments. The crisis, however, paved the way for the
liberalization of the Indian economy, since one of the conditions stipulated in
the World Bank loan taken at that time, required India to open itself to
participation from foreign entities in its industries. This was the beginning of
Liberalization, Privatization and Globalization (LPG) in India.
These fundamental changes led to continuous and comprehensive economic

reforms in the country in coming years. As a part of LPG, besides certain other
measures, ‘Financial sector reforms’ were introduced which refer to the
reforms in the banking system and capital market. It was felt by the policy
makers that the banking sector, which is very crucial for development of the
economy as well as for handling the flow of money, needed serious reforms
to make it internationally reputable and develop it into an efficient, vibrant
and competitive sector for supporting the country's financial needs. In the
light of these requirements, two expert Committees were set up in 1990s by
Government of India under the Chairmanship of Shri M. Narasimham (ex-RBI
Governor) which are widely credited for spearheading the financial sector
reforms in India. The first Narasimhan Committee (Committee on the
Financial System – CFS) was appointed by Dr Manmohan Singh as India's
Finance Minister in 1991 and the second one (Committee on Banking Sector
Reforms) was appointed by Shri P.Chidambaram as Finance Minister in 1997.
Subsequently, the first one widely came to be known as the Narasimham
Committee-I and the second one as Narasimham Committee-II.
This committee recommended, for the first time, the ‘prudential norms’ for
banks in India as propounded by the Bank for International Settlements (BIS).
The ‘prudential norms’ were regarding income recognition, capital adequacy,
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assets classification, provisioning, etc., popularly known as ‘Basel norms’,
named after the Basel town in Switzerland where the BIS is located. These
concepts took time to digest, and the RBI played a stellar role in bringing them
in a calibrated manner so that the system was not disrupted. Thus with the
reforms, the banks and Insurance companies have been given more freedom
to do business but are more closely regulated than in the past.
2.5.2.1 Committee on the Financial System - Narasimham Committee I

– (1991):
The “Committee on the Financial System” known as Narasimham Committee-

I was set up in order to study the problems of the Indian financial system and
to suggest recommendations for improvement in the efficiency and
productivity of the financial institution.
The significant reform measures recommended by the committee were as

under:
i. Reduction in SLR and CRR:
The funds of banks were invested for meeting Statutory Liquidity Ratio (SLR)
requirements in Government approved securities which earned lower rate of
interest as compared to other investments. Similarly funds parked for meeting
Cash Reserve Ratio (CRR) requirements earned no interest. This also put
pressure on profitability of the banks. SLR funds were used by the
Government to finance budgetary deficits.
The committee recommended reduction in the proportion of the SLR and the
CRR. The SLR then was 38.5% and CRR was 15%. This high amount of SLR
and CRR meant locking the bank resources to the extent of 53.5%. It also
came in the way of effective productivity of the bank. Therefore, the committee
recommended their gradual reduction. It was recommended to reduce SLR
from 38.5% to 25% and CRR from 15% to 3 - 5%.
(ii) Phasing out of Directed Credit Programme: In India, since

nationalization, directed credit programmes have been adopted by the
government. The committee recommended phasing out of this programme. At
that point of time, domestic banks were required to direct 40% of their
advances towards priority sector lending (32% for Foreign Banks).
Narasimham Committee recommended reduction of priority sector lending to
10%.
(iii) Interest Rate Determination: The interest rates in India were regulated
and controlled by the authorities. The committee felt that the determination
of the interest rate should be on the grounds of market forces such as the
demand and supply of funds. Hence the committee recommended eliminating
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government controls on interest rate and phasing out the concessional
interest rates for the Priority Sector.
(iv) Structural Reorganizations of the Banking Sector: The committee

recommended that the number of public sector banks need to be reduced.
Three to four big banks including SBI should be developed as international
banks. Eight to ten banks having nationwide presence should concentrate on
the national and universal banking services. Local banks should concentrate
on region specific banking.
(v) Capital Adequacy Norms: The Narasimham committee recommended that

all banks, financial institutions and non-banking finance companies
operating in India adopt steps required to be in line with international banking
norms. The committee recommended that capital to risk weighted assets ratio
(CRAR) should be minimum 8%.
2.5.2.2 Committee on Banking Sector Reforms 1998 (Narasimham

Committee-II)
In 1998 Shri P Chidambaram, the then Finance Minister of GoI, appointed

another Committee named “Committee on Banking Sector Reforms” headed
again by Shri Narasimham. This committee was asked to “review the progress
of banking sector reforms to date and a programme on financial sector reforms
to strengthen India's financial system and make it internationally
competitive”. The committee submitted its report to the government in April
1998.The report covered issues like- capital adequacy, bank mergers,
recasting bank board, and creation of global sized banks.
The main recommendations of this Committee were as under:
(i) Strengthening Banks in India: The committee considered the stronger

banking system in the context of the Current Account Convertibility (CAC). It
thought that Indian banks must be capable of handling problems regarding
domestic liquidity and exchange rate management in the light of CAC. Hence,
it recommended the merger of strong banks to make them internationally
competitive.
(ii) Narrow Banking: Those days many public sector banks were facing a
problem of Non-performing assets (NPAs). Some of them had NPAs which were
as high as 20 percent of their assets. Thus for successful rehabilitation of
these banks, the Committee recommended 'Narrow Banking Concept' where
weak banks will be allowed to place their funds only in short term and risk
free assets.
(iii) Capital Adequacy Ratio: In order to improve the inherent strength of the
Indian banking system, the committee recommended that the Government
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should raise the prescribed capital adequacy norms. This will improve their
absorption capacity also.
(iv) Bank ownership: It felt that the government control over the banks and
banks’ autonomy do not go hand in hand and thus it recommended a review
of functions of boards to enable them to adopt professional corporate
strategies.
(v) Review of banking laws: The committee considered that there was an
urgent need for reviewing and amending certain laws governing Indian
banking industry like RBI Act, Banking Regulation Act, State Bank of India
Act, etc. This upgradation would bring them in line with the present needs of
the banking sector in India.
Apart from these major recommendations, the committee also recommended

faster computerization, technology upgradation, training of staff,
depoliticizing of banks, professionalism in banking, reviewing bank
recruitment, etc.
Greater autonomy was proposed for the public sector banks to enable them
to function with equivalent professionalism as their international
counterparts. For this, the Committee recommended that recruitment
procedures, training and remuneration policies of public sector banks be
brought in line with the best-market-practices of professional bank
management. The committee recommended that GoI’s equity in nationalized
banks be reduced to 33% for increased autonomy. The committee
recommended a review of functions of banks’ boards with a view to make them
responsible for enhancing shareholder value through formulation of corporate
strategy and reduction of government equity.
2.5.2.3 Role of RBI in reforms
Following specific recommendations were made relating to the RBI:
(i) The Committee recommended that the RBI should withdraw from the 91-
day Treasury Bills market and that interbank call money and term money
markets be restricted to banks and primary dealers. The Committee also
proposed a segregation of the roles of RBI as a regulator of banks and owner
of banks. It observed that "the Reserve Bank as a regulator of the monetary
system should not be the owner (shareholder) of bank in view of a possible
conflict of interest". As such, it highlighted that RBI's role of effective
supervision was not adequate and wanted it to divest its holdings in banks
and financial institutions.
(ii) Pursuant to the various recommendations of the Narasimham committee,

RBI introduced ‘Liquidity Adjustment Facility’ (LAF) operated through repo
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and reverse repos in order to set up a corridor for money market interest rates.
To begin with, in April 1999, an Interim Liquidity Adjustment Facility (ILAF)
was introduced pending further upgradation in technology and
legal/procedural changes to facilitate electronic transfer. RBI also decided to
transfer its respective shareholdings of public banks like SBI, National
Housing Bank (NHB) and NABARD to GoI. Subsequently, in 2007-08, GOI
decided to acquire entire stake of RBI in SBI, NHB and NABARD.
2.5.2.4 Stronger Banking System by merger of banks
The Committee recommended for merger of large Indian banks to make them
stronger for supporting international trade. It recommended a three tier
banking structure in India through establishment of three large banks with
international presence, eight to ten national banks and a large number of
regional and local banks. Considering the very high percentage of non-
performing assets of weaker banks, some as high as 20% of their total assets,
the concept of "narrow banking" was proposed to assist in their rehabilitation.
There have been a string of mergers in banks of India over the years,
encouraged strongly by the Government of India, in line with the Committee's
recommendations.
2.5.2.5 Non-Performing Assets
Non-performing assets had been the single largest cause of worry of the
banking sector in India. Earlier the Narasimham Committee-I had broadly
concluded that the main reason for the reduced profitability of the commercial
banks in India was priority sector lending. The committee had highlighted
that priority sector lending was leading to the buildup of non-performing
assets of the banks and thus be phased out.
The Narasimham Committee-II also highlighted the need for 'zero' non-
performing assets for all Indian banks with International presence. The 1998
report further blamed poor credit decisions, behest-lending and cyclical
economic factors among other reasons for the buildup of the non-performing
assets of these banks to uncomfortably high levels.
The Committee recommended creation of Asset Reconstruction Funds or

Asset Reconstruction Companies (‘Bad bank”) to take over the bad debts of
banks, allowing them to start on a clean slate. The option of recapitalization
through budgetary provisions was ruled out. Overall, the committee wanted
a proper system to identify and classify NPAs. NPAs to be brought down to 3%
by 2002 and for an independent loan review mechanism for improved
management of loan portfolios.
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The committee's recommendations led to introduction of a new legislation
which was subsequently implemented as the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002 and came into force with effect from 21 June 2002.
2.5.2.6 Capital adequacy and tightening of provisioning norms.
In order to improve the inherent strength of the Indian banking system, the
committee recommended that the Government should raise the prescribed
capital adequacy norms. This would also improve their risk taking ability. The
committee targeted raising the capital adequacy ratio to 9% by 2000 and 10%
by 2002 and have penal provisions for banks that fail to meet these
requirements. For asset classification, the Committee recommended a
mandatory 1% provision in case of standard assets and for the accrual of
interest income to be done every 90 days instead of 180 days.
To implement these recommendations, the RBI in Oct 1998, initiated the

second phase of financial sector reforms by raising the banks' capital
adequacy ratio by 1% and tightening the prudential norms for provisioning
and asset classification in a phased manner on the lines of the Narasimham
Committee-II report. The RBI targeted to bring the capital adequacy ratio to
9% by March 2001.
The recommendations of both Narasimham committees on capital adequacy

were in line with the Bank for International Settlements (BIS)
recommendations of Basel norms which also helped the banking sector.
2.5.2.7 Entry of Foreign Banks
The committee suggested that the foreign banks seeking to set up business
in India should have a minimum start-up capital of $25 million as against the
existing requirement of $10 million. It said that foreign banks can be allowed
to set up subsidiaries and joint ventures that should be treated at par with
private banks.
2.5.2.8 Rural Sector Banks
With the implementation of the Narasimham Committee Report, commercial

banks were expected not to cross-subsidize loans to the rural sector with
earnings from the urban sector. It anticipated that the need and the demand
for credit in the rural sector will only grow as the economy grows. To meet
this demand, a number of specialized banks may come up, probably floated
by entrepreneurs with strong rural roots.
Because such entrepreneurs were likely to perform much better than the rural
subsidiaries of the existing commercial banks at the critical tasks of credit
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appraisal and understanding the real needs of rural people, it expected these
new financial institutions to serve rural markets better. Two major problems
were however anticipated, namely:
1. They will always be localized and therefore not adequately diversified,

which will make them prone to failure with every local disaster;
2. They will be short of capital in the short run.
It expected that the government will have to find ways to provide capital to
such new banks, preferably in the form of venture capital or equity.
Thus it may be seen from above that Narasimham Committee I and II had a
wide ranging impact on the Indian Banking system.
2.5.3 BASEL COMMITTEE
The Basel Committee on Banking Supervision (BCBS), is part of Bank for

International Settlements (BIS) - an international body, established by the
Central bank Governors in 1974. It is the primary global standard setter for
the prudential regulation of banks and provides a forum for regular
cooperation on banking supervisory matters. Its 45 members comprise of
central banks and bank supervisors from 28 countries. It has about twenty
five technical working groups and task forces, which meet regularly. It usually
meets at the BIS office in Basel- a town in Switzerland, where its permanent
secretariat is located. The standards (Basel-I, Basel II etc.) are named after
this town – Basel. These are important global norms that set a common
standard for banks across countries.
2.5.3.1 BASEL I ACCORD
In 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set

of minimum capital requirements for banks, also known as the 1988 Basel I
Accord. It was enforced by law in the Group of Ten (G-10) countries in 1992.
Basel I is now widely considered as an important part of global financial

standard/guidelines. The world has changed after 1988 as financial
conglomerates, financial innovation, technologies and risk management tools
have developed. Therefore, a more comprehensive set of guidelines, known as
Basel II are in implementation by several countries.
Basel I primarily focused on credit risk. Assets of banks were classified and
grouped in five categories according to credit risk, carrying risk weights of
zero to one hundred percent. Banks with international presence were
required to hold capital equal to 8 % of the risk-weighted assets.
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Since 1988, this framework has been progressively introduced in member
countries of G-10, currently comprising 13 countries, namely, Belgium,
Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain,
Sweden, Switzerland, United Kingdom and the USA. Most other countries,
currently numbering over 100, have also adopted, the principles prescribed
under Basel I. However, the efficiency with which the principles are enforced
varies. The RBI started implementing the Capital Adequacy Norms prescribed
by Basel Committee in April 1992.
In India banks were required to maintain minimum Capital-to-Risk- Weighted

Asset Ratio (CRAR) of 9 per cent on an ongoing basis.
2.5.3.2 BASEL II ACCORD
Basel II is the second of the Basel Accords, which are recommendations on

banking laws and regulations issued by the Basel Committee on Banking
Supervision.
Basel II, initially published in June 2004, was intended to create an

international standard for banking regulators to control how much capital
banks need to put aside to guard against the types of financial and operational
risks faced by banks (and the whole economy).
Overview of Basel II
A. Purpose: Basel framework was to bring financial stability and soundness of

systems in banks that should benefit banks and customers.
B. Objective
i. To promote safety and soundness in the financial system

ii. To enhance competitive equality
iii. To provide a more comprehensive approach for addressing risk
iv. Ensuring that capital allocation is more risk sensitive
v. Enhancing disclosure requirements which will allow market
participants to assess the capital adequacy of an institution
vi. Ensuring that credit risk, operational risk and market risk are
quantified based on data and formal techniques;
vii. Attempting to align economic and regulatory capital more closely
to reduce the scope for regulatory arbitrage.
C. Tier I & II Capital: For the purposes of the Basel – II, capital is
differentiated into Tier I capital and Tier II capital.
Tier I capital, called as core capital, consists of
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a. Paid up capital, statutory reserves and other disclosed free
reserves, if any
b. Capital reserves representing surplus arising out of sale proceeds
of assets
Tier II capital, called supplementary capital, consists of:
a. Undisclosed reserves
b. Revaluation provisions / General loan loss provisions
c. Hybrid instruments
d. Subordinated debt
D. Three Pillar Approach.
Basel II applies the "three pillars" concept –
a. Pillar I- Minimum capital requirements (addressing risk),
b. Pillar II- Supervisory review and
c. Pillar III- Market discipline.
The Basel I accord dealt with only parts of each of these pillars. For
example: with respect to the first Basel II pillar, only one risk, credit
risk, was dealt with in a simple manner while market risk was an
afterthought; operational risk was not dealt with at all.
First Pillar
The first pillar deals with maintenance of ‘regulatory capital’ calculated

for three major components of risk that a bank faces: credit risk,
operational risk, and market risk. Other risks are not considered fully
quantifiable at this stage.
The credit risk component can be calculated in three different ways of

varying degree of sophistication, namely standardized approach,
Foundation IRB and Advanced IRB. (IRB = "Internal Rating-Based
Approach").
For ‘Operational risk’, there are three different approaches - basic

Indicator Approach or BIA, Standardized Approach or STA, and the
Internal Measurement Approach (an advanced form of which is the
Advanced Measurement Approach or AMA).
For market risk the preferred approach is VaR (value at risk) for which
the banks are required to-
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• Prepare for internal and external rating system,
• Determine correct asset classes of entire business,
• Re-examine balance sheet,
• Review products, pricing methods and
• Educate staff on rating.
Second Pillar
The second pillar deals with the supervisory review. This pillar is to
ensure that the bank’s capital is aligned to its actual risk profile. For
this, the preparatory work required from bank’s side is to re-examine
the product in terms of revised requirements of risk assessment and
examine potential to include new products to reduce risk and thereby
charge the capital. It gives banks a power to review their risk
management system. Internal Capital Adequacy Assessment Process
(ICAAP) is the result of Pillar II of Basel II accords.
Third Pillar
Third Pillar is the market discipline pillar to enhance the role of the
other market participants in ensuring that appropriate capital is held
by prescribing higher disclosure.
For this, banks are required to measure their own market approach in
comparison with other participants, prepare product wise cost benefit,
compute and reduce charge on capital and implement the chosen
methodology.
This pillar aims to complement the minimum capital requirements and

supervisory review process by developing a set of disclosure
requirements which will allow the market participants to gauge the
capital adequacy of an institution.
The aim of pillar 3 is to allow market discipline to operate by requiring

institutions to disclose details on the scope of application, capital, risk
exposures, risk assessment processes and the capital adequacy of the
institution. It must be consistent with how the senior management
including the board assess and manage the risks of the institution.
169
Operational Risk Management
Basel Committee has defined the Operational Risk Management as,

“Operations risk is the risk of direct or indirect loss resulting from inadequate
or failed internal process, people and systems or external events”.
Operational risk in credit is not new to banks. Banks are handling this risk
since their commencement. Developing banking practices suggest that risks
other than credit risk, interest risk and market risk can be substantial. These
new growing risks are failure risk of technology with growth of e-commerce,
potential risk of internal controls and back-up systems. While implementing
Basel – II Accord, all these aspects become important as all risks need to be
measured and commensurate capital requirement is to be built.
Basel II and the Regulators
One of the most difficult aspects of implementing an international agreement

is the need to accommodate differing cultures, varying structural models, and
the complexities of public policies and existing regulation. In India, RBI
advised the commercial banks to implement the Basel II standardized norms
on 31 March 2009.
2.5.3.3 Basel III Norms
“Basel III” norms were introduced in 2010 by the Basel Committee on Banking
Supervision (BCBS) in the wake of global financial crises of 2008 when more
than 1200 banks went bankrupt in USA. RBI guidelines for Indian banks were
issued in 2012 to become effective from January 1, 2013 in a phased manner
and to be fully implemented by 2019. Basel III is a comprehensive set of
reform measures, developed by the BCBS, to strengthen the regulation,
supervision and risk management of the banking sector. These measures aim
to:
❖ To raise the quality and quantity of capital, with a much greater focus on
common equity to absorb losses.
❖ Improve the banking sector’s ability to absorb shocks arising from financial
and economic stress, whatever the source.
❖ Improve risk management and governance, especially those related to

capital market activities. Trading book exposures, for example, will be
subject to a stressed value-at-risk requirement. Banks must hold
appropriate capital for less liquid, credit sensitive assets with much longer
holding periods.
❖ Strengthen bank’s transparency and disclosures.
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2.5.4 Let us sum up
Major reforms in the form of ‘LPG’ were started in a big way after the payment
crisis faced by India in 1991. Financial sector reforms were an important part
of it and two Narasimham Committees were set up in 1991 and 1997 in order
to study the problems of the Indian financial system and to suggest
recommendations for improvement in the efficiency and productivity of the
financial institution. The recommendations of Narasimham committee have
enabled steps to be taken to introduce reforms in our banking system and
making our system more robust and resilient.
In the context of the financial sector reforms in in India, the international

standards proposed by the Basel Committee on Banking Supervision (BCBS)
of BIS have played an important role. BSCB is the primary global standard
setter for the prudential regulation of banks. The RBI in India has gone ahead
and implemented all the three Basel Accords – Basel I, Basel II and Basel III.
Notwithstanding the problems imposed by COVID19, the norms are expected
to be implemented in the letter and spirit and strengthen the Indian banking
system to emerge as the robust banking of international standards. There is
no doubt that Basel framework will bring more financial stability and
soundness of systems in banks that should benefit banks, all the customers
and ultimately the country.
2.5.5 Key words
Narasimham Committee, Financial Sector Reforms, BIS, BCBS, Basel-I,

Basel-II, Basel-III Accords, Priority Sector, Capital Adequacy, The three
Pillars, credit risk, market risk, Operational Risk Management, Regulators
State True or False
1. The financial sector reforms got a big push after 1991 ‘Balance of
Payment crisis’.
2. Financial Sector Reforms include Banking Sector reforms and Capital

Market reforms.
3. Basel Accord has recommended discontinuation of priority sector

lending
4. Introduction of Prudential Accounting norms, in the banking industry

has been suggested by the Narasimham Committee
171
5. The Basel Committee on Banking Supervision (BCBS), is part of Bank
for International Settlements (BIS)- an international body located at
Basel (Switzerland)
6. Narasimham committee recommended that the SLR and CRR should

be reduced in India.
7. Based on Narasimham committee recommendations, RBI introduced

‘Liquidity Adjustment Facility’ (LAF) operated through repo and reverse
repo.
01. True 02. True 03. False 04.True 05.True 06. True 07. True
1. The Committee on the Financial System was headed by:
a. Dr C Rangarajan
b. Shri M Narasimham
c. Prof A Vaidyanathan
d. Chaudhary Brahma Prakash
2. On SLR and CRR, Narasimham Committees recommended?
a. Reduction in CRR and SLR
b. No Change
c. Increase in CRR and SLR
d. It did not suggest any thing on SLR and CRR
3. According to Narasimham Committee recommendations, the Capital

Adequacy ratio in banks is:
a. To be reduced
b. To be increased
c. To be maintained
d. None of these
4. Financial Sector Reforms got a big push after the ‘Balance of Payment
crisis’ in the year…
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a. 1947
b. 1961
c. 2011
d. 1991
5. ‘LPG’ in the context of reforms in India refers to:
a. Liquefied Petroleum Gas
b. Liberalization, Privatization and Globalization
c. Light, Powerful and Glorious
d. None of these
6. Prudential norms for banks include:
a. Capital adequacy
b. Provisioning
c. Both (a) & (b)
d. None of these
7. How many Committees were formed under the Chairmanship of Shri

Narasimham:
a. One
b. Two
c. Three
d. Four
8. To make the banking system of India stronger, Narasimham Committee

recommended
a. Merger of Indian banks to make strong banks with international

presence
b. Need for ‘Zero’ NPA in the banks and creation of Asset Reconstruction
Companies to take over NPAs of banks
c. Both (a) and (b)
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9. According to prudential norms/ Basel Committee norms, Paid up
capital of banks is part of:
a. Tier I capital
b. Tier II capital
c. Provisions for NPA
10. How many set of norms under the name of ‘BASEL’ have been
issued so far (till 2020)?
a. One
b. Two
c. Three
d. None of these
Key to terminal /Multiple Choice Questions
01. (b) 02. (a) 03. (b) 04. (d) 05. (b) 06. (b) 07. (b) 08. (c) 09. (a) 10. (c)
Gaurav Datt and Ashwani Mahajan (2015) Datt & Sundharam’s Indian
Economy
RBI Circulars through the website: https://www.rbi.org.in
Bank for International Settlement (BIS) website www.bis.org - Basel Accord

Reports
Pramod Rao and Anil Varma (2007) Globalization: Indian Financial Sector
Reforms, ICFAI University Press
174
2.6 Lesson No.6 Financial Inclusion for Inclusive Growth
2.6.1 Objectives
2.6.2 Introduction
2.6.3 Financial Exclusion
2.6.4 Financial Inclusion
2.6.5 The Committee on Financial Inclusion -Dr. Rangarajan Committee
2.6.5.1 Business Facilitator Model

2.6.5.2 Business Correspondence Model
2.6.5.3 KYC norms
2.6.6 National Strategy for Financial Inclusion 2019-24
2.6.7 Let us Sum up

2.6.8 Key Words
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2.6.1 Objectives
The objectives of this lesson are to understand:
• The significance of financial inclusion for inclusive growth and
• The recommendations of the Rangarajan Committee.
• National Financial Inclusion Strategy of India 2019-24
2.6.2 Introduction
Financial inclusion is increasingly being recognized as a key driver of inclusive

growth and poverty alleviation the world over. Access to formal finance can
boost job creation, reduce vulnerability to economic shocks and increase
investments in human capital. Seven of the United Nations Sustainable
Development Goals (SDG) of 2030 view financial inclusion as a key enabler
for achieving sustainable development worldwide. Without adequate access to
formal financial services, individuals and firms need to rely on their own
limited resources or rely on costly and exploitative informal sources of finance
to meet their financial needs. At a macro level, greater financial inclusion can
support sustainable and inclusive socio-economic growth for all.
As a student of DCBM you may appreciate the idea that financial inclusion
efforts of banks are not charity, they can lead to sustainable business too for
banks and other cooperatives besides helping their customers.
2.6.3 Financial Exclusion
Financial exclusion is opposite of financial inclusion and means inability to

access the financial services from formal sources. Exclusion is not a new
phenomenon. History over the years has shown exclusion is part of life
especially if one belongs to disadvantaged sections of society like
small/marginal farmers, landless labourers, oral lessees, slum dwellers,
urban migrants, schedule caste, scheduled tribes, ethnic minorities and
senior citizens, illitereates, poor women, etc. However, a country like ours,
having a wide cross section of people cannot afford to neglect its citizens.
Facilities/ Opportunities are to be provided to every individual in the society
to develop themselves. The reasons for financial exclusion, ranges from, lack
of identity cards/papers, limited literacy, low incomes and lack of awareness,
lack of customer friendly services and facilities for enabling financial
inclusion, etc. and the financial inclusion addresses precisely those issues.
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2.6.4 Financial Inclusion
Financial Inclusion means delivery of banking services at

an affordable cost to vast sections of disadvantaged and
low income groups.
The need for financial services assumes more importance in the changed
environment. Financial services include the provision of savings, loans,
insurance, payments and remittance facilities by formal financial system to
those who tend to be excluded.
Financial Inclusion envisages (a) encouraging savings (b) use of bank

accounts (c) making available financial advice (d) providing affordable credit
(e) introducing tailor made insurance products (f) extending the services of
payment and remittance systems.
All these measures which are in place for the affordable, affluent and others
should be made available to the hitherto financially excluded lot.
As a proactive measure, the RBI in its Annual Policy Statement for the year
2005-06, while recognizing the concerns in regard to the banking practices
that tend to exclude rather than attract vast sections of population, urged
banks to review their existing practices to align them with the objective of
financial inclusion.
Financial inclusion is not a charity but business opportunity
Financial inclusion offers several opportunities which can be exploited to the

mutual advantage of those excluded, the banking system and society at large.
Banks need to understand the market and develop products suited to the
clientele. Financial inclusion needs to be viewed as a business strategy for
growth and banks need to position themselves accordingly. Establishment of
an account relationship can pave the way to the customer availing of a variety
of savings products, loan products for consumption livelihood and housing.
The account can be used for making small value remittances at low cost and
making purchases on credit. The same banking account can be used by State
Governments to provide social security services like health and calamity
insurance under various schemes for the disadvantaged. This has been
proven now by the fact that although under Pradhan Mantri Jan Dhan Yojana
(PMJDY) scheme, saving bank accounts were opened with ‘zero’ balance, now
the 42 crore PMJDY accounts have a total saving deposit of Rs 1,39,864 crore
(say Rs 1.4 lakh crore!) as on March 10, 2021 which is a huge amount!.
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2.6.5 The Committee on Financial Inclusion -Dr. Rangarajan
Committee
The Govt. of India set up a Committee on Financial Inclusion under the

Chairmanship of Dr. C. Rangarajan, Ex-Governor of the RBI in the year 2008.
The committee defined financial inclusion as “the process of ensuring access
to financial services and timely and adequate credit where needed by
vulnerable groups such as weaker sections and low-income groups at an
affordable cost.” In his report, the Committee observed that 51.4% of farmer
households are financially excluded from both formal/informal sources and
of the total farmer households, only 27% access formal sources of credit, one
third of this group also borrow from formal sources. Overall, 73% of farmer
households had no access to formal sources of credit. This exclusion is most
acute in Central, Eastern and North-East regions of the country.
Recommendations of the Committee
Following are the important recommendations of the Rangarajan Committee:
• A National Financial Inclusion Mission comprising representatives of all

stakeholders may be constituted and made responsible for deciding on
policy issues, for supporting stakeholders in the domain of public,
private and NGO sectors and monitoring the execution of National Rural
Financial Inclusion Plan (NRIFP).
• Setting up of:
➢ Financial Inclusion Promotion and Development Fund and
➢ Financial Inclusion Technology Fund, with the National Bank for

Agriculture and Rural Development (NABARD), with an initial
corpus of Rs. 500 crore.
The Financial Inclusion Promotion and Development Fund would focus on

financing Farmers' Service Centres (FSC), promoting rural entrepreneurship,
SHGs, developing human resource while the Financial Inclusion Technology
Fund would help make available technology applications for greater financial
inclusion. It urged Regional Rural Banks (RRBs) to extend their services to
non-banked areas and increase their credit to deposit ratio.
To encourage self -help groups (SHGs), the committee recommended that

state governments and NABARD should set aside specific funds out of
budgetary support and the Micro Finance Development and Equity Fund
(MFDEF), to promote SHGs in regions with high levels of exclusion. The
committee has recommended the creation of a ‘Credit guarantee fund’ as a
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risk mitigation mechanism and also for providing comfort to banks for lending
to Joint Liability Groups (JLGs).
The objective of “Comprehensive Financial Inclusion” would be to provide a

holistic set of services encompassing such as small deposit account (no frills
banking account), suitable savings product to meet the requirements of the
rural poor considering their position and ability, etc.
The recommendations of the committee included the following:
National Rural Financial Inclusion Plan (NRFIP)
There is a need to take up on a mission mode a financial inclusion plan at the

national level. The emphasis is on providing comprehensive financial services
to at least 50% of the excluded rural cultivator and non-cultivator households
by 2012. Semi-urban and rural branches of commercial banks and the RRBs
may set for themselves a minimum target of covering 250 new cultivator and
non-cultivator households per branch per annum. Targets have to be
disaggregated district wise and branch wise at SLBC/ DLCC level.
Recommendations for Commercial Banks
The recommendations specific to Commercial Banks were as under:
i. Targeted branch expansion in excluded districts

ii. Product innovations are required for meeting needs of the excluded
segments; SHGs to be utilized for tapping the small savings by providing
back-end technology support
iii. A savings linked financing model to be evolved, based on the repayment
behavior. Banks to undertake distribution of suitable micro insurance
products
iv. Existing staff in rural branches to be assessed based on an index of
measurable performance criteria
Business Facilitators (BFs)/ Business Correspondents (BCs)
The committee recognizing the fact that it was not possible to achieve financial
inclusion through the brick and mortar model (branches) recommended the
BC/BF model for achieving financial inclusion.
The recommendations in this regard included the following:
• Need for flexibility in approach : Banks to be given the discretion to

identify business correspondents based on due diligence; individuals
like locally settled retired post-masters, school teachers, bank staff and
defense personnel may be enabled to act as Business Correspondents.
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• Commensurate incentives may be provided to BCs in tune with the
number of accounts/ volume of transactions handled.
• Financial responsibilities may be placed on BCs over a period of time,
for ensuring safety of deposits, recovery of loans, etc.
• SLBCs may discuss with State Governments regarding routing
Government payments through BC.
• Commercial Banks may play a very important role in SHG-Bank
Linkage Program particularly in regions featuring high levels of
exclusion.
• Commercial Banks to support on a significant scale Joint Liability
Groups (JLGs) of marginal farmers, tenant farmers, etc.
Technology Adoption
Financial inclusion, on the scale visualized, cannot be achieved unless it is

backed by technology support. Several models are available linking the small
value transactions of the poor with the mainframe banking at branch/ bank
level through smart cards with farmers, terminals with BCs and a Central
Processing Unit at district or cluster of districts level.
Regional Rural Banks
Post-merger, RRBs represent a powerful instrument for financial inclusion.

Their presence and contribution to SHG Bank Linkage, particularly in
excluded regions, is very impressive. In this regard, following areas require
attention:
(i) Setting exclusive targets for micro finance and financial inclusion
(ii) Providing funding support and
(iii) Providing technology support.
While there can be a commitment that there will be no further merger of

RRBs, re-capitalization of banks with negative net worth and widening their
network to cover all the districts could be the support requirements. RRBs
would require immediate support in preparing and implementing NRFIP, a
strategic micro finance plan in their areas of operation, pilot testing and
grounding of BF/ BC models, etc. NABARD may extend required support and
engage in strategic alliance with RRBs. Government of India, in addition to
recapitalization of RRBs with negative net worth, may also consider tax
exemption in respect of profits transferred to reserves till the RRBs achieve
standard capital adequacy ratios.
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Local Area Banks (LAB)
RBI may allow new LABs without compromising on start-up capital and other
regulatory prescriptions.
Cooperative Banks
Cooperative banks have a very significant role to play in facilitating greater

inclusion. Early implementation of Vaidyanathan Committee revival package,
strengthening their involvement in SHG-bank linkage with enabling
legislation for admitting SHGs as members of PACS, use of PACS and other
primary cooperatives as Business Correspondents of commercial banks and
RRBs, etc. are to be seriously considered.
SHG-Bank Linkage: Policy related initiatives
Encouraging SHGs in excluded regions, funding support to NGOs for

promotion of SHGs in tribal and backward areas, capacity building of
Government functionaries, opening of dedicated project offices by NABARD in
priority states, and providing an incentive package for NGOs operating in
backward regions are the supportive measures.
Microfinance Institutions:
There is need to recognize a special category of MF-NBFCs without any

relaxation on start-up capital and subject to other regulatory prescriptions.
At least 80% of their assets should be in the form of micro credit. Such MF-
NBFCs may be made eligible to act as Business Correspondents of banks for
providing only savings and remittance services and to act as agents of
regulated (life and non-life) insurance companies. Guidelines may be relaxed
stipulating minimum amount of foreign equity for MF- NBFCs at a level of US
$ 100,000 instead of US $ 500,000 as of now. SEBI venture capital guidelines
may permit Venture Capital Funds to invest in MF-NBFCs. NABARD may
extend equity support to MF-NBFCs operating in regions featuring high levels
of exclusion. Tax concession to the extent of 40% of profits may be considered
by including them as eligible institutions under Section 36(1) (viii) of Income
Tax Act.
Micro Insurance
For leveraging the existing network for Micro insurance, the partner-agent
model for delivery, where the insurer underwrites the risk and the distribution
is handled by an existing intermediary, seems most appropriate. Micro credit
without micro insurance is financial behaviour fraught with risk. There is a
need to emphasize on linking micro credit with micro insurance and involve
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NABARD in the process to leverage on its experience in the field of micro
credit.
Creating a cadre of full time and part time staff for insurance marketing and
servicing, evolving appropriate systems for tracking client information, setting
up of a technology platform over the long run and stimulating demand for
micro-insurance by simplifying and rationalizing the procedures for premium
payments, renewals, settlement of claims, etc. require immediate attention.
There has to be a machinery for consumer education, marketing and
grievance handling. Specific recommendations have also been made regarding
micro insurance schemes of life, crop, livestock and asset insurance.
Remittance needs of the poor
Migrant labor and an emerging need for safe, simple and low cost remittance
services go together. A low value card linked to a bank account and
encashable at over 3 lakh POs and 1.5 lakh post offices, designing an
electronic remittance product and facilitating remittances through the BC of
banks (backed by technology support) are the major recommendations.
2.6.5.1 Business Facilitator Model
There are two types of facilitators or agents who can be appointed by bank –
‘Business Facilitator (BF)’ and ‘Business Correspondent’ (BC). The difference
between the two is as follows: while the BCs are permitted to carry out
transactions (including cash transactions) on behalf of the bank as agents,
the BF can refer clients, pursue the clients' proposal and facilitate the bank
to carry out its transactions, but cannot transact on behalf of the bank.
However, BF can help in financial inclusion in several ways. Some of the roles
and responsibilities of a BF are as follows:
a. Identification of borrowers and fitment of activities.

b. Collection and preliminary processing of loan applications
c. Verification of primary information / data
d. Creating awareness about savings and other products
e. Education and advise on managing money and debt counseling
f. Processing and submission of applications to banks
g. Promotion and nurturing Self Help Groups / Joint Liability groups
h. Post – sanction monitoring
i. Monitoring and handholding of SHGs/ JLGs / Credit Groups
j. Follow up of recovery
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As these services are not intended to involve the conduct of banking business
by Business Facilitators, no approval is required from RBI for using these
intermediaries for facilitation of services.
Eligible entities as BF are presented in Figure 2.6.1
Figure 2.6.1: Eligible entities eligible to be appointed Business

Facilitator
Eligible entities –
Business Facilitator
Farmers’ clubs, Community based

Post Offices, Insurance Well functioning
Cooperatives, Agri organizations; IT Individuals as
agents, Krishi Vigyan Panchayats, Village
Clinics/Agri Business enabled rural outlets of specified by RBI,
Kendras, KVIC/KVIB knowledge centres
Centers corporate entities
2.6.5.2 Business Correspondent (BC) Model
As mentioned earlier, BCs are authorized to carry out transactions (including

cash transactions) by the bank. Therefore, while engaging any person or
agency as BC, banks to ensure that they are well established, enjoy good
reputation and have confidence of the local people.
The activities to be taken by the Business Correspondents include:
a. Disbursal of small value credit

b. Recovery of Principal / collection of interest
c. Collection of small value deposits
d. Sale of micro insurance / mutual fund products/ pension
products/ third party products
e. Receipt and delivery of small value remittances/ other payment
instruments.
Eligible entities as BC are presented in Figure 2.6.2.
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Figure 2.6.2: Eligible entities eligible to be appointed Business
Correspondent
Eligible entities –
Business Correspondent
Societies registered under

Individuals as specified by Mutually Aided Cooperative
Post Offices, Section 8 Registered NBFCs not
RBI; NGOs /MFIs set up Societies Acts or the
companies accepting public deposits
under Societies/Trust Acts Cooperative Societies Acts
of States including PACS
Banks are expected to give wide publicity in the locality about the
intermediary engaged by them as Business Correspondent and take measures
to avoid being misrepresented. Correspondents and banks to ensure that the
schemes formulated and implemented are in strict compliance with the
objectives and parameters laid down in the circular issued by RBI. Banks may
pay reasonable commission / fee to the Business Facilitators/
Correspondents, the rate and quantum of which may be reviewed periodically.
The agreements with BFs/ BCs should specifically prohibit them from
charging any fee to the customers directly for services rendered by them on
behalf of the bank.
The arrangements with the BCs should specify the following:
a. Suitable limits on cash holding by intermediaries as also limits on

individual customer payments and receipts.
b. The requirement that the transactions are accounted for and
reflected in the bank’s books by end of day or next working day.
c. All agreements / contracts with the customer to clearly indicate that
the bank is responsible to the customer for acts of omission and
commission of the BF / BC.
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2.6.5.3 KYC Norms
Compliance of KYC norms will continue to be the responsibility of banks. The
KYC guidelines issued provide sufficient flexibility to banks. Since the
objective is to extend savings and loan facilities to the underprivileged and
unbanked population, banks may adopt a flexible approach within the
parameters of guidelines issued on KYC from time to time.
2.6.6 National Strategy for Financial Inclusion 2019-24
The National Strategy for Financial Inclusion (NSFI) for India 2019-2024 has
been prepared by RBI under the aegis of the Financial Inclusion Advisory
Committee and is based on the inputs and suggestions from Government of
India, other Financial Sector Regulators viz., Securities Exchange Board of
India (SEBI), Insurance Regulatory and Development Authority (IRDA),
NABARD, National Payments Corporation of India (NPCI), Commercial Banks
and Corporate Business Correspondents, etc. It is first of its kind document
and sets forth the vision and key objectives of the Financial Inclusion policies
in India to expand the reach and sustain the efforts through a broad
convergence of action involving all the stakeholders in the financial sector.
The report reviews the huge efforts of all the stakeholders in India led by GoI
in the direction of Financial Inclusion. It states that the first initiative in this
regard was as early as in 1956 with the nationalisation of Life Insurance
companies. This was followed by nationalisation of banks in 1969 and 1980
and then nationalisation of the general insurance companies in 1972. The
biggest initiative in this context is Pradhan Mantri Jan Dhan Yojana (PMJDY)
in the year 2014 which has enabled a whopping 42 crore people to open bank
account with zero balance. Several other initiatives like KCC, SHG, NRLM,
insurance schemes at nominal premium (Pradhan Mantri Suraksha Bima
Yojana -PMSBY- wherein one- year accidental death cum disability cover of
₹2 lakhs is offered to all subscribing bank account holders in the age group
of 18 to 70 years for a premium as low as Rs 12/- per annum) and several
others. The reports states that a host of initiatives have been undertaken over
the years in the financial inclusion domain in India.
Vision of the National Strategy for Financial Inclusion
The vision of NSFI articulated in the report is “To make financial services
available, accessible and affordable to all the citizens in a safe and transparent
manner to support inclusive and resilient multi-stakeholder led growth”. The
vision and the strategic objectives (referred as strategic pillars in the Report)
are presented in Figure 2.6.3.
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Figure 2.6.3: Vision and strategic objectives of NSFI
Important recommendations
Important recommendations of the NSFI are presented below:
1. Universal Access to Financial Services
1. The digital infrastructure in the country needs to be expanded

through better networking of bank branches, BC outlets, Micro
ATM, PoS terminals and stable connectivity etc. coupled with
electricity. Efforts are needed to be undertaken through co-
ordination with various stakeholders to ensure creation of the
requisite infrastructure for moving towards completely digital on-
boarding of customers.
2. Encourage adoption and acceptance for digital payments and

bringing people into the fold of formal financial system. In
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addition to the traditional banking outlets, efforts may also be
taken to involve co-operative banks, Payments Banks, Small
Finance Banks and other non-bank entities such as fertilizer
shops, fair price shops, local Government Bodies, Panchayat,
Common Service Centres, educational institutions, etc., to
promote efficiency and transparency through digital transactions.
3. Some of the issues such as remuneration to the BCs, need for

furnishing cash-based collaterals, cash management issues and
lack of insurance for cash in transit which act as deterrents in
smooth functioning of the BC network, need to be redressed by
banks in a timely manner.
2. Providing Basic Bouquet of Financial Services
1. The banks may undertake periodic review of their existing

products and adopt a customer centric approach while designing
and developing financial products.
2. Ensure efficient delivery by leveraging on ‘Fin-tech’ and BC

network.
3. Initiate measures for capacity building of the BCs by encouraging

and incentivizing them to acquire requisite certifications and
enabling them to deliver a wide range of financial products.
3. Access to Livelihood and Skill Development �
1. There should be convergence of objectives of the National Rural

Livelihood and Urban Livelihood Missions to deepen Financial
inclusion through an integrated approach.
2. Inter-linkages may be developed between banks and other

financial service providers with ongoing skill development, and
livelihood generation programmes through RSETIs, NRLM, SRLM,
Pradhan Mantri Kaushal Vikas Yojana etc.
4. Financial Literacy and Education
1. Customers need to be explained in simple language the nature of

the product, its suitability to their requirements and the cost vis-
à-vis return.
2. Concerted efforts are needed to ensure coordination among the

ground level functionaries viz. Lead District Manager (LDM),
District Development Manager (DDM) of NABARD, Lead District
Officer (LDO) of RBI, District and Local administration, Block level
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officials, NGOs, SHGs, BCs, Farmers’ Clubs, Panchayats, PACS,
village level functionaries etc. while conducting financial literacy
programmes.
5. Customer Protection and Grievance Redressal
1. A robust customer grievance redressal mechanism at different

levels helps banks in timely redressal of grievances.
2. Develop a portal to facilitate inter-regulatory co-ordination for

redressal of customer grievance.
6. Effective Co-ordination
1. Strengthen the various fora under Lead Bank Scheme viz., SLBC
/ DCC / BLBC to ensure the achievement of the vision of the
strategy at the ground level.
2. Leverage on the emerging developments in technology to

promote effective stakeholder co-ordination by having in place a
digital dashboard/ MIS monitoring.
3. Encourage decentralized approach to planning and development

by creating a forum to actively involve Gram Panchayats/ Civil
Society/ NGOs to accelerate financial inclusion using various
tools like social audit.
The above is a brief about this report. The full report can be accessed at the
RBI Website.21
2.6.7 Let us sum up
Financial inclusion is increasingly being recognized as a key driver of inclusive

growth and poverty alleviation the world over as access to formal finance can
boost job creation, reduce vulnerability. Seven of the United Nations
Sustainable Development Goals (SDG) of 2030 view financial inclusion as a
key enabler for achieving sustainable development.
Financial inclusion is the delivery of financial services by the financial system

at an affordable cost to vast sections of disadvantaged and low income groups.
Financial services include the provision of savings, loans, insurance,
payments and remittance facilities by formal financial system to those who
tend to be excluded.
21
Web link: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1154#3
188
Lot of efforts have been made in India for Financial Inclusion since
independence however, it is a matter of concern that still large sections of
population – especially the poor and vulnerable - continue to remain
financially excluded. In this context, Government of India appointed
Rangarajan Committee in 2008 to suggest ways of improving the situation. It
gave several very important recommendations including implementation of
National Rural Financial Inclusion Plan in a mission mode. Based on the
recommendations, two funds were created in NABARD for Financial Inclusion,
viz., Financial Inclusion Promotion and Development Fund and Financial
Inclusion Technology Fund.
Another very important development with regard to financial inclusion efforts

was preparation of “National Strategy for Financial Inclusion” for India 2019-
2024 by RBI. It has articulated the vision and 6 strategic objectives (referred
as ‘Pillars’) of financial strategy.
It is obvious that financial inclusion is no longer a choice but a compulsion

for all the stakeholders- especially for the poor and vulnerable. For bankers it
is to be realized that financial inclusion is not charity but it is sound and
sustainable business.
For the poor and financially excluded it is a journey towards a better life.
2.6.8 Key words
Financial Inclusion, Financial Exclusion, GoI, RBI, NABARD, IRDA, NPCI, Dr

Rangarajan, Business Correspondent, Business Facilitator, Financial
Inclusion Promotion Fund, Financial Inclusion Technology Fund, National
Strategy for Financial Inclusion (NSFI)
State True or False
01. Financial inclusion means delivery of banking services at an affordable

cost to vast sections of disadvantaged and low income groups
02. Financial inclusion is basically charity and not business for the banks
03. KYC norms not applicable for the bank accounts opened for financial
inclusion purpose
04. PMJDY (Pradhan Mantri Jan Dhan Yojana) is an important initiative

of the Government of India for financial inclusion
05. Micro credit without micro insurance to be encouraged, the

Committee on Financial Inclusion concluded.
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06. Business correspondent (BC) and Business Facilitators (BF) are the
same.
1. True 02. False 03. False 04. True 05 False 06. False
2.6.10 Terminal Multiple Choice Questions
01. The Committee on Financial Inclusion was headed by
a. Dr. Man Mohan Singh
b. Dr. Y V K Reddy
c. Dr. C. Rangarajan
d. Dr. Jalan
02. Financial inclusion means?
a. Providing banking service to poor and disadvantaged
b. Charging high interest for providing credit
c. Both (a) and (b)
03. Financial inclusion is not merely opening bank account. It also includes:
a. Insurance
b. Remittance facilities
c. . Both (a) and (b)
04. The difference between Business Correspondent (BC) and Business

Facilitator (BF) is:
a. BC is authorized to conduct transactions on behalf of the bank

including cash transactions
b. BF can help the bank customers/ bank in several ways but can’t
carry out transactions on behalf of the bank including cash
transactions
c. Both (a) and (b)

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05. Who can be appointed as Business Facilitator?
a. Societies and NGOs
b. SHG/ Farmers Clubs
c. Post office
d. All of the above
06. Who can be appointed as Business Correspondent?
a. Private Company/ Corporates
b. PACS/ MACS
c. Both (a) and (b)
07. What is true of National Strategy for Financial Inclusion?
a. It was prepared by RBI
b. It is for the period 2019-2024
c. Both (a) and (b)
08. Which technologies are useful in Financial inclusion?
a. Digital payment by using mobile
b. POS Terminals/ Machines
c. Micro ATMs
d. All of the above
09. Which institutions contribute in Financial inclusion?
a. Commercial Banks
b. DCCBs
c. State Coop. Banks
d. All of the above
10. NPCI stands for
a. National Plantation Corporation of India
191
b. National Payments Corporation of India
c. National Power Corporation of India
d. National Players Club of India
Key to terminal / Multiple Choice Questions:
1.(c) 2. (a) 3.( c) 4 (c) 5. (d) 6.( c) 7 (c) 8.(d) 9 (d) 10.(b)
Dr. Rangarajan Committee Report on Financial Inclusion (2008)
RBI (2020) National Strategy for Financial Inclusion (NSFI) weblink:

https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID
=1154#3
Sujatha B (2007) Financial Inclusion, ICFAI University Press.
192
Unit 3: Foundation of Cooperatives: Evolution, Status, Values,
Principles and Structure
3.1 Lesson No. 1 Introduction to Co-operative Credit Structure
3.1.1 Objectives
3.1.2 Introduction
3.1.3 Definitions
3.1.4 Evolution and Status of Cooperatives in India
3.1.5 Cooperative values and Principles
3.1.6 Features of cooperatives
3.1.7 Types of Credit Co-operatives

3.1.8 Let us Sum Up
3.1.9 Keywords
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3.1.1 Objectives
• Co-operation and related issues
• Co-operative Movement and its significance.
3.1.2 Introduction
In a cooperative set up, members come together on a voluntary basis to

achieve results for the benefits of the members for a common purpose.
3.1.3 Definitions
The term ‘Co-operation’ is derived from the Latin word ‘co-operari’, where ‘co’
means ‘with’ and ‘operari’ means ‘to work’. Thus the term Co-operation means
working together, that people will have to come together to share with each
other and support one another.
• A ‘Co-operative’ is a form of business organization based on the

principles of cooperation.
• A ‘Co-operative Society’ is formed and directed by an association of
users applying for itself the rules of democracy and directly intending
to serve both its own members and the community at large.
• The ‘Co-operative Movement’ is a socio-economic movement. It means
something more than just a series of activities. Its purpose is to evolve
a system of co-operative community organization which deals with all
aspects of life to the extent possible.
As per International Cooperative Alliance (ICA), “A cooperative is an
autonomous association of persons united voluntarily to meet their common
economic, social, and cultural needs and aspirations through a jointly owned
and democratically-controlled enterprise.”
In a cooperative, the members associate and try to build up consensus so that

the efforts could bring the desired results. Since the benefits are likely to be
used by the members of the co-operative setup, the honesty, openness, social
responsibility and caring for one another are given due importance. The noble
objective of co-operative movement is “one for all and all for one”.
3.1.4 Evolution and Status of Cooperatives in India
Although the value system of cooperation existed in the society ever since the
human civilization started, the formal cooperative movement has its roots in
Europe of 19th century. The cooperative movement developed in pre-
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Independence India in response to agricultural distress and indebtedness.
The first known ‘mutual aid society’ is the ‘Anyonya Sahakari Mandali’
organised in the erstwhile princely State of Baroda in 1889 under the
guidance of Shri Vithal Laxman also known as Bhausaheb Kavthekar.
Following the recommendation of Famine Commission, the Government of

India appointed in 1901, a Committee under the presidentship of Sir Edward
Law to report on the steps to be taken for the establishment of the co-operative
credit societies in the country. This committee recommended the
establishment of co-operative societies on the ‘Raiffeisen model’- named after
Mr Friedrich Wilhelm Raiffeisen from Germany, who pioneered rural credit
unions. The report of this committee showed that no real progress was
possible without Government legislation. It was on the basis of this report
that the Co-operative Credit Societies Act of 1904 was passed. The growth of
cooperatives in India was fostered, first by India's erstwhile British rulers and,
then, several steps have been taken, post-Independence, to assist in their
growth and functioning.
The matters relating to cooperatives are guided and coordinated by

Department of Cooperation under Government of India (GoI). It was part of
Ministry of Agriculture, Cooperation and Farmers Welfare but only on 07 July
2021, GoI has created Ministry of Cooperation which will provide a separate
administrative, legal and policy framework for strengthening the cooperative
movement in the country, realising the vision of ‘Sahkar se Samriddhi’
(Prosperity through cooperatives).
Since India is a country mainly dependent on agriculture, importance was

given to agriculture related co-operatives. Later developments saw that co-
operative setups have come off in other areas such as housing co-operatives,
employees’ co-operatives, co-operative credit agencies, co-operative banks,
consumer cooperatives, etc. The total number of cooperatives as reported by
National Cooperative Union of India (NCUI) is 8,54,355 as on 2017, with total
membership of 29 crore (NCUI, 2018). These cooperatives belong to 26 major
activities, viz dairy, credit, consumer stores, marketing cooperatives, housing,
labour, transport, etc.
Cooperative movement is a massive people based movement, spread all over

the world and International Cooperative Alliance (ICA) is a global body
representing cooperatives at the international level.
3.1.5 Cooperative values and Principles
Cooperatives are based on the values of self-help, self-responsibility,

democracy, equality, equity and solidarity. Cooperative members believe in
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the ethical values of honesty, openness, social responsibility and caring for
others.
The cooperative principles are guidelines by which cooperatives put their

values into practice. Following are the 7 ‘Cooperative principles’ adopted
internationally and published by International Cooperative Alliance (ICA).
These principles were adopted at the 1995 Congress and General Assembly of
the ICA held at Manchester (UK).
First Principle: Voluntary and Open Membership
Cooperatives are voluntary organisations, open to all persons, who are able to
use their services and willing to accept the responsibilities of membership,
without gender, social, racial, political or religious discrimination.
Second Principle: Democratic Member Control
Cooperatives are democratic organisations controlled by their members, who

actively participate in setting their policies and making decisions. Men and
women serving as elected representatives are accountable to the membership.
In primary cooperatives, members have equal voting rights (one member, one
vote). Cooperatives at other levels are also organised in a democratic manner.
Third Principle: Member Economic Participation
Members contribute equitably to, and democratically control, the capital of

their cooperative. The members benefit in proportion to their business
transactions with the cooperative and not merely based on the investment.
Fourth Principle: Autonomy and Independence
Cooperatives are autonomous, self-help organisations controlled by their

members within the legal framework of the country and state where they
operate. If they enter into agreements with other organisations, including
governments, or raise capital from external sources, they do so on terms that
ensure democratic control by their members and maintain their cooperative
autonomy.
Fifth Principle: Education, Training, and Information
Cooperatives provide education and training for their members, elected

representatives, managers, and employees so they can contribute effectively
to the development of their co-operatives. They inform the general public -
particularly young people and opinion leaders - about the nature and benefits
of co-operation.
Sixth Principle: Cooperation among Cooperatives
Cooperatives serve their members effectively and strengthen the cooperative

movement by working together through local, national, regional and
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international cooperative and other structures. The synergy can help all the
partners in many ways.
Seventh Principle: Concern for Community
Cooperatives work for the sustainable development of their communities

through policies approved by their members.
3.1.6 Features of cooperatives
Features of a cooperative undertaking can be easily understood with the

following dimensions:
• Ownership: The unique feature of cooperative is that each member is

considered as the owner. A co-operative is based on private individuals
coming together as members to set up a collective, joint or social
ownership. Since all are considered as owners, individual dominance is
not given importance.
• Goal: The goal of a co-operative is to serve members as favorably as
possible and to serve them with service motive rather than profit motive.
Since the profit motive is not given importance, even if profit is earned,
it is shared among the members as per the rules.
• Control: A co-operative is being controlled by its members in a
democratic manner. For management of cooperatives, an elected Board
of Directors with Chairman, is put in place. For day to day management,
the Chief Executive Officer/ Managing Director and staff as per the
requirement are appointed.
• Coordination: Following the principle of Cooperation among
cooperatives, activities are undertaken in coordination with the
members and other stakeholders for carrying out day to day business.
• Open Membership: One of the significant aspects is the open
membership concept. No one is denied membership on grounds of
caste, creed, gender, economic or financial position.
• Democratic Control: ‘One person, one vote’ is one of the foundation
bases of the Co-operative concept. Everyone is treated at par. Equality
is given more attention. Irrespective of the number of shares held, all
the members are treated equally. Thus cooperative model is quite
different from private ownership model of business where the owner’s
importance depends on the number of shares or amount of share
capital invested.
• Distribution of surplus (Dividend): The excess earning (surplus) is
divided among the members as dividend or bonus, in proportion to their
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business done through the co-operative and not based on the
investment made in it.
• Political and religious neutrality: The main purpose of co-operative is
to serve its members by enhancing their economic standard and not to
serve members of any political or a religious group.
• Business focus: Most of the cooperatives focus on one main activity or
a few selected activities. For example, dairy cooperatives focus on dairy
activities and cooperative banks focus on banking. This helps in
efficient and effective management.
• Dual Control : Registrar of Cooperative Societies (RCS) is the regulator
of cooperatives with vast powers under the Cooperative Societies Act,
right from registration (birth of the society) till cancellation of
registration of the society (death of the society). The RCS could be for
the state, if the society is registered under the State’s Cooperative
Societies Act or the Central Registrar of GoI for Multi-State Co-operative
Societies. When the Co-operative society is a cooperative bank (having
banking license), it comes under ‘dual control’. As far as the matters
are related to banking, then the guidance has to be sought from RBI as
RBI is the regulator of banks in India and has been vested with the
powers to deal with Co-operative banks such as issuing of licensing,
matters associated with the provisions of Banking Regulation Act, 1949
and RBI Act, 1934 in running the co-operative bank22. However, where
the matters relating to registration, compliance to the provisions of
cooperative societies act, conduct of AGM, elections, winding up etc are
concerned, the RCS continues to be the authority. Due to this, there
are some limitations under which the cooperative banks have to
function.
• Promotion of Education: Education alone improves social and
cultural values of any society. Hence Co-operative setup has to support
the education of members to ensure better results.
1.3.7 Types of Credit Co-operatives
Credit cooperatives are important constituents of cooperative movement in

India. The Co-operative credit structure can be broadly grouped into ‘rural’
and ‘urban’ credit co-operatives. These institutions provide a fairly large
basket of services for their clientele. The rural co-operative credit structure in
India is classified into Short Term Credit and Long Term Credit Co-operatives.
22
NABARD conducts inspection of the DCCBs and StCBs as a part of supervisory function. But RBI is the regulator
for all the cooperative banks (urban cooperative banks as well as DCCBs, StCBs).
198
Short-term Co-operative Credit Structure
The short term Co-operative Credit Structure (STCCS) consists ‘three tier’,
‘two tier’ or ‘unitary’ structure. The ‘Three tier’ structure is the most
prominent, comprising of Primary Agricultural Credit Societies (PACS) at the
village level (grass root level), District Central Co-operative Banks (DCCBs) at
the middle or intermediate position at district level and State Co-operative
Banks (StCBs) at the State Level. Each one has different role and contributes
for the overall development of the economy. The ‘Two tier’ structure comprises
of PACS at the grass root level and the StCB at the state level without DCCB
in the middle level. The third type of structure- ‘Unitary structure’ has only
the StCB without the DCCB and PACS and it operates directly through the
branches.
Long Term Co-operative Credit Structure
The long term Co-operative credit structure or investment credit structure

consists of Primary Co-operative Agricultural and Rural Development Banks
(PCARDB) at the base level (grass root) and State Co-operative Agricultural
and Rural Development Bank (SCARDB) at the State level.
Urban Co-operative Credit Structure
The urban co-operative banks (UCB) also called Primary Cooperative Banks,
as the name suggests, carry out business in urban areas. Although most of
these banks operate in local areas- some have only one branch, a few have
their businesses in more than one State. These institutions are registered
under State Cooperative Societies Act as also Multi State Co-operative
Societies Act, 2002. UCBs are allowed to convert into Small Finance Banks
subject to certain conditions stipulated by RBI. There are also other kinds of
salary earners/ wage earners/ employees credit Co-operative Societies as well
but they are not registered as banks.
3.1.7 Let us sum up
A cooperative is an autonomous association of persons united voluntarily to

meet their common economic, social and cultural needs as also aspirations
through a jointly owned and democratically-controlled enterprise.
Co-operative movement, originated more than a century ago, has become an

important part of our system.
The Cooperative Societies Act was passed in India in the year 1904 and since
then the cooperative movement has grown to over 8.5 lakh cooperatives of
various kinds with a massive membership of 29 crore. Cooperative movement
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is spread throughout the world and ICA is the international body representing
cooperatives.
Cooperatives are based on the ethical values like self-help, self-responsibility,

democracy, equality, etc.. There are 7 ‘cooperative principles’ which are
adopted in cooperatives.
The Co-operative credit structure plays an important role of providing

financial services to their clientele across the country, especially in rural
areas. All these credit units help to develop the economy on a continuous
basis. The Co-operative banks have ‘dual control’ of the Registrar of Co-
operative Societies and of RBI. This is a unique feature of cooperative banks.
Thus cooperative model of business is a model of sustainable and inclusive

economic growth which can help the people especially the small farmers, poor
and vulnerable sections.
3.1.8 Keywords
Co-operative Credit, Rayat Commission, Co-operative Credit Societies Act,

Primary Agricultural Credit Societies (PACS), District Central Co-operative
Banks (DCCBs), State Co-operative Banks (StCBs), Primary Co-operative
Agricultural and Rural Development Bank (PCARDBs), State Co-operative
Agricultural and Rural Development Bank (SCARDBs), democratic control,
dual control.

State True or False
1. The Cooperative Societies Act was passed in the year 1947 in India.
2. In a co-operative set up activities are being undertaken in coordination
with the members for doing services.
3. Self- help, self-responsibility, democracy, equality, equity and
extending support are the key aspects associated with the Cooperative
set up.
4. In cooperative the number of votes depend upon member’s investment-
if a member has more investment, he can have more voting rights.
5. A Co-operative activity is mainly for serving the members and not the
general public.
6. In Co-operation, members share the rewards in proportion to their
investment.
7. One of the principles of Co-operation is Voluntary and Open
Membership.
8. Most of the states have three tier structure of short term cooperative
credit structure.
9. A Multi-State Co-operative Bank works under dual control.
200
10. Cooperatives provide education and training for their members,
elected representatives, managers and employees.
Key to questions asked:

1. False 2. True 3. True 4. False 05. True 06.False 07. True
08. True 09. True 10.True
01. The First Co-operative Credit Societies Act was passed in India in the year
a. 1947
b. 1910
c. 1904
d. 1944
02. District Central Co-operative Banks (DCCB) operate at the
a. Apex level
b. Middle or intermediate position
c. Base level
d. None of these
03. The officials managing the co-operative society are accountable to
a. the general public
b. the beneficiaries of the society
c. the members of the society
d. the creditors of the society
04. The Board of Directors to manage the co-operative society are elected by
the:
a. President of the society
b. All the voters of the village
c. Registrar of Co-operatives
d. Members of the Society
05. Identify which one is not the co-operative principle.
a. Concern for Community
b. Education, Training and information
c. Democratic Member Control
d. Dual control
06. ICA stands for :

a. Indian Cooperative Authority
b. Indian Cooperative Alliance
c. International Cooperative Alliance
d. International Cooperative Authority
201
07. What does the Third Principle: Members Economic Participation mean?
a. Irrespective of business, the members will get the benefit.

b. More a member participates in the business more will be the benefit.
c. If a member has more share capital he will get more benefit
d. Members will benefit even if he is dormant member
08. What is the status of StCB in 3 Tier Short Term Coop Credit structure:
a. It is an apex organization
b. It is middle or intermediate level
c. It is a grass-root level institution
09. The grass root level institution in 3 Tier Short Term Coop Credit structure
is:
a. District Central Coop Bank (DCCB)
b. Primary Agricultural Coop Society (PACS)
c. State Coop Bank (StCB)
d. Registrar Cooperative Societies (RCS)

01. (c) 02. (b) 03. (c) 04. (d) 05. (d) 06. (c) 07. (b) 08. (a) 09. (b)
IIBF (2007) - Co-operative Banking
International Cooperative Alliance (ICA) website: https://www.ica.coop
NCUI (2018) National Cooperative Union of India- Indian Cooperative

Movement- A statistical profile, NCUI, New Delhi
Gursharan Singh Kainth (2002) - India's Rural Cooperatives, Regency

Publications (India)
202
3.2 Lesson No. 2: Co-operative Credit Institutions: Structure and
their role in Rural Economy
3.2.1 Objectives
3.2.2 Introduction
3.2.3 Rural Cooperative Credit Structure
3.2.3.1 Short-term Co-operative Credit Structure
3.2.3.2 Long Term Co-operative Credit Structure
3.2.4 Role of Cooperative Credit Structure in Rural Economy
3.2.4.1 State Cooperative Bank (StCB)
3.2.4.2 District Central Cooperative Banks (DCCBs)
3.2.4.3 Primary Agricultural Credit Societies (PACS)
3.2.4.4 State Cooperative Agriculture and Rural Development Banks

(SCARDBs)
3.2.4.5 Primary Co-operative Agriculture and Rural Development Banks

3.2.5 Distinction between Primary and Federal or Secondary Co-operatives
3.2.6 Major problems of Rural Credit System
3.2.7 Performance of Rural Credit Cooperatives – a brief review
3.2.8 Reorganization of Cooperative Credit Structure
3.2.9 Let Us Sum Up
3.2.10 Keywords
3.2 11 Check Your Progress-questions
203
3.2.1 Objectives
The objective of this lesson is to understand the structure of rural co-operative

credit institutions and their role in rural economy.
3.2.2 Introduction
As discussed in the earlier chapter (Unit 3 Chapter 1), Rural Credit

Cooperatives have existed in India for a long time. A shortage in supply of
credit in rural areas on reasonable and transparent terms was and still is
prevalent in India, which the rural cooperative credit institutions can meet at
least to some extent.
3.2.3 Co-operative Credit Structure
In India rural co-operative credit structure is categorized under two main

heads: Short Term Cooperative Credit Structure (STCCS) and Long Term
Cooperative Credit Structure (LTCCS).
The rural cooperative credit structure is presented in Figure 3.2.1.
Figure 3.2.1: Structure of Rural Cooperative Credit institutions
Rural Credit
Cooperatives
Long Term Short Term
SCARDBs
StCBs
PCARDBs DCCBs
PACS
At all India level, federations of these structures are working viz., National
Federation of State Cooperative Banks (NAFCSOB) and National Cooperative
Agriculture & Rural Development Banks Federation Ltd. (NAFCARD). These
204
federations act as the national body for taking up policy issues of all the
members with Government of India, RBI, NABARD etc. and also help the
cooperative movement.
3.2.3.1 Short-term Co-operative Credit Structure
The short term Co-operative Credit Structure (STCCS) consists of ‘three tier’
or ‘two tier’ structure. ‘Three tier’ structure is the most prominent, comprising
of Primary Agricultural Credit Societies (PACS) at the village level (grass root
level), District Central Co-operative Banks (DCCBs) at the middle or
intermediate position at district level and State Co-operative Banks (StCBs)
at the State Level. Each one has different role and contribute for the overall
development of the economy. The ‘Two tier’ structure comprises of PACS at
the grass root level and the StCB at the state level without DCCB in the middle
level. The third type of structure- ‘Unitary structure’, may have only the StCB
at the state level, without the DCCB and PACS and it may operate directly
through the branches like the UCBs or commercial banks. The ‘three tier’
and ‘two tier’ structures are called ‘Federal structures’ as the State Coop.
Bank in both of these cases are federations of the lower tier of cooperatives.
Similarly DCCB is a federation of PACS. There are 33 StCBs in the country
out of which 20 are in three tier and 13 are in two tier structures. There is no
state with unitary structure for STCCS.
3.2.3.2 Long Term Co-operative Credit Structure
The long term Co-operative credit structure or investment credit structure

consists of Primary Co-operative Agriculture and Rural Development Bank
(PCARDB) at the base level (grass root) and State Co-operative Agriculture and
Rural Development Bank (SCARDB) at the State level. This structure is
functional in 13 states of the country.
3.2.4 Objectives and role of Cooperative Credit Structure in Rural

Economy
The rural financial system in the country calls for a strong and efficient credit
delivery system, capable of taking care of the expanding and diverse credit
needs of agriculture and rural development. Despite expansion of network of
branches of commercial banks and Regional Rural Banks, the cooperative
credit structure continues to perform an important role in meeting banking
needs especially the credit needs of rural population. In this direction,
NABARD has been taking various initiatives in association with Government
of India and RBI to improve the health of Co-operative banks.
The main objectives and role of Cooperative Credit Structure in rural economy
are as under:
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• The credit cooperatives were originally established for the en-
couragement of thrift and self-help among the members, which
continues to be the main objective even today.
• Cooperative banks function with the prime objective of making available
loans at reasonable rates to needy members.
• To provide credit facilities to small and marginal farmers, agriculture
laborers, artisans, small entrepreneurs and other weaker sections.
• To save the rural poor from the money lenders and to act as a catalyst
element and thereby accelerate the economic growth in the rural areas.
• To cultivate the banking habits among the rural people and mobilize
savings for the economic development of rural areas.
3.2.4.1 State Cooperative Bank (StCB)
The federal character of the co-operative financial system was initially mooted
by the Maclagan Committee in 1914. The said committee also suggested for
having an apex co-operative bank in each of the then major provinces. The
Mehta-Bhansali Committee (1939) recommended that those societies which
had fulfilled the criteria of banking should be allowed to work as banks and
recommended an ‘Association’ for these banks. Accordingly, the ‘Apex Co-
operative banks’ were established at the provincial level with the prime
objective of coordinating the work of DCCBs and linking up the co-operative
credit organization with the general money market and the RBI.
The State Cooperative Bank (StCB) is the ‘apex bank’ of the three-tier co-
operative credit structure in each state. It exercises general control over
DCCBs and PACS. It finances and controls the working of the DCCBs in the
State. It serves as a link between NABARD, from which it borrows and the
DCCBs and PACS. NABARD provides refinance to lower level co-operatives
mainly through the StCBs.
The StCB obtains its working funds from its own share capital and reserves,
deposits from the general public and loans and refinance from NABARD.
NABARD provides liberal assistance to the State Governments for
contributing to the share capital of the weak central co-operative banks. The
StCB is interested, not only in helping the co-operative credit movement but
also in promoting other co-operative ventures and in extending the principles
of co-operation.
• Functions of StCBs:
Following are the main functions of the StCBs:
o To develop the co-operative movement in the state,
206
o To be the leader of cooperative credit societies in the state and be
their voice for policy advocacy and state level matters,
o To guide and support the credit cooperatives and other cooperatives
in the state,
o To take a lead role in the formulation and extension of credit policies
for the entire Co-operative movement of the state,
o To supervise, regulate and inspect the functioning of DCCBs and
extend timely guidance, help and support,
o To support in management of DCCBs by deputing capable staff to
the DCCBs,
o To act as a nodal agency for channelization of funds from RBI/
NABARD to DCCBs and farmers through PACS,
o To function as a balancing centre for the resources of the Co-
operatives in the State by borrowing funds form surplus DCCBs and
channeling the same to needy DCCBs,
o To act as an intermediary between DCCBs, NABARD, RBI and money
market,
o To act as an investment agency for DCCBs,
o To carry out banking business on its own by accepting deposits,
providing credit and other banking services to members as well as
to non-members, societies, companies, HUF, local bodies,
educational institutions, municipal bodies and others. They have to
maintain SLR and CRR and all the requirements as per the Banking
Regulation Act, 1949 as applicable to Co-operative societies.
3.2.4.2 District Central Cooperative Banks (DCCBs)
DCCBs are the federations of PACS and are generally located at district level,
although due to reorganizing districts, certain DCCBs have more than one
district under their area of operation. On the other hand, some of the DCCBs
have been closed or merged. Due to such developments, there were only 363
DCCBs in the country in 2019-20 while the number of districts has crossed
700.
Functions of DCCBs
Following are the main functions of the DCCBs:

o To develop the co-operative movement in the district,
207
o To act as the central coordinator for all the cooperative societies in
the district (hence they are called ‘Central Cooperative Bank’) by
providing banking facilities as well as guidance and support,
o To be the leader of cooperative credit societies in the district and be
their voice for policy advocacy and district level matters and take up
the matters with StCB or other appropriate agencies,
o To guide and support the credit cooperatives and other cooperatives
in the district,
o To act as a balancing centre of finance for the primary societies in
the district by providing them funds when they have a shortage,
o To supervise, guide and control the working of member societies,
o To guide PACS to improve their business and profitability,
o To provide a safe place for investing the reserves of primary societies,
o To develop and extend banking facilities in rural areas.
• Business of DCCBs
o Banker to the cooperative societies: The DCCBs generally extend
banking facilities to member primary Co-operative credit societies.
The credit support is for short and medium term on the basis of the
agreements/ documents, security of land, house, term deposit, gold,
Government securities, bonds, etc. The DCCB Loans are granted up
to a certain limit fixed for each society depending upon its
requirement and capacity to repay. DCCBs are expected to pay
dividend on the share capital and to build up reserve fund.
o Banking Business: Besides providing banking facilities to the
societies of the district, DCCB also provide banking facilities to
people at large in the district and for that purpose, they open
branches at different locations.
o Maintenance of SLR and CRR: As per the Banking Regulation Act,
1949 (as applicable to Co-operative Societies), DCCBs are required
to maintain applicable CRR (Cash Reserve Ratio) with RBI and SLR
(Statutory Liquidity Ratio) in Government securities and approved
institutions.
o Sources of Working Capital : The sources of working capital/
funds for the DCCB are: Deposits from members as well as non-
members including Government deposits, Share Capital, Reserves
and other funds and borrowings from StCB and other financial
institutions.
208
o Management of DCCBs: The management of DCCBs vests with the
Board of Directors consisting of elected and nominated members. At
least 02 professional directors are required to be in the Board, either
elected or coopted by the Bank.
3.2.4.2 Primary Agricultural Credit Societies (PACS)
The PACS came into existence as a replacement (substitute) for traditional

credit functionaries i.e., money lenders, to arrest the evils created by them. A
co-operative credit society, commonly known as the primary agricultural
credit society (PACS) may be started with ten or more persons, normally
belonging to a village.
The PACS were expected to be multipurpose in character- providing all needs

– agricultural or others, and they were expected to be ‘one stop shop’ for the
village community. In tribal areas a special category of PACS was launched,
named as LAMPS (Large sized Multi-Purpose Societies). However, in a large
number of cases, they continue to deal mainly in credit only. The Primary
Agricultural Credit Societies (PACS) constitute the `hub’ of the Indian co-op
movement.
• Main functions of PACS

o To promote and develop the habit of thrift (savings) and self-help
among the rural people,
o To provide timely and adequate, short and medium term loans to
members on reasonable rate of interest, terms and conditions,
o To discharge functions of State Government as may be given to
them. Also act as agency for the State Government Development
work related to agriculture development,
o To undertake educative, advisory and welfare functions for the
benefit of farmers,
o To promote the economic interests of members,
o To take efforts to have smooth recovery of money lent.
• Sources of Funds
The PACS have recourse to the sources of funds as share capital
contribution through member participation and also Government
participation, reserve funds and borrowings.
Other aspects
o The value of each share is generally nominal so as to enable even the
poorest farmer to become a member.
209
o The management of the society is under an elected body consisting
of President (Chairman), Secretary and Treasurer. The management
is honorary. However, the Secretary is the paid employee in some
states.
o Loans are given for short periods, normally for one year, for carrying
out agricultural operations, and the rate of interest is low. In some
states like Maharashtra, the effective interest rate on crop loans
taken from PACS is NIL if repaid on time, due to interest subvention
from state government and GoI.
o Most of the PACS have agricultural input business like fertilizer and
pesticides, etc. as a regular business and for storage of these items,
a godown is constructed.
3.2.4.3 State Cooperative Agriculture and Rural Development Banks
(SCARDBs)
State Cooperative Agriculture and Rural Development Banks (SCARDBs)

constitute the upper tier of Long Term Co-operative Credit Structure (LTCCS)
in India. It is meant for encouraging and promoting investment credit in
agriculture and rural economy which in turn helps in improving productivity
and efficiency. Though long term credit co-operatives have been allowed to
access public deposits subject to certain conditions, such deposits constitute
a relatively small portion of their total liabilities. SCARDBs are mostly
dependent on borrowings from NABARD and the state cooperative bank for
on-lending.
The main functions of SCARDB are as under:
o To be the leader of Primary Cooperative Agriculture and Rural

Development Banks (PCARDBs) in the state and be their voice for
policy advocacy and state level matters for promotion of investment
credit for improving productivity in agriculture and rural economy,
o To guide and support the PCARDBs generally and to support in
management of PCARDBs by deputing capable staff,
o To provide financial support by refinance to the PCARDBs,
o To take a lead role in the formulation and extension of credit policies
for all the PCARDBs of the state as a whole for improving business
and profitability,
o To act as a nodal agency for channelization of funds from NABARD
to PCARDBs for supporting farmers.
210
3.2.4.4 Primary Cooperative Agriculture and Rural Development Banks
(PCARDBs)
PCARBDS are the lowest layer of long-term credit co-operatives. As in the case
of SCARDBs, PCARDBs are primarily dependent on borrowings for their
lending business. They are meant to support farmers and rural entrepreneurs
for medium term and long term investments in their endeavors by taking
investment credit so that the productivity and efficiency of agriculture and
rural enterprises improve.
3.2.5 Distinction between Primary and Federal or Secondary Co-

operatives
A primary co-operative society means a society formed by individual members

with a common purpose, goal and objective in mind. The federal or secondary
or central co-operative society (like StCB, DCCB or SCARDB), on the other
hand, means a society formed by co-operative societies as primary members.
Both the Central as well as State governments, Government undertakings and
departments, public financial institutions, local authorities etc., have been
permitted by law to become members of both primary as well as secondary
co-operatives.
Federal co-operatives means a federation of Co-operative Societies registered

under the Multi-State Co-operative Societies Act, 2002 and whose
membership is available only to a Co-operative Society or a Multi-State Co-
operative Society.
3.2.6 Major problems of the Rural Credit System
The rural cooperative credit system has been facing many problems. The
major problems are:
• Many units of the cooperative credit system are incurring losses

affecting their health and ability to survive and grow.
• Inadequate business growth due to lack of proper business strategies
as well as stiff competition from commercial banks, RRBs and Small
Financing Banks leads to declining share of rural credit cooperatives in
agricultural lending.
• Lack of quality human resource and inadequate staff in many
cooperatives- absence of manpower planning.
• Low emphasis on capacity building (training) and professionalism.
• Board of Directors are not professionals, hence are unable to create
appropriate vision and provide leadership to move towards sustainable
viability.
211
• Slow in adopting technology like computerization and digital products,
making them less popular among younger generation.
• Lack of efforts in enrolling young generation in cooperatives.
• Absence of marketing strategies and lack of innovative products and
services as per the market needs.
• Organizational and financial limitations reduce their ability
considerably to provide adequate credit to the rural population.
• Overdues and Non-Performing Assets (NPA) are increasing alarmingly
at all levels.
• Lack of adoption of risk management tools and policies.
• They have not been able to provide adequate and timely credit to the
borrowing farmers.
• It has not produced desired results in terms of the direction, quantum
and quality of the flow of credit.
• Unsatisfactory and deteriorating customer services.
• Directed credit programs and subsidized lending have badly affected
viable functioning of credit disturbing units.
• Lack of professionalism in their functioning and impairment on the
governance front.
• Political interference.
• Lack of business diversification in tune with the changing requirements
of the rural economy.
3.2.7 Performance of Rural Credit Cooperatives – a brief review
As at end of March, 2020, there were a total 96,248 rural cooperative

institutions operating in the country comprising of 33 StCBs, 363 DCCBs,
95238 PACS, 13 SCARDBs and 601 PCARDBs. Out of the total number of
rural cooperatives, short term cooperatives constituted a majority while less
than 1% of the total cooperatives operating in the country were long term
(SCARDBs & PCARDBs) in nature.
One important dimension of performance of these rural credit cooperatives is
profitability. The overall position of number of various kinds of credit
cooperatives regarding profitability for 2018-19 has been presented in Table
3.2.123.
23
NABARD Annual Report(2020) , p 58-63
212
Table 3.2.1: Profitability of different kinds of rural credit cooperatives
Type of rural credit No. in profit No. in loss Total
cooperative
StCB 30 3 33
DCCB 303 60 363
PACS 46405 37838 84243#
SCARDB 8 5 13
PCARDB 281 320 601
Total 47027 38226 85253
Percentage to total 55% 45% 100%
# available data for 85253 PACS only although the total number is 95238
It may be seen from the above Table that:

• Overall, 55% of rural credit cooperatives were in profit while 45% were
in loss, which leaves much to be desired.
• Profitability of Short Term Structure is better than that of Long Term
Structure.
• Even some of the apex federations incurred losses. 03 out of 33 StCBs
and 05 out of 13 SCARDBs incurred losses.
The performance of StCBs and the DCCBs was generally better in terms of
growth of business as their balance sheet grew by 10% and 9% respectively
during 2018-19 while the SCARDBs reduced the balance sheet by 3% and
PCARDBs were stagnant. In case of PACS also there was no business growth
(2017-18).
Regarding NPA level in these institutions, the position of StCBs was better as
Gross NPA (GNPA) was at 4.32% as against 5.5% in SCABRDBs and 11.85%
in DCCBs in 2018-19. This NPA parameter is not applicable as such for
PCARDBs and PACS but the overall recovery position of these institutions is
not satisfactory indicating high overdues and resultant poor asset quality.
The analysis of agency wise credit flow indicates that the cooperative banks
were the major source of agriculture credit earlier. As per the available data,
in 1975-76, they constituted around 71 per cent of the total credit flow for
agriculture followed by commercial banks at 24.2 per cent and Regional Rural
Banks at 4.9 percent. Though cooperative banks had dominated agriculture
credit supply till the early reform period, Commercial Banks and Regional
Rural Banks recorded impressive growth rates and resultant improvement in
their share in recent years. As a result, in 2019-20, the share of cooperative
213
banks in total institutional flow of credit for agriculture receded to 10.9%
while that of commercial banks advanced to 77.2 per cent and RRBs to 11.9
per cent. Although the quantum of disbursement from cooperative banks
increased, it could not keep pace with commercial banks in enhancing credit
flow due to several reasons including poor financial health, systems and
procedures, technological weakness, corporate governance issues, lack of
financial resources, etc. Hence, the cooperative banks need to plan out
strategies for improving their share.
A task force was constituted by the Central Government under the
chairmanship of Professor A Vaidyanathan in 2004 to analyze the challenges
and issues in the rural cooperative sector as well as to design future action
plan for this sector. Following the recommendation of this committee, a revival
package for short term rural cooperative was announced in January, 2006. A
separate revival package for long term cooperatives was announced
subsequently in the Union Budget of 2008-09. However, the implementation
in many states was not satisfactory and hence the improvement was not
significant.
3.2.8 Reorganization of Cooperative Credit Structure
Several attempts have been made in the past for reorganization or

restructuring of rural cooperative credit structures. One of these measures is
by way of converting three tier structure into two tier structure by merger of
the DCCBs into StCB. This has been attempted in Chhattisgarh and Kerala
states. Another attempt was to merge the short terms and long term
cooperative credit structure to have one integrated rural credit cooperative
structure. This was carried out in the state of erstwhile Andhra Pradesh which
is now bifurcated into Andhra Pradesh and Telangana.
3.2.9 Let us sum up
Rural cooperative credit institutions play an important role in rural economy

by supporting thrift and credit. The rural co-operative credit structure is
categorized under two main heads: Short Term Cooperative Credit Structure
(STCCS) and Long Term Cooperative Credit Structure (LTCCS) for meeting
short term and long term credit needs of rural people. The structure
comprises of 3 tier, 2 tier, unitary and ‘mixed’ in different states generally
having StCB/SCARDB, DCCB and PACS and PCARDBs. The StCBs, DCCBs
and SCARDBs serve as an important supporting and guiding institutions the
cooperative movement in their respective states/districts. The presence and
contributions of PACS and PCARDBs aid rural development. The cooperative
credit structure is facing several problems due to which the profitability,
business and market share are declining. However, these institutions can play
214
an important role in helping the rural population which will boost the rural
economy.
3.2.10 Keywords
Co-operative credit, Short, Medium and Long term credit, Rural Credit
Cooperatives, STCCS, LTCCS, State Cooperative Bank (StCB), District Central
Co-operative Bank (DCCB), Primary Agricultural Credit Society (PACS), State
Cooperative Agriculture and Rural Development Banks (SCARDBs), Primary
Cooperative Agriculture and Rural Development Banks (PCARDBs). NABARD,
RBI
3.2.11 Check your progress –questions
01. Rural cooperative credit institutions are of two types- short term and long
term.
02. State Cooperative Bank is part of Long term cooperative credit structure.
03. Primary Agricultural Credit Societies function at the middle level in the
Co-operative Credit Structure
04. Agriculture and Rural Development Banks (ARDBs) were earlier called as
Land Development Banks/ Land Mortgage Banks.
05. ARDBs are mainly for financing short term credit needs of the farmers.
06. Recently in Kerala state the three tier short term cooperative credit
structure has been converted to two tier by amalgamation of DCCBs into
StCB.
01. True 02. False 03. False 04. True 05. False 06. True
01. Identify which is not the function of Primary Agricultural Credit Society.
a. To accept deposits and provide timely adequate short and medium

term loans to members on reasonable rate of interest, terms and
conditions.
b. To promote and develop the habit of thrift (savings) among the rural
people.
c. To undertake educative, advisory and welfare functions for the benefit

of farmers
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d. None of these
02. The sources of working capital of DCCB consist of
a. Share Capital & Reserves and other funds
b. Deposits from members and non-members
c. Borrowings
d. All of these
03. Following are the part of 3 tier Short Term Coop Credit structure:
a. State Cooperative Bank
b. District Central Cooperative Bank (DCCB)
c. PACS
d. All of the above
04. What is true of the Long Term Co-operative Credit Structure?
a. It has State Coop Agriculture and Rural Development Bank at the

state level (Apex level)
b. It can finance for long term credit needs of the farmers like irrigation
structure (Tube well, etc.)
c. Both (a) and (b)
05. What is the main function of State Cooperative Bank?
a. To carry on banking operations on its own
b. To extend timely guidance, help and support to DCCBs in the state
c. Both (a) and (b)
06. What is the main function of District Central Cooperative Bank (DCCB)?
a. To be the leader of all cooperative societies of the district
b. To extend timely credit facilities, guidance, help and support to PACS

in the district
c. Both (a) and (b)
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07. Important role(s) of cooperative credit structure in the rural economy

is/are:
a. Making available loans at reasonable rates to needy members
b. To save the rural poor from the money lenders
c. Both (a) and (b)
08. What is ‘Apex Bank’ in the context of rural cooperative credit structure?
a. The State Cooperative Bank
b. National Federation of State Coop. Banks (NAFSCOB)
c. District Central Cooperative Bank
d. The best Multi State Cooperative Bank
09. What are the main businesses of DCCBs?
a. Providing loans to PACS in the district
b. Providing loans directly to individuals for their credit needs
c. Both (a) and (b)
10. Major problems of rural cooperative credit system in India are:
a. Low business growth and poor recovery resulting in many cooperative

banks incurring losses
b. Lack of quality human resources and low emphasis on training and

professionalism
c. Both (a) and (b)
d. none of the above
11. What is/are correct statement(s) about credit flow to agriculture in the
country?
a. According to latest data the share of cooperatives in agricultural

credit in the country has fallen to around 11% in 2019-20.
217
b. The share of Commercial banks in agricultural credit has increased
to 77% in 2019-20.
c. Both (a) and (b)
d. none of the above
01. (d) 02. (d) 03. (d) 04. (c) 05. (c) 06. (c) 07. (c) 08. (a) 09. (c) 10. (c)
11(c)
NABARD (2020) Annual Report , p 58-63
IIBF (2007) Co-operative Banking , Indian Institute of Banking and Finance,

Mumbai
Gursharan Singh Kainth (2002) India's Rural Cooperatives, Regency

Publications (India)
218
Lesson No. 3: Cooperatives in Five Year Plans and Important Acts for
Development of Co-operative Credit Institutions
3.3.1 Objectives
3.3.2 Introduction
3.3.3 Emphasis on Cooperatives in Five Year Plans
3.3.3.1 The First Five Year Plan
3.3.3.2 The Second Five-Year Plan
3.3.3.3 The Third Five Year Plan
3.3.3.4 The Fourth Five Year Plan
3.3.3.5 The Fifth Five Year Plan
3.3.3.6 The Sixth Five Year Plan
3.3.3.7 NABARD Act, 1981
3.3.3.8 Multi-State Cooperative Societies Act, 1984
3.3.3.9 The Seventh Five Year Plan

3.3.3.10 Model Cooperatives Act, 1990
3.3.3.11 The Eighth Five Year Plan

3.3.3.12 Parallel Cooperative Legislation or Self- reliant cooperatives Act
3.3.3.14 SARFAESI Act, 2002

3.3.3.15 CERSAI
3.3.10 Cooperatives in NITI Aayog
3.3.5 Formation of new ‘Ministry of Co-operation’
3.3.6 Let Us Sum Up

3.3.7 Key words
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3.3.1 Objectives
The objectives of the lesson are to understand:
• Emphasis on cooperatives in five year plans
• Development of important cooperatives institutions and certain other

institutions for supporting cooperatives
• Important GoI Acts for supporting credit cooperatives
3.3.2 Introduction
Cooperative development received a boost after India attained Independence

in 1947, with cooperatives being given a vital role in the various plans
formulated by the Planning Commission. Further, several Acts were passed
by GoI to create legal framework for supporting, nurturing and protecting the
cooperative and related institutions. GoI also created certain institutions at
the national level which went a long way to support credit cooperatives. This
Chapter covers these important aspects of credit cooperatives.
3.3.3.Emphasis on Cooperatives in Five Year Plans24
The importance given on cooperatives in Five Year Plans and related

important developments have been summarized below:
3.3.3.1 The First Five Year Plan (1951-56), outlined in detail the vision of
the cooperative movement in India and the rationale for emphasizing
cooperatives and panchayats as the preferred organizations for economic and
political development. The Plan emphasized the adoption of the cooperative
method of organization to cover all aspects of community development. It
provided for setting up of urban cooperative banks, industrial cooperatives of
workers, consumer cooperatives, housing cooperatives, diffusion of
knowledge through cooperative training and education and recommended
that every government department follow the policy of building up
cooperatives.
A major initiative at this time was the setting up of the Gorwala Committee,
popularly known as the All India Rural Credit Survey which submitted its
report in 1954. This committee examined the various issues and made
important recommendations on Cooperatives. It was this committee which
said the famous statement that “In the village itself, no form of credit
organization will be suitable except the cooperative society… Co-operation has
failed, but co-operation must succeed”
24 Source: Report of the High Powered Committee on Cooperatives, May 2009
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3.3.3.2 The Second Five-Year Plan (1956-1961), emphasized “building up a
cooperative sector as part of a scheme of planned development” as being one
of the central aims of National Policy. It aimed at enabling cooperatives to
increasingly become the principal basis for organization of economic activity.
The Plan drew up programmes of cooperative development based on the
recommendations of the All India Rural Credit Survey Committee (AIRCS).
Following were the important highlights of the Second Five Year Plan:
• It was envisaged that every family in a village would be a member of at

least one cooperative society.
• Linking of credit and non-credit societies to provide better services to

the farmers.
• State partnership with cooperative institutions at various levels, the

essential basis of which was to be assistance and not interference or
control
• For facilitating State partnership in cooperatives, the Plan also

recommended the establishment of a National Agricultural Credit Long-
term Operations Fund.
• The National Cooperative Development Fund was also established by

the Central Government, during this period, to enable states to borrow
for the purpose of subscribing to the share capital of non-credit
cooperatives.
• The Committee on Cooperative Law under the chairmanship of Shri

S.T.Raja in 1956 recommended a Model Bill for consideration of State
Governments.
• Another important development, at this time was that the National

Development Council Resolution of 1958 which stressed that
cooperatives should be organized on the basis of the village community
as the primary unit and that, there should be close coordination
between the village cooperative and the Panchayat. The Resolution also
recommended that the restrictive features of existing cooperative
legislation should be removed. Many State Governments amended their
Acts, as a result of the recommendations of the Model Bill.
• Cooperative marketing and processing of agricultural produce also

formed an important part of the Integrated Scheme of Cooperative
Development in the Second Plan. About 1900 primary marketing
societies were set up and State Marketing Federations were established
in all the States. National Cooperative Marketing Federation (NAFED)
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was also set up in 1958 at the Centre. Marketing cooperatives along
with the agricultural cooperatives played a major role in promoting the
‘Green Revolution’ by providing credit and inputs to farmers as well as
processing their increased outputs.
3.3.3.3 The Third Five Year Plan (1961-1969) stressed that “Cooperation
should become, progressively, the principal basis of organization in branches
of economic life, notably agriculture, minor irrigation, small industries and
processing, marketing, distribution, rural electrification, housing and
construction and provision of essential amenities for local communities. The
Plan also added that even the medium and large industries and in transport,
an increasing range of activities can be undertaken on cooperative lines”.
From the mid-sixties onwards, agro processing cooperatives, like sugar and
spinning grew in number.
During the Third Five Year Plan, following National Institutions were set up:
• The Agricultural Refinance Corporation (ARC) was set up in 1962 by

the Government of India to provide long-term loans to cooperatives,
through Land Mortgage Banks. It was the precursor to NABARD which
was set up in 1982.
• In 1963, the National Cooperative Development Corporation (NCDC)

was established as a statutory corporation by an Act of Parliament
which gave a boost to growth of cooperative marketing and processing
societies.
In 1964, Shri Lal Bahadur Shastri, the then Prime Minister of India visited
AMUL dairy at Anand (Gujarat) and, impressed by the socio-economic
transformation brought about by milk cooperatives, National Dairy
Development Board (NDDB) was set up as a national level organization to
replicate the Anand pattern of cooperatives in milk throughout the country.
With the setting up of NDDB, the Indian dairy cooperative movement received
an impetus. Later on, NDDB also ventured into the field of edible oils.
Several other significant organizational developments also took place during

this period such as the setting up of various National Cooperative Federations
and re-organization of the National Cooperative Union of India (NCUI). In
1967, the Vaikunth Mehta National Institute of Cooperative Management was
set up in Pune in the name of Late Shri Vaikunthbhai Mehta, the ‘doyen of
cooperatives’. Growth of consumer cooperatives was also an important devel-
opment of this period. Simultaneously, the growth of Land Development
Banks (later on renamed as Agriculture and Rural Development Banks) also
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accelerated and programmes for dairy, poultry, fishery. Many labour
cooperatives were set up during this period.
3.3.3.4 The Fourth Five Year Plan (1969-1974) gave high priority to the re-
organization of cooperatives to make cooperative short-term and medium-
term structure viable. It also made necessary provisions to provide
cooperatives with management subsidy and share capital contribution, as
well as for the rehabilitation of Central Cooperative Banks. It also emphasized
the need to orient policies in favour of small farmers.
3.3.3.5 The Fifth Five Year Plan (1974-1979) took note of the high level of
over-dues. In its recommended strategy for cooperative development, the
correction of regional imbalances and reorienting the cooperatives towards
the under-privileged was to receive special attention. Based on the
recommendations of an Expert Group appointed by the Planning Commission
in 1972, structural reforms of the cooperative set-up were envisaged. The Plan
recommended the formulation of Farmers’ Services Cooperative Societies as
had been envisaged by the National Commission on Agriculture and stressed
the need for professional management of cooperatives.
3.3.3.6 The Sixth Five Year Plan (1979-1985) also emphasized the
importance of making cooperative efforts more systematically directed
towards improving the economic conditions of the rural poor. The Plan
recommended steps for re-organizing Primary Agricultural Credit Societies
(PACS) into strong and viable multi-purpose units. It also suggested
strengthening the linkages between consumer and marketing cooperatives.
Consolidation of the role of Cooperative Federal Organizations, development
of dairy, fishery and minor irrigation cooperatives, manpower development in
small and medium cooperatives were some of the planned programmes in this
Five Year Plan.
3.3.3.7 NABARD Act, 1981
In a landmark development, the National Bank for Agriculture and Rural

Development (NABARD) Act was passed in 1981 and NABARD was set up in
1982 which was mandated, inter-alia, to provide re-finance support to
Cooperative Banks, and to supplement the resources of Commercial Banks
and Regional Rural Banks to enhance credit flow to the agriculture and rural
sector. Since the establishment of NABARD, Besides refinance support,
several programmes for institutional development of cooperatives have been
started by NABARD for improving their business, sustainability, governance,
human resource development, etc.
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With the objective of introducing a comprehensive central legislation to

facilitate the organization and functioning of multi-state societies and to bring
uniformity in their administration and management, the Multi-State
Cooperative Societies (MSCS) Act of 1984 was enacted. The earlier Multi-Unit
Cooperative Societies Act of 1942 was repealed. This Act was further amended
in 2002.
3.3.3.9 The Seventh Five Year Plan (1985-1990) pointed out that while
there had been all round progress in credit, poor recovery of loans and high
level of overdues were matters of concern. The Plan recommended amongst
others, development of PACS as multiple activity based viable units;
realignment of policies and procedures to expand flow of credit and ensure
inputs and services particularly to weaker sections; special programmes for
the North Eastern Region; strengthening of consumer cooperative movement
in urban as well as rural areas and promoting professional management.
In 1989, the Agricultural Credit Review Committee (ACRC) under the

chairmanship of Prof. A.M. Khusro – hence popularly called as Khusro
Committee- was appointed to examine the problems of agricultural and rural
credit and recommended a major systemic improvement. The Committee
recommended that the Eighth Five Year Plan should become the plan for
revival of weak agricultural credit societies.
3.3.3.10 Model Cooperatives Act, 1990
In 1990, an Expert Committee, under the chairmanship of Choudhary Brahm

Perkash, was appointed by the Planning Commission to make a rapid review
of the broad status of the cooperative movement, suggest future directions
and finalize a Model Cooperatives Act. The Committee submitted its report in
1991. Since cooperation is a State subject and each State has its own
cooperative legislation covering cooperatives whose membership is confined
to the State, the report of the Committee, along with a draft Model Cooperative
Law, was circulated to all State Governments for their consideration and
adoption at State level.
The opening up of the economy in 1990, and the liberalized economic policies
followed by the government since then, led to increasing pressures for various
governments, state and central, to bring about changes that would provide
cooperatives a level playing field to compete with the private sector.
3.3.3.11 The Eighth Five Year Plan (1992-1997) laid emphasis on building
up the cooperative movement as a self-managed, self-regulated and self-
reliant institutional set-up, by giving it more autonomy and democratizing the
224
movement. It also spoke of enhancing the capability of cooperatives for
improving economic activity and creating employment opportunities for small
farmers, labourers, artisans, scheduled castes, scheduled tribes and women
and emphasized development and training of cooperative functionaries in
professional management.
3.3.3.12 Parallel Cooperative Legislation or Self- reliant cooperatives Act
From the Ninth Plan (1997-2002) onwards, there has been no specific mention
about cooperatives as a part of the Plan. Since Cooperation is a State subject
and recognizing the difficulties in having the existing State Cooperative Acts
amended on the lines of the Model Cooperatives Act, a section of cooperators
and civil society initiated action to put in place Parallel Cooperative Legislation
for self-reliant cooperatives.
Self- reliant cooperatives are generally defined as those which have not
received any assistance from the Government in the form of equity
contribution, loans and guarantees. These Acts are largely based on the
recommendations of the Choudhary Brahm Perkash Committee. Nine States
namely AP (1995), MP (1999), Bihar (1996), J&K (1999), Orissa (2001),
Karnataka (1997), Jharkhand (1996)), Chhattisgarh (1999) and Uttarakhand
(2003), have so far enacted Parallel Cooperative Acts which are enabling and
ensure autonomous and democratic functioning of cooperatives. In some
states the term used for these cooperatives is ‘Mutually Aided Coop Socieies
Act (MACS)’.
The Multi-State Cooperative Societies (MSCS) Act, enacted in 1984, was

modified in 2002, in keeping with the spirit of the Model Cooperatives Act.
Unlike the State Laws, which remained as a parallel legislation to co-exist
with the earlier laws, the MSCS Act, 2002 replaced the earlier Act of 1984.
The Registrar for these cooperative societies is the Central Registrar of GoI.
3.3.3.14 SARFAESI Act
Banks and Financial Institutions lend money by obtaining security which is

to act as a protection for the money advanced and in the case of need, the
loan can be realised by the sale of securities. The objective of Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act) was to create a new legal framework and new
concepts about security and new procedures for recovery of dues by banks
and financial institutions. The SARFAESI Act allows banks and other financial
institutions to auction residential or commercial properties for the purpose of
recovering loan from the borrowers when they fail to repay their loan.
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The Act is applicable to Cooperatives w.e.f 02 January 2003 and the co-
operative banks registered under the State legislation and multi-State level
co-operative societies registered under the MSCS Act, 2002 both can take
measures under this Act.
The Act has brought a legal framework for the following important activities
in the credit market:
(a) Securitisation of financial assets
(b) Reconstruction of financial assets
(c) Recognition of any ‘interest’ created in the security for due
repayment of loan as a ‘security interest’, irrespective of its form
and nature but when it is not in the possession of the creditor.
(d) Power to enforce such a security for the realization of money due
to banks and the financial institutions in the event of a default,
without the intervention of the courts.
(e) Enabling provisions for the setting up a central registry for the
purpose of registration of transactions of securitization,
reconstruction and creation of the security interest.
The Provisions of this Act shall not apply to:
• Any security interest created in agricultural land
• Any case in which the amount due is less than twenty percent
of the principal amount and interest thereon.
• Any security interest for securing repayment of any financial
asset not exceeding on lakh rupee
• A lien on any goods, money or security given by or under the
Indian Contract Act, 1872 or the sale of goods Act 1930 or any
law for the time being in force
• Pledge of movables
• Creation of security in any aircraft or vessel
• Any conditional sale, hire purchase or lease or any other
contract in which no security interest has been created
• Any properties not liable to attachment
3.3.3.15 Central Registry of Securitisation Asset Reconstruction and

Security Interest of India (CERSAI)
Central Registry of Securitisation Asset Reconstruction and Security Interest

of India (CERSAI) is a Section 8 company (non-profit company) registered
under of the Companies Act, 2013). The purpose of its creation was to check
and identify fraudulent activity in lending against equitable mortgages of
properties. In simple terms, the company was formed to deter the practice of
taking out several loans from various banks using the same asset/property.
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CERSAI was formed with the primary intention of maintaining a centralized
registry of equitable mortgages. This registry contains all relevant information
on mortgages or loans that have been taken out on an assets or property. In
addition, it also contains all relevant information on the bank or lender that
sanctioned the loan on the property as well as information on the borrower.
As per directives issued by the Government, all lenders (banks, financial

institutions etc.) are required to register any and all information with CERSAI
with regards to security interests that they have been created. Registration
must be completed within a period of 30 days of the creation of security
interests.
The above discussion reveals that development of the Cooperatives has been
an important agenda in the country’s Five Year Plans. Further several
important measures have been taken to improve the condition of the
cooperative sector and help them sustainable viability.
3.3.3 Cooperatives in NITI Aayog
After the replacement of Planning Commission by NITI Aayog in 2015,

‘Cooperative Federalism’ has been given the prime importance wherein the
role of state governments becomes more prominent for development of
cooperatives. However, as the country’s ‘think tank’, Niti Aayog has a very
important and constructive role to play. In view of vast impact of cooperatives
especially PACS and the credit cooperatives, it is earnestly expected that
cooperative sector will also benefit from its expertise, guidance and financial
support.
3.3.4 Formation of new ‘Ministry of Co-operation’
In a recent historic move, a separate ‘Ministry of Co-operation’ has been

created by the Government of India on 6 July 2021. So far the cooperation
was handled by Department of Cooperation under Ministry of Agriculture.
This historic move is for realizing the vision of ‘Sahkar se Samriddhi’
(Prosperity through cooperatives). This ministry will provide a separate
administrative, legal and policy framework for strengthening the cooperative
movement in the country. It will help deepen Co-operatives as a true people
based movement reaching up to the grassroots25. This historic move is
expected to give much needed boost to development of cooperatives in the
country.
25
https://pib.gov.in/PressReleasePage.aspx?PRID=1733225
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3.3.5 Let us sum up
Cooperatives have been assigned very high importance in the country’s Five
Year Plans as it was considered appropriate structure for enabling
development of the masses especially the rural, poor and disadvantaged
sections. Several measures were taken post-independence to have vibrant
cooperatives. Several committees were set up to exclusively study this sector
and make recommendations. Many important organizations were also set up
to provide focus on the development of cooperatives. To provide legal
framework for growth and protection of these institutions, several new Acts
were passed. In a recent historic move, a separate ‘Ministry of Co-operation’ has
been created by the Government of India on 6 July 2021 which will help the
cooperative movement to a great extent. These developments have helped the
cooperative movement in becoming a robust and sustainable movement and
are expected to help it in future also.
3.3.6 Keywords
Five Year Plans, Multi-State Cooperative Societies Act, NABARD, Task Force
on Revival of Cooperative Credit Institutions, High Powered Committee on
Cooperatives. CERSAI, SARFAESI, NAFED, NCDC, NITI Aayog.
3.3.7 Check your progress – questions (CARE: questions to be added)
State true or false
1. Cooperatives are an integral part of the financial system and have an

important role to play.
2. Some of the committees had felt that cooperatives will never be able to
address the problems of the rural sector.
3. Cooperatives have never been supported in Five Year Plans by the

Government of India.
4. Cooperatives are no longer needed as several other financial institutions

are now there to purvey rural credit.
5. First Five Year Plan (1951-56) outlined the vision of the cooperative
movement in India.
6. There is no independent Ministry of Cooperation in India, it continues

to be under Ministry of Agriculture in 2021.
7. NABARD was set up in the year 1982.
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Key to questions asked.
01.True. 02. False. 03. False. 04, False 05. True 06. False 07. True
1. What was the period of First Five Year Plan?
a. 1951-56
b. 1956-61
c. 1991-96
d. 2000- 2005
2. An important committee which was formed during First Five Year Plan
was:
a. Vaidyanathan Committee (Task Force on Revival of Cooperative

Credit Structure)
b. Rangarajan Committee (Committee on Financial Inclusion)
c. Gorwala Committee (All India Rural Credit Survey Committee)
d. Khusro Committee (Agricultural Credit Review Committee)
3. In the Third Five Year Plan, NCDC was set up. Expansion of NCDC is:
a. National Corporate Development Corporation
b. National Coconut Development Corporation
c. National Cooperative Development Corporation
d. Northern Cooperative Data Corporation
4. In 1964, Shri Lal Bahadur Shastri, the then Prime Minister initiated
setting of NDDB. NDDB means?
a. National Defence Development Board
b. National Dairy Development Board
c. North-East Dentistry Development Board
d. Northern Dairy Development Board
5. In 1967, NCUI was set up. Its full form is:
a. National Cooperative Union of India
229
b. Northern Cooperative Union of India
c. National Cooperative University of India
6. NABARD was set up in 1982 mainly :
a. To enhance credit flow to agriculture and rural

development
b. To provide refinance to cooperative as well as other banks
c. Both (a) and (b)
7. In 1990, an Expert Committee, under the Chairmanship of Choudhary

Brahm Prakash recommended:
a. Merger of all tiers of cooperatives
b. Model Co-operatives Act
c. Setting up of NABARD
d. Setting up of NCDC
8. What is true for Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002 (SARFAESI Act)?
a. It has helped banks in recovery of NPA loans
b. It is not applicable for Co-operatives banks
c. Both (a) and (b)
9. Central Registry of Securitisation Asset Reconstruction and Security

Interest of India (CERSAI) was formed to:
a. To maintain a registry of equitable mortgages of properties

at national level
b. To prevent taking out multiple loans using the same

property
c. Both (a) and (b)
230
10. What is correct about Cooperation in India?
a. In the year 2021 a new Ministry of Cooperation has been

formed at national level
b. Cooperation continues to be under Ministry of Agriculture,

Cooperation and Farmers Welfare
c. Cooperation is a state subject, hence there is no ministry

at GoI level
Answers to terminal/ Multiple Choice Questions
01 (a) 02 (c) 03(c) 04(b) 05(a) 06(c) 07(b) 08(a) 09(c) 10(a)
Report of the High Powered Committee on Cooperatives, May 2009- Chairman

Late Shri Shivaji Rao G Patil
RBI website: https://www.rbi.org.in
NABARD website: https://www.nabard.org
Ramesh Singh (2020) Indian Economy, Tata McGraw Hill Publications
231
Unit 4: Recommendations of Select Committees
4.1 Lesson No1: All India Rural Credit Survey Committee, 1954
4.1.1 Objectives
4.1.2 Introduction
4.1.3 Viewpoints of the committee
4.1.4 Major recommendations of the Committee
4.1.5 Developments after the Committee’s report
4.1.6 Let Us Sum Up
4.1.7 Key words
4.1.8 Check Your Progress questions
232
4.1.1 Objectives
The objective of this lesson is to understand the implications of one of the

major committees viz. ‘All India Rural Credit Survey Committee’ of 1954,
set up to identify the issues and problems relating to the Co-operative credit
system, then prevailing.
4.1.2 Introduction
A major watershed initiative undertaken by GOI in the year 1951, was the
appointment of the Gorwala Committee, popularly known as the All India
Rural Credit Survey (AIRCS) Committee on the Cooperative Movement in
India. The committee was set up to understand the position of rural sector
in general and to have a proper survey. The Committee, headed by Shri A. D.
Gorwala, an officer of the Indian Civil Service as its Chairman submitted its
report in 1954. It helped the Government to take number of corrective steps
to strengthen the rural system.
The All-India Rural Credit Survey, covered seventy-five districts around the
country. Eight villages in each of the seventy five districts were chosen for the
survey, A sample of fifteen households from each of the selected villages was
taken, with a view to recommend practical policies on rural credit for the
future. The survey was struck by the utter insignificance of co-operatives in
providing rural credit. It observed that ‘Positive and deliberate’ measures
rather than ‘small administrative, functional or other changes’ were required
to ensure the success of co-operative credit institutions and enable them to
become self-supporting. It observed that a large part of the country were not
covered by cooperatives and in such areas where it had presence, a large
segment of the agricultural population remained outside its membership.
Even where membership did exist, the bulk of the credit requirement (75.2%)
was met from other sources.
4.1.3 Viewpoints of the Committee
Following were the important observations and recommendations of AIRCS

committee:
• The committee made a famous statement which is often quoted even

now: “Co-operation has failed, but Co-operation must succeed”
• The Committee recommended an integrated approach to cooperative

credit and emphasized the need for viable credit cooperative societies
by expanding their area of operation, encouraging rural savings and
diversifying business. The Committee also made recommendation for
Government participation in the share capital of the cooperatives.
233
• In 1951, the AIRCS found that the share of banks as a whole in rural
credit was less than 1 percent. Further, the role of private commercial
banks in rural credit remained minimal and indirect. AIRCS pointed
out that the advances of commercial banks for the production of
agricultural commodities constituted less than 4 per cent of their total
advances. The AIRCS had wanted involvement of these banks in
agricultural marketing and processing but not directly in farm output.
Rural branches of commercial banks were few and far between despite
a 1954 RBI directive for them to open at least one branch in unbanked
rural and semi-rural areas for every branch opened in previously
banked areas.
• The committee recommended key role for the Reserve Bank of India in
coordinating the proposed network of co-operative institutions and for
its Agricultural Credit Department in over seeing their functioning.
• The State’s tendency was to ‘over-administer and under - finance’ the
co-operative movement. Thus there was the need for an integrated
system of co-operation and rural credit.
• It emphasized the importance of training. The All India Cooperative
Union and the State Cooperative Unions were entrusted with training
of members and office bearers of cooperative organizations.
• Non-economic causes for the failure of the cooperative movement were
basically structural and functional, low educational levels and lack of
training. Multi-purpose Societies had not made any significant
difference.
• Location of both ‘power’ and ‘finance’ continued to be largely urban and
hence more responsive to urban than rural interest; cooperative was in
danger from various vested interests.
4.1.4 Major Recommendations of the Committee
• Integrated scheme of Rural Credit, based on State partnership

including financial partnership in cooperatives; training with a rural
bias.
• Cautioned against state interference in day to day working. While
societies at the rural base should become fully cooperative by process
of replacing share capital, partnerships at higher levels have to be
retained till base level societies develop sufficient strength.
• Setting up of a National Agricultural Credit Long Term Operations Fund
and National Agricultural Credit Stabilization Fund; to be reviewed at
the end of 5 years, responsibility for which would be with the RBI.
234
• Administrative and other matters including training.
• Creation (establishment) of the State Bank of India by amalgamation of
the Imperial Bank of India and certain other state banks like State Bank
of Saurashtra and others.
• Establishment of a Central Land Mortgage Bank in each State with
more than 51% of State share capital.
• Establishment of Apex Cooperative Marketing Federations in the states.
• Licenses to be issued on a priority basis to cooperative processing
plants.
• State plans for rationalizing and strengthening Central Cooperative
Banks.
• District Marketing Societies on territorial or commodity basis should be
set up with at least 51% State Govt. share capital and suitable technical
staff
• PACS should be with reasonably large membership and share capital
and covering groups of villages. There were detailed observations with
regard to the nature of liability, deposit, reserve, loan operations of
PACS, etc.
• Establishment of primary land mortgage banks and primary marketing
societies located at important mandis or at taluka centers after due
consideration of the conditions of each area.
• Audit to continue to be in the hands of govt. and be strengthened on a
high priority; adoption of uniform standards of audit classification on
an All India basis.
4.1.5 Developments after the Committee’s report
• The Government accepted the basic approach and the major

recommendations of the Gorwala Committee.
• A National Cooperative Development and Warehousing Board was set
up.
• The RBI Act, 1934 was amended to enable it to play an active role in
building up of cooperative credit institutions.
• The Second Five-Year Plan (1956-1961), emphasized “building up a
cooperative sector as part of a scheme of planned development” as being
one of the central aims of National Policy. It aimed at enabling
cooperatives to increasingly become the principal basis for organization
of economic activity.
• Formation of State Bank of India: Since cooperative credit
institutions depended on the banking system for a number of services,
235
there was a need for positive State association with a defined sector of
commercial banking. The Report thus recommended the creation of the
State Bank of India through the statutory amalgamation of the then
Imperial Bank of India and the major State associated banks to
undertake an expeditious program of banking expansion, particularly
in the rural areas.
• The Imperial Bank of India was nationalized and the new State Bank of
India was created in July 1955, in order to give a boost to direct flow of
funds of the banking system into certain neglected, but important,
sectors of the economy such as agriculture and allied activities and
spread banking facilities in rural areas. The flow of funds to the rural
sector increased over the years.
• State Bank of India was asked to open around four hundred branches
in semi-urban areas and start agricultural lending, even if at a loss.
• Reserve Bank of India was authorized to make long-term loans to State
Governments for subscribing to the share capital of co-operative
institutions and to Central Land Mortgage banks and set up the
proposed special funds.
• A third Deputy Governor was appointed in RBI having exclusive
responsibility of rural credit.
• The National Agricultural Credit (Long-term operations) Fund was
created in 1955 and the Reserve Bank was authorized to specify from
time to time, the purposes for which it would make medium-term loans.
Over the years such loans were utilised to finance a wide range of
investments relating to the rural sector.
• The All India Cooperative Congress, held at Patna in 1956, accepted the
principle of state participation and government representation on the
Board of Directors of cooperatives. It resolved that the number of such
nominees should not exceed one-third of the total number of Directors
or three, whichever is less and applicable even to cooperatives having
government share capital in excess of 50% of total share capital. This
recommendation was accepted by the Central Government.
4.1.6 Let us sum up
Setting up of the All India Rural Credit Survey Committee in the year 1951
under the Chairmanship of Shri A D Gorwala is considered as the milestone
in the development of rural credit system in India. This committee’s
viewpoints and recommendations paved way for better understanding. It also
helped to take appropriate corrective steps. The recommendations led to
several landmark institutions like State Bank of India, Central Land Mortgage
Banks, Marketing Societies, Etc. Several dedicated funds were created to
support sustainable development of rural credit. Thus, this Committee could
236
be considered as a first major step towards taking stock of things about the
happenings in the rural credit system at that time.
4.1.7 Key words
All India Rural Credit Survey Committee (AIRCS), Gorwala, Imperial Bank,
State Bank of India, Central Land Mortgage Banks, Marketing Societies
4.1.8 Check your progress
State True or False
01. All India Rural Credit Survey Committee suggested for the nationalization
of select commercial banks
02. The National Cooperative Development Fund was established by the

Central Government
03. The ‘All India Rural Credit Survey (AIRCS) Committee recommended
setting up of National Agricultural Credit- Long-term Operations (AC-LTO)
Fund, to be established by Reserve Bank of India.
04. “Co-operation has failed, but Co-operation must succeed” is a famous

statement by All India Rural Credit Survey (AIRCS) Committee
05. The AIRCS Committee recommended setting up of National Agricultural

Credit- Stabilization (AC-S) Fund, to be established by Reserve Bank of India.
06. AIRCS Committee was headed by Dr C Rangarajan.
01- False 02- True 03- True 04. True. 05 True 06. False
4.1.9 Terminal Multiple Choice questions
01. State Bank of India was established in the year
a. 1954
b. 1955
c. 1969
d.1980
02. The All India Rural Credit Survey Committee in 1951 was set up under
the chairmanship of
a. Dr D R Gadgil
237
b. Shri A. D. Gorwala
c. Dr. C Rangarajan
d. None of them
03. Review of National Agricultural Credit - Long Term Operations (NAC-LTO)

Fund to be undertaken by
a. Reserve Bank of India
b. NABARD
c. Central Government
d. Special Committee set up for this purpose
04. “Co-operation has failed, but Co-operation must succeed” is a famous

statement by :
a. Mahatma Gandhi
b. Pandit Jawahar Lal Nehru
c. All India Rural Credit Survey (AIRCS) Committee
d. Vaidyanathan Committee
05. An important observation of the All India Rural Credit Survey (AIRCS)
Committee was :
a. Utter insignificance of cooperatives in providing rural credit
b. Very high proportion of cooperatives in providing rural credit
c. Both (a) and (b)
06. The AIRCS Committee known as Gorwala Committee has contributed in

the following decisions after submission of its report:
a. Emphasis was laid on building cooperative sector as a scheme of

planned development
b. State Bank of India was formed for Government association with the
banking
c. Both (a) and (b)
238
07. To get an idea about the situation of the rural India, the All India Rural
Credit Survey (AIRCS) Committee conducted a survey of:
a. One district in each state.
b. One village in each state.
c. Seventy five districts around the country and 8 villages in each

district
08. The Gorwala Committee has recommended:
a. Establishment of a Central Land Mortgage Bank in each State
b. Establishment of Apex Cooperative Marketing Federations in the

states
c. Both (a) and (b)
Key to terminal Multiple Choice questions
01.(b) 02 (b) 03 ( a) 04.(c) 05 (a) 06 ( c) 07. (c) 08 (c)
All India Rural Credit Survey Committee Report (available at RBI Website:
https://www.rbi.org.in )
239
4.2 Lesson No. 2: All India Rural Credit Review Committee, 1969
4.2.1 Objectives
4.2.2 Introduction
4.2.3 Observations/Viewpoints
4.2.4 Recommendations of AIRCRC
4.2.5 Let Us Sum up
4.2.6 Keywords
240
4.2.1 Objectives
The objective of this lesson is to understand the significance of the All India
Rural Credit Review Committee.
4.2.2 Introduction
In July 1966, the All India Rural Credit Review Committee (AIRCRC) under
the Chairmanship of Shri B Venkatappiah (known as Venkatappiah
Committee) was formed by RBI with two objectives:
a. First- to review the developments that have taken place in rural credit
since the Report of the Rural Credit Survey Committee (about 15 years
had elapsed after that report); and
b. The second- to make recommendations on the basis of this review and

of the estimated pattern and dimension of future needs.
4.2.3 Observations/Viewpoints
The AIRCRC, submitted its report in July 1969, just before the nationalization
of fourteen major commercial banks. It came to the conclusion that in large
parts of the country, the marginal and small farmers were deprived of having
access to the credit from cooperatives both for production and investment
purposes. This stressed the establishment of institutional financial agencies
under public sector. Consequently the first spell of nationalization of banks
was done.
It admitted that co-operatives would have to be strengthened. It highlighted

that the farmer would be better served, if other institutions coexisted with the
cooperatives in healthy competition. The adoption of the multi-agency
approach as the most feasible and appropriate response to the credit
requirements of agriculture and allied activities was recommended.
Commercial banks had begun to provide direct and indirect finance to

farmers/agriculture by then. There were two driving forces behind this. One
was ‘social control’, which forced banks to extend agricultural and rural credit
on a significant scale. The other was the introduction of the high-yielding
varieties program from the kharif season of 1966. The program involved large
outlays on irrigation/ inputs and, consequently, the credit disbursed by
cooperatives was expected to expand enormously. However, this did not
happen.
4.2.4 Recommendations of AIRCRC
AIRCRC submitted the final report in the year 1969 and recommended the
following:
241
• Agricultural Credit Corporations to be set up in States.
• State Coop Banks (StCBs) to play major role in rectifying deficiencies in
cooperative credit and various steps taken.
• To strengthen StCBs.
• StCB through its branches to finance PACS, where CCB is inoperative
and similarly, CCB to finance cultivators where PACS dormant.
• Appropriate staffing and upgradation through training.
• Special grants by State Government to cooperative banks for
employment of staff and to write off irrecoverable debts in certain cases.
• Supersession of management and appointment of Administrative
Officer in special cases.
• Amalgamation of Banks where required.
• Rehabilitation of weak Central Cooperative Banks.
• Promotion of viable units at the primary level so as to ensure that area
of operation is not too large for the cultivators’ convenience.
• Efforts to convert all PACS to limited liability.
• Reactivation of dormant societies or their liquidation.
• State government to contribute additional sums to share capital of
PACS where levels of noncredit business warrant.
• Managerial subsidies to societies which employ a full time paid
Secretary.
• Data verification of land records etc. to ensure reliability of credit
finance.
• Scales of finance to be fixed up and credit to consist of two components
viz., cash and kind.
• Recoveries to be tightened up.
• Supersession of management where Society affairs are unsatisfactory
and Central Bank having a say in the management until a fresh elected
Board is in position.
• State Acts and Rules to incorporate provisions for defaulters to be
disqualified from continuing on Board of Directors.
• Financing of defaulters to be barred, those unable to repay on account
of crop failure to be provided with conversion facilities or in certain
cases to be granted extensions.
242
• Detailed guidelines for structure and resources of LDBs and lending
policies & procedures were laid down.
• Special care to be taken for financing small cultivators. Small Farmers
Development Agency to be established in selected districts for this
purpose.
• RBI Act to be amended to provide for the constitution of Agricultural
Credit Board, which would function through separate Standing
Committees and may also deal with non-agricultural aspects of rural
credit and all relevant aspects of cooperative credit.
• Provisions of the Banking Regulations Act may be gradually extended
to select agricultural credit societies.
• To cover rural electrification aspect, a Rural Electrification Fund to be
administered. Rural Electrification Corporation may be set up for this
purpose.
• The Committee also made recommendations with regard to medium
term finance for agriculture, credit for animal husbandry, fisheries and
other activities, and credit for marketing.
• Grant of pledge loans by marketing societies to members to be
continued subject to certain safeguards.
• Need for qualified staff at all levels and appropriate training was
emphasized; a study team was proposed to examine and design training
courses and determine the magnitude of training required at all levels.
• Training to emphasize practical aspects of working.
• Member education was also emphasized.
• The principle of seasonality should be observed by co-operatives in
lending and recovery of production credit. However, there should be
flexibility in implementing this principle taking into account special
problems, such as those where the cultivators carry on cultivation
almost round the year because irrigation facilities are available and
certain crops, such as coconut, which do not call for expenditure on a
seasonal pattern and provide a yield throughout the year. Cash credit
type of accommodation may be provided to cultivators engaged in
multiple cropping.
• Small Farmers Development Agency (SFDA) and Marginal Farmers
and Agricultural Labourers Development Agency (MFAL): The
Committee observed that small and marginal farmers were not receiving
credit from the cooperative or commercial banks due to various
cumbersome lending procedures and their inability to furnish tangible
243
securities for obtaining loans, undue delays in disbursement of loans
etc., As a result, the marginal and small farmers depended mostly on
the private money lenders for their credit needs paying high rates of
interest and at other exploitative terms. To solve these problem, the
Committee recommended the establishment of Small Farmers
Development Agency (SFDA) and Marginal Farmers and Agricultural
Labourers Development Agency (MFAL) which became operational in
1971. The objectives and functions of both of these agencies were as
follows:
• To assist persons specifically identified from the target group in
raising their income level.
• To identify the problems of small farmers and formulate a

programme incorporating suitable measures to be implemented
either by itself or through other agencies and institution.
• To help small farmers to secure loans from co-operative banks and

other assistance for sinking wells, improved seed, fertilizer and other
inputs in the required quantities and at the right time from the local
sales depots, co-operatives, government or private retailers.
• To provide various services such as spraying of insecticides, hiring

out of tractors and land levelling to small farmers through the agro
industries, corporations or other bodies.
4.2.5 Let us sum up
The initiative taken by the RBI /Government in setting up the All India Rural
Credit Review Committee (AICRC) known as Venkatappiah Committee, made
a review of credit related matters for agriculture and rural credit,15 years after
the Gorwala Committee {All India Rural Credit Survey (AIRCS) Committee} and
also examined new dimensions. Further, it made several new
recommendations which had wide ranging impact on agriculture and rural
development in the country. The major recommendations of the Committee
included setting up of Agricultural Credit Corporations in States;
establishment of SFDA and MFAL; strengthening of StCBs; Amalgamation of
Banks where required and rehabilitation of weak Central Banks.
4.2.6 Key words
All India Rural Credit Review Committee, Venkatappiah Committee,

commercial banks, Regional Rural Banks, SFDA, MFAL, Social Control of
banks, Rural Electrification Corporation
244
4.2.7 Check your progress questions State True or False
State True or False
1. The All India Rural Credit Review Committee was set up under the
Chairmanship of Shri Narasimham.
2. Setting up of Rural Electrification Corporation (REC) was one of the

recommendations of the All India Rural Credit Review Committee.
3. The All India Rural Credit Review Committee was formed in the year 1991.
4. The All India Rural Credit Review Committee recommended adoption of

‘Multi- agency approach’ for provision of credit for agriculture and allied
activities.
5. The All India Rural Credit Review Committee recommended formation of

SFDA and MFAL development agencies.
6. The All India Rural Credit Review Committee was very happy about the
access of small and marginal farmers to credit from cooperatives at that
time.
01. False 02. True 03. False 04. True 05. True 06.False
4.2.7 Terminal / multiple choice questions
01. All India Rural Credit Review Committee was setup in the year ____ and
submitted its report in the year____ ?
a. 1951, 1952
b.1966, 1969
c. 1981, 1982
d.1991, 1992
02. All India Rural Credit Review Committee recommended for setting up of
a. SFDA
b. MFAL
c. Both (a) and (b)
03. Expansion of SFDA is
245
a. Southern Farmers Dedicated Agency
b. Small Farmers Distribution Authority
c. Small Farmers Development Agency
04. The expansion of MFAL is
a. Multipurpose Farmers and Labourers Authority
b. Marginal Farmers and Agricultural Labourers Development Agency
c. Maharashtra Farmers and Labourers Agency
05. All India Rural Credit Review Committee was headed by:
a. Dr C Rangarajan
b. Prof A Vaidyanathan
c. Shri B Venkatappiah
06. An important recommendation of All India Rural Credit Review

Committee recommended was adoption of:
a. Multi Agency Approach
b. Establishment of NABARD
c. Formation of SIDBI
07. An important recommendation of All India Rural Credit Review

Committee recommended was establishment of:
a. Rural Electrification Corporation
b. SFDA
c. Both (a) and (b)
08. Multi Agency Approach means?
246
a. Cooperative banks as well as commercial banks to be involved in
financing for agriculture and allied activities
b. Farmer to have choice from which bank he/she would like to take
loan for agriculture and allied activities
c. Both (a) and (b)
09. Important objectives of setting up the “All India Credit Review Committee
(AICRC) were:
a. To review the developments in rural credit since the Report of the

Rural Credit Survey Committee submitted its report in 1951(about 15
years elapsed after that report)
b. To make recommendations on the basis of this review and for the

future needs
c. Both (a) and (b)
Key to terminal/ multiple choice questions
01. (b) 02. (c) 03. (c) 04. (b) 05. (c) 06. (a) 07. (c) 08. (c) 9. (c)
All India Rural Credit Review Committee Report, B. Venkatappiah Report,

RBI, 1969
247
4.3 Lesson No 3: Committee to Review the Arrangements for
Institutional Credit for Agriculture and Rural Development
(CRAFICARD), 1981
4.3.1 Objectives
4.3.2 Introduction
4.3.3 Terms of Reference
4.3.4 Select observations and recommendations of CRAFICARD
4.3.5 Let Us Sum up
4.3.6 Key words
4.3.7 Check Your Progress –questions
248
4.3.1 Objectives
The objectives of this lesson are to enable the readers:
• To explain the important recommendations of CRAFICARD
• To describe the relevance and the various aspects associated with

institutional arrangements for agricultural and rural credit.
4.3.2 Introduction
At the instance of the Government of India, the RBI appointed, on March 30,
1979, a ‘Committee, to Review the Arrangements for Institutional Credit
for Agriculture and Rural Development (CRAFICARD). The Committee was
headed by Shri B Sivaraman, former member of Planning Commission, GoI.
Its recommendations have led to several important and long lasting changes
in agricultural and rural credit in the country.
4.3.3 Terms of Reference
The terms of reference of the Committee were as follows:
i. To review the structure and operations of the Agricultural Refinance

and Development Corporation ARDC) in the light of the growing need
for term loans for agricultural and allied purposes including village
industries, marketing, processing and other services relevant to
integrated rural development;
ii. To examine the need for and the feasibility of integrating short-term and
medium-term credit structure with long-term credit structure at
national, state, district and village levels in the context of the
intensification of rural development programmes;
iii. To consider the relative merits of three-tier and two-tier structures for
cooperative financing institutions and suggest improvements, if any;
iv. To study the consultancy services provided by the Agricultural Finance
Corporation and suggest improvements for achieving satisfactory
coordination between it and financing institutions;
v. To review the role of the Reserve Bank of India in the field of rural credit
having due regard to its central banking functions; and
vi. To make recommendations on the above issues and other related
matters.
4.3.4 Select observations and recommendations of CRAFICARD
1. The national policy objective of growth with social justice requires that
integrated rural development must embrace all the poor households.
249
The normal criterion of banking that a family of rural poor is not credit-
worthy would have to give place to the concept that many of the poor
can be brought into the mainstream of economic development through
credit-worthy programmes.
2. For successful implementation of the programmes for the rural poor, it
is necessary to identify them as target groups. These are:
small/marginal farmers, agricultural labourers, rural artisans,
scheduled castes and scheduled tribes.
3. The ARDC definition of small farmer based on income criterion was
precise and workable, while the GoI definition based on acreage, aims
to restrict subsidy, as a matter of policy, to a smaller number among
them, on the principle of Antyodaya. The credit institutions must
ensure that those coming under the GoI definition are given absolute
priority.
4. The household will remain the basic unit of poverty eradication
programme oriented to target groups. From the point of view of credit
institutions it will be useful to classify the poor households into three
categories:
a) Those who can become viable with loan assistance,
b) Those who require some capital-subsidy, in addition to loan, to
become viable and
c) Those who are non-viable and require special assistance from the
State, in the nature of social security. The third category was
outside the purview of the credit institutions.
5. Different methods of reaching the rural poor need to be evolved. Some
sections may have to be approached as well-organised groups such as
co-operative societies, some others will have to be dealt with as informal
groups so as to facilitate group activity and group lending, yet others
have to be approached individually.
6. The Committee viewed the integration inherent in rural development in
four dimensions. Combining credit and programmes for (a)
comprehensive agriculture, (b) tiny, village and cottage industries, (c)
rural services including marketing and (d) infrastructure for production
and supporting services. The committee hoped that the Sixth Plan
would take care of these aspects.
7. In the Committee's view, credit to the weaker sections could be
facilitated by quicker and simpler method of identification of target
groups, simplification of procedures and terms, updating of land
250
records, project based lending and creation of the requisite
infrastructure for ensuring supply of inputs and services.
8. The development agencies including the credit institutions have to plan
and progress together and ensure that credit was tied up with
development programmes and supported by appropriate backward and
forward non-credit linkages.
9. The percentage shares of loans by co-operatives and commercial banks
in different states were more or less the same. Thus, commercial banks'
agricultural credit has been additive and has not substantially helped
to fill the geographical gaps, in the availability of credit, not covered by
co-operatives.
10. Some of the major recommendations of the RBI's Study Team on
Overdues have not been given effect to by most of the state
governments. On the other hand, some of the state governments have
issued, from time to time, blanket stay orders on, or banned coercive
action for, recovery of co-operative dues.
11. The progress in implementation of the rehabilitation programme for
DCCBs has not been satisfactory in many cases. For want of
investigation of overdues on a scientific basis, financial assistance
available to the banks for write off of irrecoverable debts has not been
properly utilized in many cases. Certain essential measures
complementary to the rehabilitation programme, such as, revitalization
and intensive development of PACS, strengthening the arrangements
for supervision, mobilization of resources, etc., have not been taken up
with the desired degree of earnestness.
12. Due to faulty loan proposals, lending without an integrated programme,
lack of effective co-ordination between investment and production
credit, laxity in post-credit follow-up and monitoring of end-use of credit
and above all wilful default, the overdues have been increasing at the
level of PLDBs/branches of SLDBs in several states.
13. In planning the future of reorganised societies, the aim should be to
transform them into a single contact point in the village for all types of
credit. They should have the capacity to serve other rural producers
such as artisans, craftsmen and agricultural labourers in respect of
their economic activities. They have to diversify their functions and
augment their resources and business. The plan must, therefore,
provide for classifying PACS according to the progress achieved from
time to time and for developing them to the next stage, on their onward
march to the ultimate goal of a truly multi-purpose service institution
251
for all types of rural producers. This was the most essential objective to
be achieved.
14. There should be two categories of membership of societies—one
exclusively reserved for the weaker sections distinguished by the lower
rate of share capital prescribed for them and the other earmarked for
those contributing share capital at the usual rate.
15. In the context of fast-changing rural scene with increased economic
prosperity, it was high time that PACS stopped working as mere lending
institutions and took steps to spread banking habit and mobilise
deposits in rural areas. The Committee felt that PACS should
immediately adopt an approach and a system that will bring confidence
to the rural saver and the potential depositor, be he/she a member of
the society or not. The Committee suggests that, to begin with, viable
societies with full-time paid secretaries, good management and
infrastructural facilities like building, may be selected in each state for
the purpose of deposit mobilisation. The StCB and CCBs in each state
should be fully involved in this programme.
16. The CCBs and StCBs are expected to provide a positive leadership in
developing the strength and soundness of the system. They should
create and build up a "Primary Co-operatives Development Fund."
17. The Committee strongly urged that in the matter of dispensing long-
term credit, PACS should act as agents of LDBs.
18. The Committee was gravely concerned at the tendency of some state
governments to exempt whole classes of defaulters and to pay the
amounts from the exchequer, in view of its dangerous implications for
the entire institutional credit system. The Committee therefore, strongly
urged that no state government should resort to such measures in
future. The GoI should prevail upon the state governments not to resort
to such measures.
19. The Committee strongly urged the GoI to consider amending the Indian
Penal Code and other relevant statutes, to provide for deterrent
punishment to willful defaulters. It was also necessary to make a
provision in the law to place the onus on the borrowers to rebut the
presumption that the default was willful.
20. National Co-operative Union of India (NCUI) and the State Go-operative
Unions should draw up and implement time-bound member education
programmes and training programmes for office bearers of all the PACS
with active financial aid administrative support from the GoI and the
state governments. Attempts should be made to familiarise the
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members with the functional aspects of their societies, their duties as
members, and how they can help in developing the societies.
21. State governments should urgently review the existing machinery for
the audit of societies, strengthen it and also maintain it as an
autonomous entity.
22. Commercial banks should be encouraged to bring together people with
common interests and purposes into homogenous groups for the
purpose of development programmes and give them the required credit
along with other necessary services. The groups may be formal or
informal. If the form of a co-operative society was favoured or preferred,
it should be made possible for such a functional co-operative society to
be registered and supervised by the Registrar of Co-operative Societies.
The idea prevalent in some quarters that all co-operative societies
should be affiliated to and be financed by co-operative credit
institutions only and by none other, should be discarded as outmoded
and injurious to the interests of the target groups.
23. Systematic and concerted efforts have to be made over a long period by
all concerned to foster attitudinal changes and to develop the right kind
of 'rural bankers'. These efforts have to be in various fields such as
recruitment, training, rewards, penalties, etc. GoI, RBI and NABARD,
when established should devote attention to these important aspects.
24. The recommendation of the Dantwala Committee was endorsed for the
transfer of entire control, regulation as well as the promotional/
developmental responsibility relating to RRBs from the GoI to the RBI,
with the modification that NABARD will take the place of the RBI in the
new set-up. Necessary amendments to the RRB Act may be made at the
earliest so that there will be a single overseeing authority to look after
RRBs.
25. The Committee considered the desirability and feasibility of establishing
a national bank for rural development in the light of integrated rural
development. It studied the views expressed by the All India Rural
Credit Review Committee (AIRCRC), the Administrative Reforms
Commission the Banking Commission and the National Commission on
Agriculture. The reasons for having a separate national level bank for
agriculture and rural development had been spelt out lucidly by the
AIRCRC. On examination of these reasons, the Committee felt that
there was a need for a new organisational device for providing
undivided attention, forceful direction and pointed focus to the
credit problems arising out of integrated rural development. The new
national level institution for integrated rural development may take over
from the RBI the existing refinance facilities for agriculture, rural
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artisans and village industries and expand them as suitable. The new
institution be named as the National Bank for Agriculture and Rural
Development (NABARD).
26. NABARD will be the refinancing agency for the entire rural credit
system. Being an institution within the RBI complex, the statutory
inspection of co-operative banks and RRBs may also be taken up by
NABARD on an agency basis. The RBI can take occasional test
inspections of these banks with a view to satisfying itself that their
operations are being carried out in conformity with the provisions of the
Banking Laws.
27. The important close links of NABARD with the RBI envisaged were:
a) RBI may own 50 per cent of share capital of NABARD and the remaining
50 per cent may be owned by Government of India only.
b) The Board of NABARD may be a nominated Board of not exceeding 15
members and 3 directors excluding the Chairman may be from among
the directors of the Central Board of the RBI.
c) A Deputy Governor of the RBI should be appointed as Chairman of the
Board.
d) The Managing Director should be appointed by the Board after
consultation with the RBI.
28. The authorised and paid-up capital of NABARD may be Rs. 500 crores
and Rs. 100 crores, respectively, owned equally by the RBI and
Government of India. In view of this share holding arrangement, there
was no need for payment of a minimum dividend. There should also be
no difficulty in exempting NABARD from the payment of income-tax as
there would be no private shareholders.
29. While NABARD should be free to recruit its own staff, and would be
administratively independent of the RBI, the personnel connected with
the items of work transferred to NABARD will provide the nucleus, to
begin with. The legitimate interests of such staff will have to be
safeguarded.
30. As regards resources for term lending operations by NABARD, the
existing arrangements of the ARDC should continue.
31. There should be an enabling provision for NABARD to receive deposits
from the StCBs, LDBs as also other deposits such as those accruing
incidentally in the business of NABARD.
32. The three tiers are three functional components of a single structure of
co-operative credit and a part cannot be removed without impairing the
structure as a whole. Hence, in our opinion, while a two-tier structure
{i.e. StCB and PACS) may be continued in smaller states and Union
Territories, the three-tier structure could remain as the general pattern
for bigger states.
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33. Where any component of the structure has developed serious
organisational or operational weaknesses and has proved to be a
hindrance to the smooth flow of credit, changes will have to be made in
the set-up. The specific recommendations of the Committee regarding
the arrangements to be made in areas where credit flow was choked, were
as under:
a) Where the non-functioning of any particular tier was due to external
factors, these factors should be removed.
b) A quick analysis of weak DCCBs may be made with reference to the flow
of credit, recovery performance etc., to identify areas where credit flow
was choked by their existence. In such cases, the StCB may open its
branches in the district concerned and undertake direct financing of
PACS.
c) Where the working of DCCB can be improved, if concerted efforts are
made, the bypassing of the institution may be resorted to as a
transitional measure, and vigorous steps taken to place it on an even
keel.
d) A more detailed examination of the financial position of DCCBs may be
undertaken. Where the functioning of a particular DCCB has been
jeopardised to such an extent that the possibilities of its rehabilitation
within a reasonable period of time, say five years, are remote, the
liquidation or merger of the CCB with the StCB may be resorted to.
e) Where the DCCB was to be liquidated, the StCB may consider
sponsoring of a RRB as an alternative to the extension of its own branch
network and serve the PACS through it.
34. A beginning may be made at the primary level for integration of credit by
making PACS, the organisation for retailing of all types of credit. The
scheme may be initially started on a pilot basis in selected areas which
are served by societies having a whole time trained secretary, competent
management and a satisfactory balance sheet. Broadly, the functions in
respect of long-term credit to be undertaken by the societies will cover
collection of applications, their preliminary scrutiny, disbursement of
loans and the supervision and recovery thereof for which commission
may be allowed by LDBs to cover the cost of such services. Moreover, the
PLDBs/branches of state LDBs should also send to the PACS concerned
the list of their loanees so that the latter could be enrolled as their
members, if they were not members already, so as to meet their
requirements of production credit.
35. RBI cannot, under its statute, provide funds for periods longer than 5
years. The funds required for the LDB structure have had to be raised
from the market or more recently from International Development
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Association (IDA) of the World Bank through GoI. Institutional
specialization, based on such temporary and tenuous grounds need not
be continued after the establishment of NABARD which will be competent
to handle both types of refinance (short term and long term). Thus, there
should be facility for PACS and their higher level bodies to advance loans
upto seven years. Similarly, the long term structure may be permitted to
provide loans for periods of 3 years and above. Suitable provisions will
have to be made by the state government in their Co-operative Societies
Acts, for the purpose.
36. Since rural development programmes are being undertaken in all the
development blocks in the country and financing of all the beneficiaries
under the programmes would involve some risks to the financing
institutions, the adequacy of existing arrangements to cover the risks to
be taken by CCBs and PACS should be examined and adequate
arrangements made to cover the risks by additional contribution to their
risk funds, or, if possible, by bringing them within the scope of the
Deposit Insurance and Credit Guarantee Corporation (DICGC).
37. If cooperative credit institutions were to function as autonomous bodies
and implement national policies effectively, in the sphere of rural credit,
there was an urgent need for a national consensus amongst political
parties to halt politicization of the co-operatives. As an immediate
measure, a vigorous educational programme should be launched to see
that office-bearers and members of co-operatives are adequately
educated regarding their obligations and responsibilities towards their
organisations. Taken up on a sufficiently large scale, a programme of this
kind should help develop genuine co-operative leadership. NCUI may be
the appropriate agency for taking initiative in this matter.
38. Supersessions of boards of StCBs and CCBs have often been ordered to
serve the political ends of the powers that be. The Banking Regulation
Act, 1949 (As applicable to Co-operative Societies) places certain duties
and responsibilities on the RBI. Obviously, RBI cannot discharge these
responsibilities satisfactorily if the managements of cooperative banks
are changed arbitrarily. With a view to preventing politically motivated
summary dissolutions of the boards of co-operative banks, a provision
should be incorporated in the Banking Regulation Act, 1949 (As
applicable to Co-operative Societies) making it obligatory on the part of
the state government to seek prior consultation with the RBI when it
proposes to supersede the boards of managements of co-operative
banking institutions. In the case of LDBs, which are not covered by the
B.R. Act, 1949 (As applicable to Co-operative Societies), the
RBI/NABARD should make it a condition for providing financial
assistance that supersession of the board of management of the
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concerned LDB should only be with the prior consultation of
RBI/NABARD. At the same time, the Co-operative Societies Act in each
state should also suitably amended making it incumbent on the state
government to have prior consultation with the RBI before resorting to
supersession of the boards of management.
39. Co-operative banks may take the initiative to enter into consortium
arrangements with commercial banks for financing agro-industries,
including processing units. The cooperative banks should be allowed to
charge higher interest on agricultural loans to large farmers compared
to small farmers. No ceiling need be fixed on such interest rates.
40. In the multi-agency set-up of rural finance, rigid classification by the
period of term loans was no longer expedient. Hence, the statute should
be suitably amended to enable LDBs to provide all kinds of term loans
including composite loans.
41. LDBs should invariably provide production finance along with term loans
for activities such as plantation, sericulture and poultry. In cases where
such composite loans are not to be given, LDBs should ensure that the
borrowers concerned become members of PACS and are provided with
production credit.
42. In the Interim Report, the Committee stated that the National
Agricultural Credit (Long Term Operations) (NAC-LTO) Fund and the
National Agricultural Credit (Stabilization) (NAC-Stabilization) Fund
should remain with the RBI as at present. However, on re-examination
of the issue at the time of drafting of the NABARD Bill, it was felt that
keeping these Funds with the RBI and asking NABARD to present its
drawal proposals every time may lead to avoidable delays, inconvenience
and confusion of roles. Hence, these two Funds should be transferred to
NABARD and form part of the National Rural Credit (LTO) Fund and the
National Rural Credit (Stabilization) Fund, respectively, to be constituted
and maintained by NABARD. RBI may make annual contributions to the
two Funds to be constituted by NABARD. Besides, NABARD would also
make such annual contributions to these two Funds as it may be in a
position to do.
4.3.5 Let us sum up
The setting up of the Committee To Review the Arrangements for Institutional

Credit for Agriculture and Rural Development (CRAFICARD) under the
Chairmanship of Shri B Sivaraman was a very important milestone in the
development of institutional credit for agricultural and rural development. It
led to the formation of NABARD. The committee’s views, opinions, suggestions
and recommendations have helped the GoI to establish NABARD in
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consultation with RBI. On account of a separate exclusive organization, the
concentration on rural credit became possible and effective and the country
today can see the large scale benefits of the same. Besides that there were
several other recommendations which were very important for sustainable
and equitable growth of agriculture and rural credit.
4.3.6 Key words
CRAFICARD, NABARD, Regional Rural Bank, Authorized Capital, StCB,

DCCB, PACS, LAMPS, Commercial Banks, LDBs, Farmers Service Societies,
Village Adoption, Lead Bank Scheme, National Agricultural Credit (Long Term
Operations) (NAC-LTO) Fund and the National Agricultural Credit
(Stabilisation) (NAC-Stabilisation) Fund,
4.3.7 Check your progress – questions
State True or False
1. Before establishment of NABARD, the related work was handled by the

Finance Ministry, Government of India.
2. The CRAFICARD recommended Authorized Capital of Rs.10000 crores for

setting up of NABARD.
3. NABARD was established based on the recommendation of CRAFICARD.
4. CRAFICARD was headed by Prof. A Vaidyanathan
5. As regards urban co-operative banks, the CRAFICARD Committee thought

it more appropriate to exclude them from the jurisdiction of NABARD as these
banks do not play a significant role in rural credit.
6. CRAFICARD recommended that RBI’s refinance for agriculture/ rural

development as well ARDC’s business should be taken over by NABARD.
7. CRAFICARD recommended that RBI should not have any links with
NABARD.
8. CRAFICARD recommended that NABARD should have ‘undivided attention,

forceful direction and pointed focus’ to the credit problems related to
integrated rural development.
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1. False 2. False 3. True 4. False 5. True 6. True. 7. False

08. True
4.3.7 Terminal / Multiple Choice questions
1. One of the tasks of CRAFICARD was to review the structure and

functioning of the
a. Reserve Bank of India
b. Agricultural Banks
c. Deposit Insurance and Credit Guarantee Corporation
d. Agriculture Refinance and Development Corporation
2. The full form of CRAFICARD is:
a. ‘Committee, to Review the Arrangements for Institutional Credit for

Agriculture and Rural Development’
b. ‘Centre to Review the Arrangements for International Credit for

Agriculture and Rural Development’
c. ‘Committee, to Review the Arrangements for Integrated Rural

Development’
d. None of these
3. The Large-Sized Multi-purpose Co-operative Societies (LAMPS) are

organized mainly in
a. Rural areas
b. Towns
c. Tribal areas
d. Semi Urban areas
4. CRAFICARD was appointed by :
a. RBI as advised by Government of India
b. Ministry of Finance
c. World Bank
d. National Cooperative Development Corporation
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5. The recommendations of CRAFICARD regarding PACS were:
a. PACS should become ‘Single Contact Point’ for all types of credit
b. PACS should mobilise deposits and spread banking habits in rural

areas
c. Both (a) and (b)
6. One of the most important recommendations of CRAFICARD was to

establish:
a. Agricultural Refinance Development Corporation (ARDC)
b. National Bank for Agriculture and Rural Development (NABARD)
c. National Cooperative Union of India (NCUI)
d. Small Finance Bank
7. Chairman/ Head of CRAFICARD was :
a. Dr C Rangarajan
b. Prof A Vaidyanathan
c. Shri B Sivaraman
d. Dr Man Mohan Singh
8. NABARD was established in the year:
a. 1991
b. 1976
c. 1982
d. 1951
9. CRAFICARD recommended that ______ should draw and implement

member education programmes and training programmes for office bearers of
PACS
a. NABARD
b. State Cooperative Banks
c. NCUI and State Cooperative Unions
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d. NCDC
10. CRAFICARD recommended that to have linkages of NABARD with RBI:
a. 50% share capital of NABARD should be owned by RBI
b. The Chairman of NABARD should be from RBI
c. Both (a) and (b)
Key to terminal/ Multiple Choice questions
1. (d) 2. (a) 3. (c) 4. (a) 5. (c) 6. (b) 7. (c) 8. (c) 9.(c) 10. (c)
RBI website: https://www.rbi.org.in
Rudra Pratap Singh (1993) National Bank for Agriculture and Rural
Development, Deep & Deep Publications
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4.4 Lesson No. 4 Vaidyanathan Committee, 2004 - GOI Revival Package
4.4.1 Objective
4.4.2 Introduction
4.4.3 The ‘Task Force on Revival of Rural Cooperative Credit Institutions’
4.4.4 Nature and Extent of Impairment and Remedial Measures
4.4.5 General Approach and Financial Restructuring
4.4.6 Reforms recommended by the Task Force
4.4.7 Implementation Mechanism
4.4.8 Transitional Problems and Long Term Outlook
4.4.9 Issues in Implementation
4.4.10 Implementation of Revival Package for Short Term Rural Cooperative

Credit Structure (STCCS) –Progress
4.4.11 Impact of the Revival Package
4.4.13 Keywords
4.4.14 Check Your Progress - questions
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4.4.1 Objective
The objective of this lesson is to enable the reader to understand the

importance of the ‘Task Force on Revival of Cooperative Credit Institutions’-
popularly known as ‘ Vaidyanathan Committee’ and its recommendations.
4.4.2 Introduction
Rural Cooperative Banking and Credit Institutions play an important role in

meeting the growing credit needs of rural India. The volume of credit flowing
through these institutions has increased tremendously over time. The
performance of these institutions, however, has been less than satisfactory
and is deteriorating rapidly. A number of Committees had gone into the
reasons for this situation and had suggested remedial measures, but there
had been little progress. Hence, Task Force on Revival of Cooperative Credit
Institutions’- popularly known as ‘ Vaidyanathan Committee’ was constituted
in August 2004 to examine the issues in detail and suggest remedial
measures. Study of the work done by the Task Force is very important for the
students of CPEC as it will give insight to the vision of the learned committee
about how to help the farmers especially the small and marginal farmers
through a robust, financially strong and sustainable cooperative credit
structure.
4.4.3 Task Force on Revival of Rural Cooperative Credit Institutions
The Government of India, which is committed to reviving and revitalizing the

rural cooperative credit structure (CCS) and attributes high priority and
urgency to it, felt it necessary to have a fresh review. In this context, the Union
Government constituted a Task Force named- ‘Task Force on Revival of
Rural Cooperative Credit Institutions’ on 05 August 2004 to formulate a
practical and implementable plan of action to rejuvenate the rural cooperative
credit structure. The Task Force was headed by Prof. A. Vaidyanathan,
Emeritus Professor, Madras Institute of Development Studies, Chennai. The
Task force was set up to study and suggest/ recommend various measures to
revive Rural Co-operative Banking institutions.
The terms of reference of the Task Force were as follows:
1. To recommend an implementable action plan for reviving the Rural

Cooperative Banking Institutions, taking into consideration, inter alia,
main recommendations made by various committees in this regard.
2. To suggest an appropriate regulatory framework and the amendments
which may be necessary for the purpose in the relevant laws.
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3. To make an assessment of the financial assistance that the Cooperative
Banking Institutions will require for revival, the mode of such
assistance, its sharing pattern and phasing.
4. To suggest any other measures required for improving the efficiency and
viability of Rural Cooperative Credit Institutions.
The Task Force focused on Short Term Credit Cooperative Structure
comprising of State Cooperative Banks (StCB), District Central Cooperative
Banks (DCCBs) and Primary Agricultural Cooperative Societies (PACS).
4.4.4 Nature and Extent of Impairment and Remedial Measures
The Task Force, having perused the reports of earlier committees, agreed with
their central approach and thrust that the cooperative credit structure (CCS)
needs:
• Special financial assistance to wipe out accumulated losses and

strengthen the capital base,
• Institutional restructuring to make for democratic, member driven,
autonomous and self-reliant institutions,
• Radical changes in the legal framework to empower the RBI to take
action directly in matters and to the extent deemed appropriate for
prudent financial management of banks and
• Qualitative improvement in personnel in all tiers and at all levels
through capacity building and other interventions, leading to an
increase in overall efficiency.
4.4.5 General Approach and Financial Restructuring
The Task Force was of the view that financial restructuring of the cooperative
credit structure (CCS) must follow some basic principles such as:
• Re-engineering, including financial re-engineering, must cover all the

tiers of the cooperative credit structure. In the opinion of the Task
Force, a superstructure could only be as strong as the base.
Recapitalization and restructuring the intermediate and upper tiers of
the cooperative credit structure, without addressing the infirmities at
the primary level, would defeat the objectives of reviving and revitalizing
the CCS. Primary Agricultural Cooperative Societies (PACS) are the
foundation of the short-term cooperative credit structure and much of
the weaknesses of the upper tiers was because of the poor financial
health and deficiencies in the way they are organized and managed.
• The Revival Package (RP), therefore, must include assistance for
restoring the PACS to an acceptable level of financial health. It must
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put in position an environment and specific measures that could enable
the PACS to evolve into democratic, self-governing and financially well
managed institutions.
• Recapitalization must cover the aggregate erosion of capital in all the
tiers of the CCS. The Task Force recommended that recapitalization be
limited to institutions that conform to the standards of eligibility
prescribed by it. At the same time, it also recommended the future
setup of the remaining non-viable, dormant and defunct credit
cooperatives or banks- by way of mergers, amalgamations or closure.
The Task Force suggested transitional arrangements to ensure flow of
credit in the areas of operation of such societies.
• Adhering to the principle that a behavioral shift cannot occur without
a strong incentive, the Revival Package combined a generous and
comprehensive capitalization package, with a stringent set of
conditionalities for legal and institutional reforms. The Task Force gave
options to State governments and the CCS to accommodate ground level
diversities in implementing the Revival Package in a phased, but time-
bound manner.
The major issues taken into consideration in working out the details of
financial reconstruction included:
a) Criteria for determining eligible purposes and institutions,

b) The quantum of assistance required,
c) The sharing pattern,
d) Conditionalities and
e) Timeframe.
4.4.5.1 Reforms recommended by the Task Force
Financial assistance alone cannot revive cooperatives and empower them to

realise their full potential to deliver adequate credit to villages and the rural
population (especially the asset-poor, the asset-less and the disadvantaged).
Cooperatives can only be revived, if they become democratic, self-governing,
self-reliant organisations for mutual thrift and credit. The scope for the
government’s involvement and interference in their internal functioning
should be eliminated. Enactment of a liberal law by the State Governments to
enable cooperatives to function fully as member driven institutions is an
essential and critical requirement.
The responsibility for using resources of societies (made up of members’ funds

and borrowings) efficiently and prudently, must be left to the democratically
elected managements, accountable to members.
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At present, most of the institutions of the Cooperative Credit Structure restrict
membership, with full voting rights to borrowers. Depositors are categorized
as nominal members without voting rights, or are not given any membership
status. This is inconsistent with cooperative principles and democratic
functioning. All users – depositors and borrowers, must be made full members
with equal voting rights. This is essential to strengthen the mechanisms of
internal supervision and enforcement of credit discipline.
A strong incentive would, therefore, be there for members to take an active

interest in the working of their societies. If that happened, there would be no
need for external regulation of internal management of cooperatives at the
primary level.
The Revival Package for the CCS entailed assistance for financial
restructuring of the cooperative societies, provided that their State
Governments agreed to participate in the package. It was also imperative that
the State Governments made a formal commitment to make specified changes
in their legal and administrative frameworks, relating to the functioning of
cooperative credit institutions. Although, the willingness for participating in
the Revival Package would be totally optional, once exercised, the State
Government concerned and the CCS units will have to accept the entire
package in totality. There cannot be a pick and choose method for various
components of the package.
The key elements of the package were:
• State Governments should accept the Union Government’s scheme in full,

including the legal and regulatory changes, institutional reform and their
share of financial commitment.
• State Governments not in agreement may be given two years to consider,
after which participation in the Union Government’s scheme may stand
closed.
• PACS, DCCBs and StCBs also to have the option to exercise options
available in the scheme
Release of funds would be linked to the progress in actually implementing the
Revival Package, by taking the following steps in their jurisdiction:
i. State Governments retire their contribution to the share capital of such

credit societies.
ii. Boards of management are reconstituted to ensure that they are
elected, and that they do not include any State Government nominees.
iii. DCCBs and StCBs accept the ‘fit and proper’ criteria (to be prescribed
by the RBI) of eligibility for Board membership and for co-option of a
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specified number of professionals as full members with voting rights, if
members with such qualifications do not get elected.
iv. Professionally qualified CEOs (qualifications to be prescribed by RBI
and selected candidates to be also approved by the RBI) are appointed
at cooperative banks and properly trained personnel as secretaries to
PACS.
v. To abolish the cadre system of all employees at all levels.
vi. To ensure that CEOs and all staff of credit cooperatives (including
cooperative banks) at all levels, are appointed by the cooperatives
themselves and that they also decide on their service conditions. All
employees are answerable only to the Boards of the credit cooperatives.
vii. In all cases, limit the powers of the Board to overall policy and reviewing
loan decisions, leaving the CEO and his/her staff free to screen,
appraise and decide on individual loan applications and to take such
action as is necessary, to ensure prompt and full recoveries.
The Task Force also recommended that, in the interests of prudent
management,
i. All thrift and credit cooperatives including primaries and their federal
structures be required to increase owned capital, so as to ensure a
minimum CRAR of seven per cent to begin with, and to raise it to 12
per cent within next five years;
ii. Encourage the Cooperative Credit Structure to set up its own system of
technical support, supervision and deposit protection;
iii. Societies to have full freedom to choose institutions from which they
can borrow and in which they can deposit their funds, and also to
decide on affiliating with, or abstaining from a federated structure
of their choice;
iv. Entrust audit to chartered accountants at all levels of CCS;
v. The State Governments and CCS institutions should further agree to
the principle that assistance will be available only to ‘viable’ or
‘potentially viable’ societies (as prescribed by the Task Force) and that
those which are defunct or non-viable should be liquidated.
4.4.6 Implementation Mechanism
To ensure success in restructuring the weak cooperative credit institutions,

it was recommended that NABARD be designated as the Nodal Implementing
and Pass Through Agency (NIPTA). It would coordinate and monitor the
progress of the program. It would represent the Government of India and
vested with due authority from the government, it would be able to give
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guidance and instructions to the cooperative banks and PACS undergoing
restructuring, for proper implementation of the program, including mid-
course corrections, wherever necessary.
NABARD would guide the field level implementation teams in approving bank
specific restructuring programs, enter into agreements with individual banks
covering the terms and conditions of the programs, and follow up its progress
with the bank and other agencies concerned. Among other things, it will also
have the authority to operate the funds earmarked by the GOI and ensure its
proper use. To provide overall guidance and to monitor the progress of the
process at the National and State levels, however, it was necessary to have
independent committees of stakeholders with defined responsibilities.
(a) National level
At the national level, there would be a National Guidance and Monitoring

Committee. This committee would be chaired by Secretary (FS), GoI, and
would include as its members Additional Secretary, Ministry of Agriculture,
GOI, Chairman, NABARD, two eminent cooperators, one representative from
the Reserve Bank of India (RBI) and one representative from the State under
review. This Committee would act as the clearing house for policy references
and monitor the implementation of the Scheme, on an All India basis. The
National Committee would report to the Finance Minister, GoI on a quarterly
basis. A dedicated team in NABARD’s headquarters (HQ) would support the
committee. The secretariat to the committee would also be provided by
NABARD. At the field level, i.e., at the level of the PACS, DCCBs and StCBs,
the programme would be implemented by a two tier structure, one at the State
level and the second at the district level.
(b) State level
A State level Implementation and Monitoring Committee (SLIC) would be put

in position with Secretary, Finance (State Government), as Chairman and
Secretary, Cooperation (State Government), Executive Director, NABARD,
State RCS, MD, StCB and a chartered accountant as members. The task to
be attended by this Committee would include, signing an MOU between the
State Government, StCB, DCCBs and the RBI, ensuring drawing up of balance
sheet and its vetting, assessment of financial assistance required at StCB
level, recommending release of assistance on fulfillment of the prescribed
conditionalities, and overall supervision and control of the implementation of
the scheme in the State. A dedicated team in the NABARD regional office was
required to assist this Committee.
268
(c) District level
A district level Planning and Implementation Committee, working under the

overall guidance and supervision of the State Level Committee, would be set
up in each district. Each district committee would be chaired by NABARD and
comprise representatives of the State Government, the DCCB concerned, and
a Chartered Accountant. Their work will relate to ensuring conduct of special
audit as on March 2004 for all PACS and the DCCB, drawing up and vetting
of balance sheets of these PACS and DCCB, getting MOUs signed, institution-
wise assessment of financial assistance required, recommending release of
such assistance on fulfillment of the prescribed conditionalities and
overseeing implementation. The committee would also ensure establishing
and stabilizing of accounting systems, MIS, and computerization, and
required HRD over a period of two years.
(d) Role of NABARD
NABARD would prepare model MOUs and model balance sheet pro forma for
PACS and DCCBs, get accounting systems designed, get common software
and hardware plan prepared, and design training modules and manuals. All
implementation costs, including costs of dedicated teams at the district, State
and national levels, would be fully met through GoI grant support.
(e) Implementation Time frame
It was recommended that the scheme be kept open for a period of two years
for the State Governments to decide on their participation, and may be closed,
for the purpose of accepting participation in the scheme, on 31 March 2008.
Similarly, the scheme may be closed for the purpose of any disbursement of
assistance after three years from the date of signing of the initial MOU by the
State Government with the GoI. It also recommended winding up of unviable
PACS to the SLIC for action by RCS.
4.4.7 Transitional Problems and Long Term Outlook
There were several issues relating to the transition for ensuring that it was as
smooth as possible and with minimum disruptions in the flow of credit to
rural areas. The exact number of societies at different levels that would be
eligible for assistance and the quantum of assistance they are entitled to could
be determined only after their latest accounts are properly audited. The
number of dormant and non-viable societies was likely to be large. The
mechanisms and processes by which they were to be liquidated was one issue.
There were several alternatives:
269
• Merger with nearby healthy societies;
• Takeover of ground level lending in the service area of liquidated PACs
by neighboring PACS, CCBs, CBs and RRBs or
• As a last resort, take over by the DCCBs as their extension counters
functioning under the supervision of their nearest branch.
All these should be viewed basically as a transition phase to ensure that credit
flow to the areas served by dormant and non-viable societies was not impeded.
The expectation was that in due course, new societies under the model law
will come into being and take over the function of providing credit at the local
level.
In the case of DCCBs and StCBs, although almost two out of five were non-
compliant with Section 11 of the BR Act, 1949 (AACS) at that point of time, a
number of them would become compliant once the accumulated losses of the
PACS were taken care of. Even so, they would need close attention and
supervision to ensure that they continued to perform to the prescribed
standard. There might still remain several cooperative banks, needed to be
liquidated or merged with the nearest restructured DCCB, which would serve
the needs of their service areas.
To facilitate the above, the Task Force recommended:
1. Appropriate amendment of existing laws to enable PACS to borrow from

CCBs outside their district as well as from CBs and RRBs; and
2. Setting up a special task force at the State level to actively promote
these linkages, so that credit flow to ground level institutions was
maintained. Under such an arrangement, PACS would have a wider
choice of sources from which they could borrow. The resulting
competition between the latter would improve the range and quality of
services PACs receive. At the same time when lending institutions
decide the volume and terms of finance on commercial considerations,
PACs will be under pressure to observe stricter credit discipline.
Over the longer run, while the task force favoured a federal cooperative credit
structure, there were questions about the justification for some features of
the existing system and in particular about the need for three tiers, the
functional and economic viability of the huge (and often overlapping) network
of branches of DCCBs and StCBs. There appeared to be considerable scope
for rationalization in this respect, both for reducing costs and to improve
service quality.
The Task Force underscored the fact that institutional credit to rural areas
tend to serve mostly those who have some land and/or other productive assets
270
to offer as collateral. Lending was skewed markedly in favor of the larger and
better off segments of rural society.
Those who had little or no productive assets of their own - consisting of those
who owned very small amount of land, tenant farmers and the landless -
constituting the large majority of the rural population, hardly benefited from
cooperative credit. Remedying this deficiency would be a major challenge for
the future.
Self-help groups have spread rapidly, grown to impressive dimensions in some

parts of the country and demonstrated their efficacy as a medium for
encouraging thrift, meeting a wider spectrum of credit needs (including
consumption credit) of the group members, ensuring prudent use of credit
and prompt repayments among the disadvantaged. These groups have been
mostly oriented to women, but there was no reason why the principle could
not be extended to effectively cater to the credit needs of SF/SM, landless and
tenant farmers.
Experience of attempts to promote institutional lending to joint liability

groups for small and marginal farmers and small nonagricultural enterprises
in rural areas were reported to be both limited and mixed. A closer study of
this experience to understand the nature of the problems involved and
devising ways to overcome them could help to formulate strategies to make
them more acceptable and capable of widespread application. The Task Force
insisted on the importance of addressing these root causes.
The practice was to make provisions on the basis of actual repayment record.
There were doubts whether prescribed provisioning norms on this basis was
done systematically and adequately. No such norms were prescribed for
PACS. Moreover, the actual repayments are heavily influenced by ad hoc
policy decisions, usually at the behest of the government, to suspend, delay
or even waive recovery. These decisions were based on particular events of
crop shortfall or failure without considering whether the extent of shortfall
were within the normal risk band.
It was important to recognize that risks involved in agricultural lending arose

essentially because of the propensity of agricultural production to vary,
depending on rainfall and other extraneous factors. While these factors were
not controllable, the risks associated with them were amenable to objective
measurement.
In conclusion, the Task Force emphasized that its recommendations for

legal and institutional reforms were means to bring about a big
improvement in credit discipline and financial management of the CCS.
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The Task Force on Revival of Rural Co-operative Credit Institutions
(Vaidyanathan Committee) submitted its final report in February 2005.
Besides the other recommendations, the report recommended implementing
financial package of around Rs.15000 crores for rural co-operative credit
institutions. The committee recommended a ‘bottom up’ approach for reforms
i.e., the bottom line rural credit institutions must be improved first and
thereafter, they would give effect to top level institutions and machineries
involved up to the Government level.
The recommendations of the Task Force were based on two basic aspects:
1. Co-operatives should be self-governed, member managed institutions

and their future success or failure had to depend on how the members
managed their institutions in future. The assistance therefore had to be
strictly seen as a onetime package to bring them on to a clean slate.
2. The State Governments had, under various regimes, promoted,
managed and interfered with the working of the Co-operatives - both in
operational terms and in taking policy initiatives, and therefore were
morally responsible for some of the accumulated problems of the sector
and hence were duty bound to offer this one-time package.
In order to honor the above, it was important to set some pre-conditions for
the financial assistance package. The financial assistance package was seen
as an incentive for the States that wanted reforms. Reforms basically meant
putting Co-operatives back into the hands of the people. Ensuring that the
operative environment was conducive for carrying on the business without
interference and strengthening and leveraging on the existing base.
The recommendations could be divided into three parts:
1. Legal reforms to ensure that Co-operatives worked as self-reliant,

mutually aided autonomous institutions.
2. Preparing the grounds for the Co-operatives to clean up their act.
3. Implementation of the financial part of the package with some
benchmarks and milestones.
4.4.8 Issues in Implementation
The recommendations of the Task Force were accepted by the Government.

There were, however, several issues in implementation. The compromises that
the State and Central Governments had to make and their implications on
the basic principles of Co-operation and the basic premises of the task force
recommendations was an issue.
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The reform package largely referred to the “bottom-up” approach in
addressing the issues of the primaries first and then moving to the upper
tiers. However, top-down approach is required for the reforms in regulatory
environment which is in the hands of the State Governments.
Most States do not have their own resources to implement an independent

revival package. The States obviously would have some concerns about the
revival package. The first concern would be about “control”. The task force
recommended that the States should give up control over Co-operatives, not
use them as extended arms of the State and their role should be largely
confined to framing an appropriate legislation and overall supervision.
However, the major hurdles in reforms would come from this angle and the
States would bargain for before entering into some compromises.
As the package adopted a bottom-up approach, the delays and frustrations

would be more significant. 100% of the institutions will have to be audited for
determining if they were eligible. Finding adequate and appropriate manpower
to undertake this task will be difficult. Indeed once the balance sheets are
recast with proper accounting practices, the amount of money that has to go
as a reform package will increase.
While the recommendations stated that the primary should be free to attach
themselves to any financial institutions, including the commercial banks, it
is unlikely that this would be sustainable in the immediate run in case the
state Co-operative banks cease to exist.
The Task Force did not specify any viability norms in the revival package.
Unlike consumer Co-operatives (from where the Co-operative principles
emerged), financial co-operatives are complex organizations by design. This is
because there is a set of savers and a set of borrowers both as members. The
role of the same person might change from situation to situation and therefore
there is a complex relationship between the people who supply finances and
people who demand finances being at the same forum. Till now, these
institutions have largely been borrower centric. Any borrower centric
institution is likely to fail on account of sheer conflict of interest. Wherever
credit Co-operatives have been successful it has been because the promoters
had the long term vision to build in members financial stakes also. Therefore
the suggestion of the task force that savings should be given due importance
with all members (including savers) getting full voting rights is indeed
important. However, the task force has not made any recommendations on
how the member’s stakes could be built to ensure that these institutions
sustain themselves for a long time. Past researches show that solid
organizations are built with significant member stake.
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4.4.9 Implementation of Revival Package for Short Term Rural
Cooperative Credit Structure (STCCS) -- Progress
The process of implementing the revival package in a State necessarily begins

with signing a Memorandum of Understanding (MoU) among the Central
Government, the State Government concerned and NABARD. 25 State
Governments have signed the MoU with Government of India and NABARD,
comprising more than 96 per cent of the rural cooperatives operating in the
country and 21 States have amended their respective State Co-operative
Societies Act.
An amount of Rs. 9,002.11 crore was released by NABARD as GoI share, while
the State Governments released Rs. 855.53 crore as their respective share of
recapitalisation of 52,902 eligible PACS in 17 States26.
Common Accounting System (CAS) and Management Information System

(MIS)
While the process of adoption of CAS is underway in 20 States, in other States

where MoUs have been signed, the RCS concerned have been advised to adopt
CAS on the lines suggested by NABARD.
Special Audit for PACS
Guidelines and formats for conduct of special audit were circulated to all
participating States. Further, training for master trainers and departmental
auditors for conduct of special audit of PACS has been completed in all 25
implementing States. So far, special audit has been completed in 80,883 PACS
across 25 States.
Legal, Institutional and Managerial Reforms
So far, 21 States amended their State Cooperative Acts. Amendment of bye

laws of StCBs and PACS have also taken place in various States.
In order to bring qualified professionals in the management of cooperatives,

the RBI has prescribed ‘fit and proper criteria’ for appointment of the directors
and chief executive officers (CEOs) of cooperatives. Accordingly, professional
directors satisfying ‘fit and proper criteria’ have been put in place in the
StCBs. Also some of the States have already implemented the prescribed
criteria for appointment of CEO of cooperatives. Elected Boards are in place
in almost all STCCS in all States.
26
NABARD Annual Report (2013) , Page 28-29
274
4.4.10 Impact of the Revival Package
The impact of Vaidyanathan Committee recommendations and the resultant

revival package has been briefly reviewed by ‘Expert Committee to examine
Three Tier Short Term Cooperative Credit Structure (ST CCS)’ appointed by
RBI. The committee was chaired by Dr. Prakash Bakshi and submitted its
report in 201327. The main observations were as under:
• Impact studies conducted in 13 States showed positive and visible

impact of the implementation of the revival package in certain areas
like: Institutional and legal reforms including amendments to
Cooperative Societies Acts, Rules, and Byelaws, thus creating the basis
for autonomy to the banks and PACS.
• Release of recapitalisation assistance leading to improve liquidity of

PACS which enabled them to re-commence lending and restore cash
flow and income streams.
• The assisted PACS could attain CRAR of 7% after recapitalisation and

many of them were able to maintain the same.
• Post implementation of the revival package, financial indicators have

shown varying degrees of improvement in all the three tiers of CCS.
Loans disbursed by PACS during the period 2006-07 to 2009-10
registered a growth of 73% in Uttar Pradesh, 53% in Madhya Pradesh
and 23% in Odisha. The annual average growth rate during the period
2003-04 to 2009-10 ranged from 62% in Odisha to 38% in Haryana.
• Small and marginal farmer coverage was a priority with the CCS and
continued to be around 70% during the period 2006-07 to 2009-10 in
Madhya Pradesh and Uttar Pradesh.
4.4.11 Let us sum up
Rural Cooperative Banking and Credit Institutions play an important role in

meeting the growing credit needs of rural India. The performance of these
institutions, however, has been less than satisfactory. To suggest remedial
measures in this regard, ‘Task Force on Revival of Cooperative Credit
Institutions’, popularly known as ‘Vaidyanathan Committee’ was constituted
by GoI in 2004. It was a major step in reviving the cooperative credit structure.
The committee observed that the cooperatives can only be revived, if they
become democratic, self-governing and self-reliant organisations for
27
RBI (2013) Expert Committee to examine Three Tier Short Term Cooperative Credit Structure (ST CCS),
Chairman- Dr. Prakash Bakshi
275
mutual thrift and credit. For improving financial viability, it suggested a one-
time package called ‘Revival Package’ of about Rs 15000 crore to strengthen
the cooperative credit institutions, especially PACS. It also suggested giving
autonomy to these credit institutions and reducing Government interference
in their operations. The package has helped in the revival of the Co-operative
credit sector to a large extent.
4.4.12 Key words
Task Force, Prof Vaidyanathan, The Task Force on Revival of Rural Co-
operative Credit Institutions, Vaidayanathan Committee, Revival package,
Capitalization, Sharing pattern, Control, Chartered Accountants, Bottom-up
Approach, Stabilizing
4.4.13 Check your progress -questions
01. Vaidayanathan Committee, suggested the measures required for

improving the efficiency and viability of Rural Cooperative Credit
Institutions.
02. According to the views of Vaidayanathan Committee, the revival package,
must include assistance for restoring the PACS to acceptable levels of
financial health.
03. According to the views of Vaidayanathan Committee, Government need
to offer one time package for revival of the co-operative sector.
04. One of the observations of the Committee being to abolish the District
Central Coop Banks in the 3 tier structure
05. The Task Force has used the data published by NAFSCOB as far as PACS
are concerned.
06. The Task force was set up to go into the details, make study and suggest
/ recommend various measures to revive Urban Co-operative Banking
institutions.
07. The Task Force identified that the cooperative credit structure (CCS) need
special financial assistance to wipe out accumulated losses and strengthen
its capital base.
08. Vaidyanathan Committee addressed the problems of Short Term as well
as Long term Cooperative Credit Structure
09. Choice was given to the State Government to accept the package
recommended by the Task Force.
276
10. The committee observed that the cooperatives can only be revived, if they
become democratic, self-governing, self-reliant organisations for mutual
thrift and credit.

01. True 02.True 03.True 04. False 05. True 06.False
07.True 08. False 09. True. 10. True
01. The ‘Task Force on Revival of Rural Cooperative Credit Institutions’ was
headed by:
(a) Chaudhary Brahma Prakash
(b) Dr. C Rangarajan
(c) Prof. A Vaidyanathan
(d) None of the Above
constituted in the year:
(a) 1947
(b) 1951
(c) 1991
(d) 2004
constituted by whom?
(a) Reserve Bank of India
(b) NABARD
(c) Government of India
(d) World Bank
04. The main focus of the ‘Task Force on Revival of Rural Cooperative Credit
Institutions’ was:
(a) To meet the credit requirement of all the farmers
(b) To ensure agricultural credit from all types of banks
(c ) To prepare action plan for reviving rural cooperative banking institutions
(d) None of the above
277
05. The ‘Task Force’ recommended entrusting audit to Chartered Accountants
at
(a) Top levels of CCS
(b) Selected levels of CCS
(c ) Identified levels of CCS
(d) All levels of CCS
06. The reform package largely refers to the ___________ approach in
addressing the issues of the primaries first and then moving ahead.
(a) Bottom-up
(b) Top-down
(c) Pragmatic
(d) Non-discriminatory
07. As per the Task Force recommendations, the ____________will prepare
model MOUs, model balance sheet pro forma for PACS and DCCBs.
(a) Committee
(b) Reserve Bank of India
(c) State Governments
(d) NABARD
08. The major issues taken into consideration in working out the details of
financial reconstruction include
(a) Criteria for determining eligible purposes / institutions
(b) The quantum of assistance required / the sharing pattern
(c) Conditionalities / timeframe
(d) All of these
09. The Task Force made specific recommendation that :
(a) A ‘Revival Package’ to wipe out the losses and strengthen the entire Short
Term Cooperative Credit Structure
(b) State Government should accept the Scheme in full including legal and
regulatory changes
(c) Both (a) and (b)
10. The implementation of the ‘Task Force on Revival of Rural Cooperative
Credit Institutions’ was carried out by whom?
278
(a) Government of India
(b) Reserve Bank of India
(c) NABARD
(d) World Bank
11. The package recommended by the ‘Task Force’ was accepted by how
many states by signing the Memorandum of Understanding (MoU)?
(a) All the states
(b) 11 States
(c) 25 States
(d) None of the States
12. The approximate quantum of financial support under the package
recommended by the ‘Task Force’ was?
(a) Rs 100000 crore
(b) Rs 15000 crore
(c) Rs 1000 crore
Key to terminal/Multiple Choice Questions

01. (c) 02. (d) 03. (c) 04.(c) 05.(d)
06. (a) 07. (d) 08. (d) 09.(c) 10.(c)
11.(c) 12.(b)
NABARD website: https://www.nabard.org for Vaidyanathan Committee

Report
RBI website: https://www.rbi.org.in for Expert Committee to examine Three

Tier Short Term Cooperative Credit Structure (ST CCS), Chairman- Dr
Prakash Bakshi
279
Unit 5: Important Provisions of Select Acts
5.1 Lesson No1 Cooperative Societies Act and the 97th Amendment to
the Indian Constitution
5.1.1 Objectives
5.1.2 Introduction
5.1.3 The Cooperative Societies Act
5.1.3.1 The Statement of objects and reasons
5.1.3.2 The origin of cooperative legislation is Cooperative Credit Societies Act,

1904
5.1.3.3 Cooperative Societies Act, 1912
5.1.3.3.1 Evolution
5.1.3.3.2 Registration
5.1.3.3.3 By-Laws & Membership
5.1.3.3.4 Audit
5.1.3.3.5 Societies to be bodies corporate
5.1.3.3.6 Other issues
5.1.3.3.7 Rules
5.1.3.4 State Cooperative Societies Acts
5.1.4 The 97th Constitutional Amendment
5.1.5 Let Us Sum Up
5.1.6 Keywords
5.1.7 Check Your Progress- questions
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5.1.1 Objectives
The objective of this lesson is to understand the important provisions of the

Co-operative Societies Act and the 97th Amendment to the Indian
Constitution.
5.1.2 Introduction
Societies Act is a Central Act. However, ‘Cooperative Societies’ is a State

Subject (Entry 32 of List II of Seventh Schedule to Constitution, i.e. State List).
Though the Act is still in force, it has been specifically repealed in almost all
the States and those States have their own Cooperative Societies Act. Thus,
practically, the Central Act is mainly of academic interest. As per preamble to
the Act, the Act is to facilitate formation of cooperative societies for the
promotion of thrift and self-help among agriculturists, artisans and persons
of limited means.
In the first part of the Chapter, important provisions of the Cooperative

Societies have been reproduced from the original Act.
The second part of the Chapter relates to the 97th Amendment to the Indian
Constitution regarding cooperatives, which is a landmark decision to bring
cooperatives to the focus of attention at the highest level.
5.1.3 The Cooperative Societies Act
5.1.3.1 The Statement of objects and reasons states as follows –
a) Cooperative Society can be established for purpose of credit, production

or distribution.
b) Agricultural credit societies must be with unlimited liability.
c) Unlimited society is not the best form of cooperation for agricultural
commodities. However, the provision is continued, as in several States
such societies do exist and are working. It is not intended to give them
undue encouragement, but to legalise their existence.
d) Unlimited society can distribute profits with permission of State
Government.
5.1.3.2 The origin of cooperative legislation is Cooperative Credit
Societies Act 1904.
The Cooperative Credit Societies Act, 1904 was modeled largely on the English
Friendly Societies Act, 1896. It was simple and elastic and was operational
throughout India. It was based on the recommendations of Sir Frederick
Nicholson for establishment of cooperative societies on the Raiffeisen model,
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popular in Germany. Sir Nicholson’s recommendation was for the creation of
village banks hence the operation of the Act was restricted to credit only.
The following were the important provisions of the Act:
i. Ten persons living in the same village or town or belonging to the

same class or caste might be registered as a cooperative society for
the encouragement of thrift and self-help among the members.
ii. The main objectives of a society were to raise funds by deposits from
members and borrowings from non-members, government and other
cooperative societies. This money was lent to members or with the
special permission of the Registrar of Cooperative Societies (RCS), to
other cooperative credit societies.
iii. The organisation and control of cooperative credit societies in each
State were put under the RCS.
iv. The accounts of every society were to be audited by the Registrar or
by a member of his/her staff free of charge.
v. Rural societies were to have four-fifth of their members
agriculturists while urban societies should have four-fifth of their
members non-agriculturists.
vi. Liability of members of a rural society would be unlimited. While in
the case of urban society it could either be limited or unlimited.
vii. No dividend would be paid from the profit in a rural society. It would
be credited to the Reserve Fund.
viii. In urban society, one-fourth of the profit would be credited to the
Reserve Fund.
ix. Loans would be provided to the members usually on personal
guarantee or on security.
x. The interest (share capital) of any one member in the society was
strictly limited.
xi. Societies formed under the Act were exempted from fee payable
under Stamp, Registration and Income Tax Acts.
Under the provisions of this Act, societies were classified into Rural and
Urban. The urban societies were given better facilities, while the rural
societies were with unlimited liability and restricted area of operation. Loans
were advanced to members on personal or other security. There was no
provision for high amount of finance in rural societies. The Act also did not
permit creation of either non-credit societies or federal societies. However, the
success and usefulness of credit societies encouraged people to create
282
societies in other areas. The necessity of removing deficiencies of the above
was also felt. Accordingly, the second Cooperative Societies Act was passed in
1912.
5.1.3.3 Cooperative Societies Act, 1912
The Cooperative Societies Act 1912 retained the principle of simplicity and
elasticity embodied in the 1904 Act. It recognized the necessity of organizing
large societies for proper supervision of credit and also paved the way for
creation of central and non-credit societies.
5.1.3.3.1 Evolution
Short Title and Extent
This Act may be called the Co-operative Societies Act, 1912; and It extends to
the whole of India.
Definitions
In this Act, unless there is anything repugnant in the subject or context,-
a) "by-laws" means the registered by-laws for the time being in force, and
includes a registered amendment of the by-laws;
b) "committee" means the governing body of a registered society to whom
the management of its affairs is entrusted;
c) "member" includes a person joining in the application for the
registration of a society and a person admitted to membership after
registration in accordance with the by-laws and any rules;
d) "Officer" includes a chairman, secretary, treasurer, member of
committee, or other person empowered under the rules or the by-laws
to give directions in regard to the business of the society;
e) "registered society" means a society registered or deemed to be
registered under this Act;
f) "Registrar" means a person appointed to perform the duties of a
Registrar of Co-operative Societies under this Act; and
g) "rules" means rules made under this Act.
5.1.3.3.2 Registration
The Registrar of co-operative Societies
The State Government may appoint a person to be Registrar of co-operative

Societies (RCS) for the State or any portion of it, and may appoint persons to
283
assist such Registrar, and may, by general or special order, confer on any
such persons all or any of the powers of a Registrar under this Act.
Societies which may be registered
Subject to the provisions hereinafter contained, a society which has as its

object, the promotion of the economic interests of its members in accordance
with co-operative principles, or a society established with the object of
facilitating the operations of such a society, may be registered under this Act
with or without limited liability.
Provided that unless the State Government by general or special order

otherwise directs-
a) the liability of a society of which a member is a registered society

shall be limited;
b) the liability of a society of which the object is the creation of funds

to be lent to its members, and of which the majority of the members
are agriculturists, and of which no member is a registered society,
shall be unlimited.
Restrictions on interest of member of society with limited liability and

a share capital
Where the liability of the members of a society is limited by shares, no member

other than a registered society shall-
a) Hold more than such portion of the share capital of the society,
subject to a maximum of one-fifth, as may be prescribed by the
rules; or
b) Have or claim any interest in the shares of the society exceeding one
thousand rupees.
Conditions of registration
No society, other than a society of which a member is a registered society,

shall be registered under this Act which does not consist of at least ten
persons above the age of eighteen years and, where the object of the society
is the creation of funds to be lent to its members, unless such persons:-
a) Reside in the same town or village or in the same group of villages;

or
b) Save where the Registrar otherwise directs, are members of the
same tribe, class, caste or occupation.
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The word "limited" shall be the last word in the name of every society with
limited liability registered under this Act.
Power of Registrar to decide certain question
When any question arises whether for the purposes of this Act, a person is an
agriculturist or a non-agriculturist, or whether any person is a resident in a
town or village or group of villages, or whether two or more villages shall be
considered to form a group, or whether any person belongs to any particular
tribe, class, caste or occupation, the question shall be decided by the
Registrar, whose decision shall be final.
Application for registration
For purposes of registration an application to register shall be made to the

Registrar.
1. The application shall be signed-

a. in the case of a society of which no member is a registered society,
by at least ten qualified persons and
b. in the case of a society of which a member is a registered society,
by a duly authorized person on behalf of every such registered
society, and where all the members of the society are not
registered societies, by ten other members or, when there are less
than ten other members, by all of them.
2. The application shall be accompanied by a copy of the proposed bye-
laws of the society, and the persons by whom or on whose behalf such
application is made shall furnish such information in regard to the
society as the Registrar may require.
Registration
If the Registrar is satisfied that a society has complied with the provisions of
this Act and the rules and that its proposed bye-laws are not contrary to the
Act or to the rules, he/she may, if he/she thinks fit, register the society and
its bye-laws.
Evidence of registration
A certificate of registration signed by the Registrar shall be conclusive

evidence that the society is duly registered unless the registration has been
cancelled.
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5.1.3.3.3 Bye-Laws & Membership
Amendment of the bye-laws28 of a registered society
i. No amendment of the bye-laws of a registered society shall be valid until

the same has been registered under this Act, for which purpose a copy
of the amendment shall be forwarded to, the Registrar.
ii. If the Registrar is satisfied that any amendment of the bye-laws is not
contrary to this Act or to the rules, he/she may, if he/she thinks fit,
register the amendment.
iii. When the Registrar registers an amendment of the bye-laws of a
registered society, he/she shall issue to the society a copy of the
amendment certified by him/her, which shall be conclusive evidence
that the same is duly registered.
Member not to exercise rights till due payment made
No member of a registered society shall exercise the rights of a member

unless or until he/she has made such payment to the society in respect
of membership or acquired such interest in the society, as may be
prescribed by the rules or bye-laws.
Votes of members
i. Where the liability of the members of a registered society is not limited

by shares, each member shall, notwithstanding the amount of his/her
interest in the capital, have one vote only as a member in the society.
ii. Where the liability of the members of a registered society is limited by
shares, each member shall have as many votes as may be prescribed
by the bye-laws.
iii. A registered society which has invested any part of its funds in the
shares of any other society may appoint as its proxy, for the purpose of
voting in such other registered society, any one of its members.
Restrictions on transfer of share or interest
1. The transfer or charge of the share or interest of a member in the capital

of a registered society, shall be subject to such conditions as to
maximum holding as may be prescribed by this Act or by the rules.
28
‘By Law’ or ‘Bye Law’- is a rule or law established by an organization to regulate itself, as allowed or
provided for by some higher authority
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2. In case of a society registered with unlimited liability, a member shall
not transfer any share held by him/her or his/her interest in the capital
of the society or any part thereof unless-
a) He/she has held such share or interest for not less than one year;
and
b) The transfer or charge is made to the society or to a member of
the society.
Address of societies
Every registered society shall have an address, registered in accordance with

the rules, to which all notices and communications may be sent, and shall
send to the Registrar notice of every change thereof.
Copy of Act, Rules and Bye-laws to be open to inspection
Every registered society shall keep a copy of this Act and of the rules governing
such society, and of its bye-laws, open to inspection, free of charge at all
reasonable times at the registered address of the society.
5.1.3.3.4 Audit
i. The Registrar shall audit or cause to be audited by some person

authorized by him/her by general or special order in writing in this
behalf the accounts of every registered society once at least in every
year.
ii. The audit under sub-section (1) shall include an examination of overdue
debts, if any, and a valuation of the assets and liabilities of the society.
iii. The Registrar, the Collector or any person authorized by general or
special order in writing in this behalf by the Registrar shall at all times
have access to all the books, accounts, papers and securities of a
society, and every officer of the society shall furnish such information
in regard to the transactions and working of the society as the person
making such inspection may require.
5.1.3.3.5 Societies to be bodies corporate
The registration of a society shall render it, a body corporate by the name
under which it is registered, with perpetual succession and a common seal,
and with power to hold property, to enter into contracts, to institute and
defend suits and other legal proceedings and to do all things necessary for the
purposes of its constitution.
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Prior claim of Society
A registered society is entitled to priority to other creditors and enforces

outstanding demand due to society from any member. However, the priority
is subject to prior claims of:
(a) Government dues in respect of land revenue or
(b) Dues of landlord in respect of rent receivable by the landlord.
The priority of society is in respect of following –
(a) Supply of seed or manure or loan for purchase of seed or manure.
The priority is upon the crops or other agricultural produce up to 18
months from date of supply of seed/manure or loan.
(b) Supply of cattle or fodder of cattle, agricultural implements or
machinery or raw materials or loan for these. The priority is upon the
cattle/fodder/ machinery / raw materials supplied or any articles
manufactured from raw materials supplied or purchased from loan
given by society. [Section 19].
5.1.3.3.6 Other issues
Charge and set-off in respect of shares or interest of member
A registered society shall have a charge upon the share or interest in the
capital and on the deposits of a member or past member and upon any
dividend, bonus or profits payable to a member or past member in respect of
any debt due from such member or past member to the society, and may set-
off any sum credited or payable to a member or past member in or towards
payment of any such debt.
Shares or interest not liable to attachment
Subject to the provisions of section 20, the share or interest of a member in

the capital of a registered society shall not be liable to attachment or sale
under any decree or order of a Court of Justice in respect of any debt or
liability incurred by such member, and neither the Official Assignee under the
Presidency-towns Insolvency Act, 1909, nor a Receiver under the Provincial
Insolvency Act, 1907, shall be entitled to or have any claim on such share or
interest.
Transfer of interest on death of member
1. On the death of a member a registered society may transfer the share

or interest of the deceased member to the person nominated in
accordance with the rules made in this behalf, or, if there is no person
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so nominated to such person as may appear to the committee to be the
heir or legal representative of the deceased member, or pay to such
nominee, heir or legal representative, as the case may be, a sum
representing the value of such member's share or interest, as
ascertained in accordance with the rules or by-laws :
2. A registered society may pay all other moneys due to the deceased
member from the society to such nominee, heir or legal, representative,
as the case may be.
3. All transfers and payments made by a registered society in accordance
with the provisions of this section shall be valid and effectual against
any demand made upon the society by any other person.
Liability of past member
The liability of a past member for the debts of registered society as they existed
at the time when he/she ceased to be a member shall continue for a period of
two years from the date of his/her ceasing to be a member.
Liability of the estates of deceased members
The estate of a deceased member shall be liable for a period of one year from
the time of his/her decease for the debts of a registered society as they existed
at the time of his/her decease.
Register of members
Any register or list of members or shares kept by any registered society shall
be prima facie evidence of any of the following particulars entered therein:-
a) The date at which the name of any person was entered in such
register or list as a member;
b) The date at which any such person ceased to be a member.
Proof of entries in societies' books
A copy of any entry in a book of a registered society regularly kept in the

course of business, shall, if certified in such manner as may be prescribed by
the rules, be received, in any suit or legal proceedings, as prima facie evidence
of the existence of such entry, and shall be admitted as evidence of the
matters, transactions and accounts therein recorded in every case where, and
to the same extent as, the original entry itself is admissible.
Restrictions on loans
A registered society can give loans only to its members. However, it can give
loan to another registered society with permission of Registrar. A society with
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unlimited liability cannot lend money on security of movable property without
sanction of registrar. State Government, by issuing a general or special order,
can prohibit or restrict lending of money on mortgage of immovable property
by any registered society or class of registered society.
Restrictions on borrowing
A registered society shall receive deposits and loans from persons who are not
members only to such extent and under such conditions as may be prescribed
by the rules or by-laws.
Restrictions on other transactions with non-members
Save as provided in sections 29 and 30, the transactions of a registered society

with persons other than members shall be subject to such prohibitions and
restrictions, if any, as the State Government may, by rules, prescribe.
Investment of funds
1. A registered society may invest or deposit its funds -

a) In the Government Savings Bank, or
b) In any of the securities specified in section 20 of the Indian Trusts
Act, 1882, or
c) In the shares or on the security of any other registered society, or
d) With any bank or person carrying on the business of banking,
approved for this purpose by the Registrar, or
e) In any other mode permitted by the rules.
2. Any investments or deposits made before the commencement of this Act
which would have been valid if this Act had been in force are hereby
ratified and confirmed.
Funds not to be divided by way of profit
No part of the funds of a registered society shall be divided by way of bonus

or dividend or otherwise among its members.
Contribution to charitable purpose
Any registered society may, with the sanction of the Registrar, after one-fourth
of the net profits in any year has been carried to a reserve fund, contribute
an amount not exceeding ten percent of the remaining net profits to any
charitable purpose, as defined in section 2 of the Charitable Endowments Act,
1890.
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Inquiry by Registrar
i. The Registrar may of his/her own motion, or on the request of the

Collector, or on the application of a majority of the committee, or of not
less than one-third of the members, hold an inquiry or direct some
person authorized by him/her by order in writing in this behalf to hold
an inquiry into the constitution, working, and financial condition of a
registered society.
ii. All officers and members of the society shall furnish such information
in regard to the affairs of the society as the Registrar or the person
authorized by the Registrar may require.
Inspection of books of indebted society
The Registrar shall, on the application of a creditor of a registered society,

inspect or direct some person authorized by him/her by order in writing in
this behalf to inspect the books of the society.
Costs of inquiry
Where an inquiry is held under section 35, or an inspection is made under

section 36, the Registrar may apportion the costs, or such part of the costs as
he/she may think right, between the society, the members or creditor
demanding an inquiry or inspection, and the officers or former officers of the
society.
Recovery of costs
Any sum awarded by way of costs under section 37 may be recovered, on

application to a Magistrate having jurisdiction in the place where the person
from whom the money is claimable actually resides or carries on business, by
the distress and sale of any moveable property within the limits of the
jurisdiction of such Magistrate belonging to such person.
Dissolution of society
Registrar, after inspection or inquiry, or on application received from 75% of

members of society, may cancel the registration of society, if in his/her
opinion, the Society should be dissolved. Any member can appeal against the
order of Registrar within two months to State Government or other Revenue
Authority authorized by State Government. If no appeal is filed within two
months, the order of dissolution shall become effective. If appeal is filed, the
order will become effective only after it is confirmed by appellate authority.
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Cancellation of registration of society
Where it is a condition of the registration of a society that it should consist of

at least ten members, the Registrar may, by order in writing, cancel the
registration of the society it at any time it is proved to his/her satisfaction
that the number of the members has been reduced to less than ten.
Effect of cancellation of registration
Where the registration of a society is cancelled, the society shall cease to exist
as a corporate body-
a) In the case of cancellation in accordance with the provisions of

section 39, from the date, the order of cancellation takes effect;
b) In the case of cancellation in accordance with the provisions of
section 40, from the date of the order.
Winding up
i. Where the registration of a society is cancelled under section 39 or

section 40, the Registrar may appoint a competent person to be
liquidator of the society.
ii. A liquidator appointed under sub-section (1) shall have power-
a. To institute and defend suits and other legal proceedings on

behalf of the society by his/her name of office.
b. To determine the contribution to be made by the members and

past members of the society respectively to the assets of the
society.
c. To investigate all claims against the society and, subject to the

provisions of this Act, to decide questions of priority arising
between claimants.
d. To determine by what persons and in what proportions the costs

of the liquidation are to be borne.
e. To give such directions in regard to the collection and distribution

of the assets of the society, as may appear to him/her to be
necessary for winding up the affairs of the society.
f. Subject to any rules, a liquidator appointed under this section

shall, in so far as such powers are necessary for carrying out the
purposes of this section, have power to summon and enforce the
attendance of witnesses and to compel the production of
documents by the same means and in the same manner as is
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provided in the case of a Civil Court under the Code of Civil
Procedure, 1908.
iii. Where an appeal from any order made by a liquidator under this section
is provided for by the rules, it shall lie at the Court of the District Judge.
iv. Orders made under this section shall, on application, be enforced as

follows :- (a) when made by a liquidator, by any Civil Court having local
jurisdiction in the same manner as a decree of such Court; (b) when
made by the Court of the District Judge on appeal, in the same manner
as a decree of such Court made in any suit pending therein.
v. No Civil Court shall have any jurisdiction in respect of any matter

connected with the dissolution of a registered society under this Act.
5.1.3.3.7 Rules
1. The State Government may, for the whole or any part of the State and
for any registered society or class of such societies, make rules to carry
out the purposes of this Act.
2. Such rules may-
a) Prescribe the maximum number of shares or portion of the capital,

of a society which may be held by a member.
b) Prescribe the forms to be used and the conditions to be complied

with in the making of applications for the registration of a society
and the procedure in the matter of such applications.
c) Prescribe the matters in respect of which a society may make by-

laws and for the procedure to be followed in making, altering and
abrogating by-laws, and the conditions to be satisfied prior to such
making, alteration or abrogation.
d) Prescribe the conditions to be complied with by persons applying for

admission as members, and provide for the election and admission
of members, and the payment to be made and the interests to be
acquired before the exercise of the right of membership.
e) Regulate the manner in which fund may be raised by means of

shares or debentures or otherwise.
f) Provide for general meetings of the members and for the procedure
at such meetings and the powers to be exercised by such meetings.
g) Provide for the appointment, suspension and removal of the

members of the committee and other officers, and for the procedure
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at meetings of the committee, and for the powers to be exercised and
the duties to be performed by the committee and other officers.
h) Prescribe the accounts and books to be kept by a society and provide

for the audit such accounts and the charges, if any, to be made for
such audit, and for the periodical publication of a balance-sheet
showing the assets and liabilities of a society.
i) Prescribe the returns to be submitted by a society to the Registrar

and provide for the persons by whom and the form in which such
returns shall be submitted.
j) Provide for the persons by whom and the form in which copies of
entries in books of societies may be certified.
k) Provide for the formation and maintenance of a register of members

and, where the liability of the members is limited by shares, of a
register of shares.
l) Provide that any dispute touching the business of a society between

members or past members of the society shall be referred to the
Registrar for decision or, if he/she so directs, to arbitration, and
prescribe the mode of appointing an arbitrator and the procedure to
be followed in proceedings before the Registrar or such arbitrator
and the enforcement of the decisions of the Registrar or arbitrator.
m) Provide for the withdrawal and expulsion of members and for the
payments, if any, to be made to members who withdraw or are
expelled and for the liabilities of past members.
n) Provide for the mode in which the value of a deceased member's

interest shall be ascertained, and for the nomination of a person to
whom such interest may be paid or transferred.
o) Prescribe the payments to be made and the conditions to be

complied with by members applying for loans, the period for which
loans may be made, and the amount which may be lent, to an
individual member.
p) Provide for the formation and maintenance of reserve funds, and the
objects to which such funds may be applied, and for the investment
of any funds under the control of the society.
q) Prescribe the extent to which a society may limit the number of its
members.
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3. The State Government may delegate, subject to such conditions, if any,
as it thinks fit, all or any of its powers to may rules under this section
to any authority specified in the order of delegation.
4. All rules made under this section shall be published in the Official
Gazette, and on such publication shall have effect as if enacted in this
Act.
Recovery of sums due to Government
i. All sums due from a registered society or from an officer or member or

past member of a registered society as such to the Government,
including any costs awarded to the Government under section 37, may
be recovered in the same manner as arrears of land-revenue.
ii. Sums due from a registered society to Government and recoverable

under sub-section (1) may be recovered, firstly, from the property of the
society; secondly, in the case of a society of which the liability of the
members is limited, from the members subject to the limit of their
liability; and, thirdly, in the case of other societies from the members.
Power to exempt societies from conditions as to registration
The State Government may, by special order in each case and subject to such
conditions, as it may impose, exempt any society from any of the requirements
of this Act as to registration.
Power to exempt registered societies from provisions of the Act
The State Government may, by general or special order, exempt any registered
society from any of the provisions of this Act or may direct that such
provisions shall apply to such society with such modifications as may be
specified in the order.
Prohibition of the use of the word "co-operative"
1. No person other than a registered society shall trade or carry on

business under any name or title of which the word "co-operative" is
part without the sanction of the State Government.
2. Whoever contravenes the provisions of this section shall be punishable

with fine which may extend to fifty rupees, and in the case of a
continuing offence with further fine of five rupees for each day on which
the offence is continued after conviction there for.
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Indian Companies Act, 1882, not to apply
Provisions of Companies Act, 1882 are not applicable to registered cooperative

society.
Saving of existing societies
Every society now existing which has been registered under the Co-operative
Credit Societies Act, 1904, shall be deemed to be registered under this Act,
and its bye-laws shall, so far as the same are not inconsistent with the express
provisions of this Act, continue in force until altered or rescinded.
5.1.3.4 State Cooperative Societies Acts
Based on the National Act, each State has passed its own State Cooperative
Societies Act which is applicable for all the Cooperative Societies in the
particular State. The States have adopted this Act with suitable modifications
and additions/ deletions. Please go through the State Coop Societies Act of your
State to appreciate the differences.
5.1.4 The 97th Constitutional Amendment
The Constitution (Ninety Seventh Amendment) Act 2011 relating to the co-
operatives is aimed to encourage economic activities of cooperatives which in
turn help progress of rural India. It is expected to not only ensure autonomous
and democratic functioning of cooperatives, but also the accountability of the
management to the members and other stakeholders.
As per the Constitution (Ninety Seventh Amendment) Act 2011 (commonly)
known as 97th Amendment Act, 2011), the changes brought in the Indian
Constitution are as under:-
• In Part III of the constitution, after words “or unions” the words
“Cooperative Societies” was added. The Part III relates to ‘Fundamental
Rights’ of the Indian citizens and Point (c) of para 19 relating to
“Protection of certain rights regarding freedom of speech, etc.” states “to
form associations or unions [or co-operative societies]”; Thus to form
cooperative society has been included as a Fundamental Right. This is
a very important development for the cooperative movement to make it
democratic, inclusive and participative.
• In Part IV which deals with the ‘Directive Principles of State Policy’
a new Article 43B was inserted, which says: The state shall endeavour
to promote voluntary formation, autonomous functioning, democratic
control and professional management of the co-operative societies”.
• After Part IXA of the Constitution, a Part IXB was inserted to elaborate
the details about the cooperative societies like definition of cooperative
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society, incorporation, Board members and office bearers, election of
Board members, supersession/ suspension, audit, Convening of
general body meetings, Right of a member to get information, Returns,
Offences and penalties, Application to multi-State co-operative
societies, Application to Union territories and Continuance of existing
laws.
Salient features Part IXB
• It makes Right to form cooperatives a fundamental right.

• Fixed that the maximum number of directors of a co-operative society
shall not exceed 21. Further it provided for reservation of one seat for
SC/ST and two seats for women on the board of every co-operative
society.
• Cooperatives could set up agency which would oversee election.
• Uniformity in the tenure of Cooperative Board of Directors.
• Provisions for incorporation, regulation and winding up of co-operative
societies based on the principles of democratic process and specifying
the maximum number of directors as twenty-one.
• Providing for a fixed term of five years from the date of election in respect
of the elected members of the board and its office bearers;
• Providing for a maximum time limit of six months during which a board
of directors of co-operative society could be kept under suspension;
• Providing for independent professional audit;
• Providing for right of information to the members of the co-operative
societies;
• Empowering the State Governments to obtain periodic reports of
activities and accounts of co-operative societies; which have individuals
as members from such categories;
• Providing for offences relating to co-operative societies and penalties in
respect of such offences.
Implications
The amendment of the Constitution to make it obligatory for the states to
ensure autonomy of cooperatives makes it binding for the state governments
to facilitate voluntary formation, independent decision-making and
democratic control and functioning of the cooperatives.
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It also ensures holding regular elections under the supervision of autonomous
authorities, five-year term for functionaries and independent audit.
Significantly, it also mandates that in case the board is dissolved, the new
one is constituted within six months. Such a constitutional provision was
urgently required as the woes of the cooperative sector are far too many, long-
lasting and deep-rooted to be addressed under the present lax legal
framework. However, it will depend on the members and the Board of
Directors of each cooperative society to utilize these provisions for the
betterment of the cooperative society and for the members at large.
In July 2021, Supreme Court quashed certain provisions of 97th

Constitutional Amendments related to functioning and effective management
of co-operative societies for want of ratification by half of the states.
5.1.5 Let us sum up
A co-operative society works on the principal of co-operation and sharing. To

bring legal importance various Acts are always in place in tune with the
requirements of the needs. As such this Co-operative Societies Act – whether
of 1904 or 1912, has helped the co-operative societies to function effectively.
Necessary measures were taken to codify this Act. The contents of this have
been helping the Co-operative Societies to have guidance and base from the
legal angle with regard to various aspects of a Co-operative Society. People
involved in managing the Co-operative Societies are required to be thorough
with the contents of the Act. Various aspects pertaining to this Act viz.,
Members, Registration of a Co-operative Society, Management, Election,
Powers and Functions of the board, Meetings, Audit, Winding up rules and
related other issues have been discussed.
Another very important development for the cooperative movement was the
97th Amendment of Indian Constitution which has made forming cooperative
a fundamental right and also helped in making the cooperatives more
democratic and professional bodies.
5.1.6 Key words
Co-operative, Co-operative Credit Societies Act,1904, Registration, Rules,

Bye-laws, Membership, Charitable Purpose, Audit Enquiry, Provisions,
Dispute, Winding up, Dissolution, The 97th Amendment to Indian
Constitution, Fundamental Right, professional management, democratic,
cooperative movement
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State True or False
01. The Cooperative Credit Societies Act was enacted in the year 1904.
02. The word "unlimited" is the last word in the name of every society with
unlimited liability registered under this Act
03. The Cooperative Societies Act was enacted in the year 1912.
04. The audit shall not include an examination of overdue debts, if any, and
a valuation of the assets and liabilities of the society.
05. As per the Cooperative Societies Act, any ten persons living in the same
village or town and from the same family can form a cooperative society.
06. No member of a society shall exercise the rights of a member unless

he/she has made payment to the society towards membership or as may be
prescribed by the Society
07. Cooperative Credit Societies Act, 1904 enabled creation of non-credit

societies
08. The Cooperative Societies Act, 1912 enabled creation of non-credit

societies
09. The 97th Amendment to Indian Constitution was introduced in the year
1991.
01. True 02. False 03. True 04. False 05.False 06. True 07. False
08. True 09. False
5.1.7 Terminal/ Multiple Choice questions
01. First Act regarding Cooperative Societies was passed in India in the year:
a. 1947
b. 1904
c. 1991
d. 1912
02. The Cooperative Societies Act 1912 enabled creation of ?
a. Credit Cooperative Societies
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b. Non Credit Cooperative Societies
c. Educational Societies
d. Social Service Societies
03. A certificate of registration signed by the Registrar shall be

___________evidence that the society therein mentioned is duly registered
unless it is proved that the registration of the society has been cancelled.
a. Prima facie
b. Conclusive
c. Preliminary
d. Informal
04. Which is/are the main Acts relating to cooperative societies?
a. Cooperative Societies Act
b. Multi State Cooperative Societties Act
c. Both (a) and (b)
05. As per the Cooperative Societies Act, the word “Cooperative” can be used
by whom?
a. Any Citizen of the Country
b. Any registered society
c. A registered society with the permission of the State Government
06. A registered society shall receive deposits and loans from persons who
are not members only to such extent and under such conditions as may be
prescribed by the
a. Rules
b. Bye-Laws
c. Rules or Bye- Laws
d. Decision of the society

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07. The registration of a society renders it a status of body corporate. This
makes it possible for the society to:
a. Hold property
b. Enter into contracts
c. Both (a) and (b).
08. The Amendment of constitution relating to Cooperatives was which

amendment?
a. 100th Amendment
b. 99th Amendment
c. 98th Amendment
d. 97th Amendment
09. An important component of the Amendment of constitution relating to

Cooperatives was:
a. Forming Cooperative society is now a Fundamental Right
b. Receiving loan has been made a fundamental right
c. Insurance of Deposits has been made compulsory for the banks
10. Under Article 43B of Part IV of the Constitution which was inserted as a
part of 97th Amendment Act, 2011, the State is asked to:
a. Promote voluntary formation of cooperatives
b. Promote professional management of the co-operative societies
c. Both (a) and (b).
Key to Terminal questions
01. (b) 02. (b) 03. (b) 04. (c) 05. (c) 06. (c) 07. (c) 08. (d) 09. (a)
10. (c)
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Co-operative Societies Act – Bare Act: https://legislative.gov.in
Constitution of India – accessed at website:

https://legislative.gov.in/constitution-of-india
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5.2 Lesson No 2 Multi- State Co-operative Societies Act, 2002
5.2.1 Objectives
5.2.2 Introduction
5.2.3 Evolution
5.2.4 Registration
5.2.5 Membership
5.2.6 Management of Societies
5.2.7 General Management and elections
5.2.8 Annual General Meeting
5.2.9 Audit
5.2.10 Disputes
5.2.11 Bar of Jurisdiction of Courts
5.2.12 Appeal
5.2.13 Winding up and Liquidation
5.2.15 Keywords
5.2.16 Check Your Progress- questions
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5.2.1 Objectives
The objective of this lesson is to understand the important provisions of the

Multi-State Co-operative Societies Act, 2002.
5.2.2 Introduction
A well-defined and coded legal provisions explains the reasons, need and all
the dimensions of the operations of the Multi-State Cooperative societies. The
Multi-State Cooperative Act, 2002 deals with various provisions in regard to
cooperative societies.
In this Chapter, important provisions of the Multi State Cooperative Societies

Act have been reproduced from the original Act with some effort to reduce the
size of the text.
5.2.3 Evolution
The first effort to have a multi state cooperative was for salary earners
cooperatives for the government and other staff during Second World War in
British rule who were transferred from one state to another and were facing
problems of remitting the funds to their family members. In order to overcome
such problems, it was thought proper to enact a separate cooperative law by
the then Government, which would have area of operation spread over in more
than one state. Accordingly, this ‘Multi Unit Co-operative Societies Act’ was
passed by British India in the year 1942 (MUCS Act 1942). However, this Act
failed to meet the changing needs and requirements of newly emerging co-
operative societies having area of operation in more than one State .Hence,
the Multi State Co-operative Act (MSCS) was enacted in 1984 by repealing the
MUCS Act, 1942. It was again amended in the year 2002 and 2010. Even
though, the latest Act is of 2010, in the literature and Government websites
and documents, it still is popularly referred as Multi-State Cooperative Act,
2002.
It is a statute enacted by the Central Government and extends to the whole of

India. Co-operative Societies functioning in more than one State are governed
by this Act while the Co-operative societies functioning within a particular
State are governed by the respective State Acts. The objective of amendment
in 2010 was to ensure that the Act is in conformity with the provisions of the
Constitution (97th Amendment) Act 2011.
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The sector has evolved in a big way over time and as on 24 November 2020,
there were 1469 MSCS societies in the country with Maharashtra having the
headquarters of the highest number at 567 societies29.
5.2.4 Registration
Registration
Multi State Co-operative Society means a society registered under the Multi-
State Co-operatives Societies Act 2002.
Application for Registration
An application in the prescribed form is to be submitted to the Central

Registrar. The signatories to the application depend on the membership
pattern of the Multi –State Co-operatives Society:
a. Where all the members are individuals: At least fifty persons from each
of the State concerned.
b. Where the members are co-operative societies: duly authorized
representatives on behalf of at least five co-operative societies that are
not registered in the same State.
c. Where members are another Multi-State Co-operative Society and other
Co-operative Societies: duly authorized representatives of each such
society, provided that at least two of the co-operative societies that are
registered in the other State.
d. Where members are a Multi-State Co-operative Society or Multi State
Co-operative Societies and individuals:
i. At least fifty persons from each of the States and
ii. one Co-operative Society each from the States or one Multi-
State Co-operative Society
The application (Form I) needs the following information:
a. Name of the proposed Multi- State Co-operative Society

b. Headquarters and address to be registered
c. Area of operation
d. Main objectives
e. Reason- Why it is absolutely necessary to be registered under the Multi
–State Co-operative Societies Act 2002
29
GoI website : https://mscs.dac.gov.in
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f. A certificate that the proposed Multi-State Co-operative Society satisfies
the basic criterion that its objectives are to serve interests of members
in more than one State- that is for the Central Registrar to get satisfied
on this aspect as per Section 7(b).
g. A certificate that its bye-laws provide for social and economic
betterment of its members though self-help and mutual support in
accordance with the co-operative principles – that is for the Central
Registrar to get satisfied on this aspect as per Section 7(c).
h. A certificate that the provisions of the proposed bye-laws are not
contrary to the provisions of this Act and Rules thereunder – that is for
the Central Registrar to get satisfied on this aspect as per Section 7(d),
and
i. If all the members are individuals, the number of members from each
State who have signed the application.
Receipt of Application for Registration
On receipt of the application for registration, if the Central Registrar is

satisfied, he/she may register the Society and its bye- laws. The Central
Registrar has to dispose off the application within four months/ five months
with reasons. If he/she is not satisfied, a reasonable time is to be given before
the final decision is taken. He/she has to give the reasons for refusal in
writing.
If the Central Registrar does not dispose off the application within four
months, then it is presumed that the application has been accepted and the
society is treated as deemed to have been registered. In such an event, the
Central Registrar is bound to issue the registration certificate.
Certificate of Registration
The Central Registrar has to issue the certificate of Registration once the
society is registered as discussed. The said certificate issued by him/her is a
conclusive proof of the registration of the society as a Multi-State Co-operative
Society.
A Multi-State Co-operative Society, after registration, becomes a body

corporate having perpetual succession and common seal. Such a society has
the power to acquire, hold and dispose off the movable and /or immovable
property, enter into a legal contract, institute and defend suits and other legal
proceedings, can sue or be sued by its name and do all things necessary for
the purpose for which it is constituted.
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5.2.5 Membership
A member is a person who joins in with an application for registration of the

Co-operative Society or is admitted after the registration of the society in
accordance with the provisions of the Act, rules thereunder and the bye-laws.
In addition to regular members, there are associate and nominal members.
a. An associate member is one whose name is included with the name of

the regular member but does not appear on the share certificate or
appears as a second name.
b. A nominal member is one who becomes a member when he/ she wants
to avail services or benefits from the society for a temporary period and,
therefore, becomes a member for that particular purpose. He / She has
no other interest in the society. He / she is not issued share certificate.
c. Both of them are not entitled to subscribe to the shares of the society.
They cannot participate in the management, including the right to vote,
cannot get elected as a director of the board or participate in the general
body meetings.
In a Multi- State Co-operative Society, the following can become members:
a. An individual competent to enter into a legal contract as per Sec 11 of

the Indian Contract Act
b. Any Multi- State Co-operative Society or any Co-operative Society
c. Central Government
d. State Government
e. National Co-operative Development Corporation established under the
National Co-operative Development Corporation Act, 1962
f. Any other Corporation owned and or controlled by the Government
g. Any government company as defined in Sec 617 of the Companies Act,
1956
h. Such class or classes of persons or associations of persons as may be
permitted by the Central Registrar, connected with the nature and
activities of the Multi-State Co-operative Society.
5.2.6 Management of Societies
Bye-laws of the Society
A bye-law is an important document as they are the rules and regulations

about the conduct of internal working procedures on all functions. These are
in additions to what is given in the Act and Rules contained therein. The Bye-
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laws should not be inconsistent or contrary to the Act and Rules. Bye-laws
need to the registered at the time of registration of the society. Any subsequent
amendments also required to be registered. Procedure for registration of the
amendment in the bye-laws is given in Sec 11 of the said Act.
Sec 10 gives details on the points or aspects based on which a society can
make its bye-laws. These mainly include:
a. Name and address of the Society

b. Area of operation
c. Main objectives ( services offered by the society)
d. Eligibility to become member and procedure thereof
e. Procedure for withdrawal or transfer or removal of membership
f. Rights and duties of members
g. Capital of society
h. Sources of funds, uses of funds and powers to raise funds
i. Allocation of net profits
j. Constitution, use and allocation of reserve funds
k. Holding and conducting of annual general meetings of the
members
l. Constitution of the board of directors, their sub-committees and
procedure of conduct of their meetings
m. Terms of appointment of directors, their duties, rights,
qualifications and disqualifications
n. Appointment, powers and duties of the Chief Executive Officer
other than provided in the Act
o. Appointment of auditors and its procedure, scope , remuneration
giving authorization to officers of the society for conduct of the
business of the society
p. Transfer of shares
5.2.7 General Management and elections
The ultimate authority of a Multi-State Co-operative Society vests in general

body of its members. The Board of Directors of every society is responsible to
call for the general body meeting within the prescribed period. This period
should not be later than six months after the close of the corresponding
account year. The issues which the general body had to deal with are
mentioned in Sec 39 of the Multi-State Co-operative Societies Act 2002. Apart
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from regular general body meetings, the Chief Executive Officer may call, at
the direction of the Board of Directors, a Special General Meeting of the
Society.
The Board of Directors consists of such number of directors as may be

specified in the bye-laws not to exceed twenty one. As per the Amendment of
2010, one SC/ST and two women should be included in the Board of
Directors. The powers and functions of the Board have been specified in Sec
49 of the said Act. The powers and functions of the Chief Executive Officer are
specified in Sec 52 of the said Act. The Board may constitute various
committees/ sub-committees in accordance with the provisions of the bye-
laws.
General Body Powers
The bye-laws and rules of a Multi-State Co-operative Society may provide for
the constitution of a smaller body, consisting of delegates of members of the
society, elected or selected in accordance with bye-laws, to exercise such
powers of the general body as may be prescribed or specified in the bye-laws.
Such a small body should not affect the ultimate powers of the General Body
or the Board or of any officer of the society.
Representation of Other Co-operative Societies in General Body or Board

Meetings
Wherever applicable, for any meeting of the general body or the Board of a
Multi-State Co-operative Society, the representative of the other co-operative
society or another Multi-State Co-operative Society shall only be through the
Chairperson or the President or the Chief Executive Officer or an authorized
person (member) of the said Co-operative Society or Multi-State Co-operative
Society.
Board or Board of Directors
The expression “Board” means Board of Directors or the governing body of a

Multi-State Co-operative Society by whatever name called with whom the
direction, the control and the management of the affairs of the society vests.
The Board of Directors may co-opt two additional members. The co-opted
members can be in addition to the total number of 21 directors.
Election of Board Members
a. The conduct of elections to the Board is the responsibility of the

existing Board.
b. The election of members of the Board has to be held by secret ballot
in the manner as may be prescribed
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c. The election of the members of the Board has to be held in the
general meetings of the members
d. The elected members of the Board, if the bye-laws of the society
permit, are eligible for re-election.
e. The term of office of the elected members shall not exceed a period
of five years
f. If the Board fails to hold the election of the members, the Central
Registrar will hold the election within a period of ninety days from
the date when the election has become due.
g. No person is eligible to be elected as a member of the Board, unless
he/she is a member of the society
h. The expenses for holding election by the Central Registrar shall be
borne by the Society
i. The Central Government may make rules for regulating elections of
the members of the Board.
Removal of Elected Member by General Body
An elected member of a Board who has acted adversely to the interests of the
Multi-State Co-operative Society, may, on the basis of a report of the Central
Registrar or otherwise, be removed from the Board upon a resolution of the
General Body passed at its meeting by a majority of not less than two-third of
the members present and voting at the meeting.
Powers and Functions of the Board
Without prejudice to the general powers, the Board has powers:
a. To admit members
b. To interpret the organizational objectives and set up specific goals to

be achieved towards meeting these larger objectives
c. To make periodic appraisal of operations
d. To appoint or remove a Chief Executive Officer, and such other

employees of the society as are not required to be appointed by the
Chief Executive Officer
e. To place the annual report, financial statements, plans and budgets

for the approval of the general body
f. To consider audit and compliance report and place the same before
the general body
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g. To acquire and dispose off immovable property
h. To review membership in other co-operatives
i. To approve annual and supplementary budgets
j. To raise funds
k. To sanction loans to members and
l. To take such other measures or to do such others as may be required

to be done under the Act or bye-laws or under the delegations made
by general body.
Committees of Board
The Board may, subject to such conditions as may be prescribed, constitute

an Executive Committee and not exceeding three committees or sub-
committees as may be considered fit and necessary, which shall perform such
functions as may be assigned to them in accordance with the bye-laws of the
society.
Meetings of the Board
The Chief Executive Officer has to call the meeting of the Board in accordance
with the bye-laws and as per the instructions of the Chairperson or the
President of the Society. The Board has to meet once in every quarter.
5.2.8 Annual General Meeting
Every Multi-State Co-operative Society has to hold an annual meeting of its

members not later than a period of six months after the close of the co-
operative year. A different date can be adopted with the previous sanction of
the Central Registrar.
All the general meetings of the society have to be called at the principal place
of the society.
Power of Board /Central Registrar to Call for Annual General Meeting
Board to call for annual general body meeting not later than six months after
the close of the corresponding year for the purpose of:
a. Consideration of the audited statement of accounts

b. Consideration of the auditor report and annual report / audit
compliance report
c. Disposal of net profits / creation of specific reserves and other
funds
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d. Approval of annual budget
e. Expulsion of members
f. Amendment of bye-laws, if any
g. Formation of code of conduct for members of the Board and officers
h. Election of members to the Board, if any
General Meeting for the First Election:
The first general meeting of the society shall be held within six months of the
registration of the society by the promoter- members. This meeting is for the
election of the Board of Directors. The interim board selected by the applicants
for the registration of the society shall hold office till the regular Board is
elected.
Notice for General Meeting
• The Annual General meeting of a society may be called by giving not

less than fourteen days’ notice, in writing.
• A Special General meeting of a society may be called by giving not less

than seven days’ notice, in writing.
When a general meeting is called by the Central Registrar or any person

authorized by him/her, or a special general meeting is called, the Central
Registrar may determine,
• Period of notice not less than seven days for calling such a meeting
• The time and place of such meeting and
• The agenda for the meeting
The Central Registrar or the person authorized by him/her may preside over
such a meeting. Notice of the annual general meeting shall be accompanied
by a copy of each of the audited balance sheet, profit and loss account
together with the auditor’s report thereon relating to the preceding year and
the report of the Board, amendment of bye-laws, if any and election of
members of the Board, if any.
Quorum at the General Meeting
Unless otherwise provided in the bye-laws, the quorum for a general meeting
shall be one-fifth of the total number of members of the general body of
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society. No business will be transacted at any general meeting unless there is
a quorum.
If within half –an-hour from the time fixed for the meeting, there is no quorum,
the meeting shall stand adjourned. No quorum shall be necessary in respect
of an adjourned general meeting. The adjourned meeting can be held on the
same date or on such date, time and place within seven days as may be
decided by the Presiding Officer.
Voting in General Meeting
All resolutions which are put to vote shall be decided by the majority of the
members present in accordance with the procedure prescribed in the bye-
laws made by the Society. In the event of equality of votes, the Chairperson
shall have a second or casting vote.
Minutes of the General Meeting
Minutes of the proceedings of the general meeting shall be entered in the book
kept for the purpose and shall be signed by the Chairperson and Chief
Executive Officer of the meeting. The minutes so signed shall be an evidence
of the correct proceedings of that meeting.
Election Procedure
Election of members of the board shall be conducted by a returning officer

appointed by the Board in its meeting. The returning officer so appointed shall
not be a member or an employee of the Society. At the request of the Board,
the Central Registrar can also appoint a returning officer. The election is to
be conducted based on secret ballot as required in the Schedule attached to
the Rules.
5.2.9 Audit
Appointment of Auditors
The Multi-State Co-operative Societies Act 2002 provides for the audit of a
Multi-State Co-operative Society. Accordingly, the audit is required to be done
once in a year.
• Every Annual General Meeting (AGM) of a Multi-State Co-operative

Society has to appoint an auditor or auditors. Such an auditor holds
office from the conclusion of the AGM appointing him/her as auditor
till the conclusion of the next AGM. If the AGM does not appoint the
auditor, then the Central Registrar has to appoint the auditor.
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• The auditor so appointed is to be intimated within seven days from the
date of AGM by the society. Each auditor appointed by the Multi-State
Co-operative Society has to inform the Central Registrar within thirty
days of his/her appointment about his/her acceptance or refusal of the
appointment.
• A retiring auditor cannot be appointed as auditor if,
a. He/she is not qualified for re-appointment
b. He/she has given notice to the Central Registrar about his/her
unwillingness for re-appointment
c. A resolution is passed by the AGM appointing someone else an
auditor or a specific resolution has been passed not to appoint
him/her as auditor.
• When the Multi-State Co-operative Society is newly formed, the Board
has to appoint auditor within thirty days from the date of registration
of the society.
• If there is a casual vacancy caused due to reason other than resignation
of the auditor, the society can fill the casual vacancy. On the other
hand, if the vacancy is due to resignation of the auditor, the AGM has
to fill the vacancy. Such an appointed auditor will have to hold office till
the conclusion of next AGM.
• Any auditor appointed as stated in the above manner can be removed
by the AGM
• The remuneration is fixed by the AGM.
• Resolutions for Appointment or Removal of Auditor
• For appointing an auditor, a special notice for the necessary resolution
is required. A special notice is not required, if the already appointed
auditor is re-appointed.
Qualifications and Disqualifications of Auditors
• A person who is a Chartered Accountant within the meaning of the

Chartered Accountants Act 1949, is qualified to be appointed as auditor
of the Multi-State Co-operative Society.
• None of the following can be appointed as auditor of the Multi-State Co-
operative Society:
a. A body corporate
b. An officer or employee of the Multi-State Co-operative Society
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c. A person who is indebted to or who has offered his/her guarantee
or who has offered his/her security as surety to the Multi-State
Co-operative Society for an amount above rupees one thousand
and
d. A person who is disqualified for any of the above reasons to be
appointed as auditor of any Multi-State Co-operative Society,
anybody corporate or any Cop-operative Society
• Powers and Duties of Auditors
a. Every auditor has a right of access at all times to the books,
accounts and vouchers of the society whether kept at the head
office of the society or anywhere else.
b. Also entitled to have any information and explanation from the
officers and employees of the Multi-State Co-operative Society for
the purpose of his/her audit.
• The auditor has the right to enquire, apart from the above, the following
as well:
a. Whether loans and advances made by the Multi-State Co-
operative Society are based on appropriate security (as per
norms) and whether the terms on which these are given are not
prejudicial to the interests of the society and its members.
b. Whether the transactions of the Multi-State Co-operative Society
represented by the book entries are not prejudicial to the
interests of the society and its members.
c. Whether any personal expenses are charged to the revenue
account.
d. Whether proper books of accounts as required by the bye-laws
and rules are maintained.
e. Whether the balance-sheet and profit and loss account exhibit a
true, fair and correct picture of the affairs of the society.
f. Whether there are any material impropriety or irregularity in the
expenditure or in the realization of money due to the Multi-State
Co-operative Society, and
g. In case of a Multi-State Co-operative Bank whether the guidelines
issued by the RBI, NABARD and concerned authorities are
properly followed or not.
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Reports of the Auditors
The auditor of the Multi-State Co-operative Society has to make a report of

his/her audit to the members of the society and place the same before the
AGM. Based on the examination done on the affairs of the society, books of
accounts, transactions, etc., the auditors have to give their opinion and fair
view:
a. In the case of balance sheet, about the state of affairs of the

society.
b. In the case of books of accounts, whether they are kept in proper
way.
c. In the case of a report of any other audit on any branch office of
the society, whether such report was sent to him/her and how
he/she had dealt with it in his/her report.
d. Whether the balance sheet and profit and loss account are in
agreement with the books of account and returns.
e. If there is any transaction contrary to the provisions of the Act,
the rules and the bye-laws of the Multi-State Co-operative
Society.
f. If any of the money belonging to the society is bad and doubtful
of recovery.
g. About the loans given to the members of the Board of the Multi-
State Co-operative Society and on any other matter as may be
specified by the Central Registrar.
Auditor’s Signature
Only the person appointed as auditor of Multi-State Co-operative Society can

sign the audit report and any other document of the Multi-State Co-operative
Society that requires authentication by the auditor.
Right to Attend Annual General Meeting
All notices and other communications relating to the general meeting of the
Multi-State Co-operative Society for which the member is entitled, are
required to be sent to the auditor also. The auditor is entitled to attend general
body meetings. He/she has the right to be heard at any general meeting which
he/she attends on any part of the business that concerns him/her as an
auditor.
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System Audit
Though the Multi-State Co-operative Society Act 2002 is silent about the
system audit, the RBI has instructed co-operative banks to have a system
audit of their computer software. The Reserve Bank of India issued a master
circular for the co-operative banks dated 23rd September 2002, covering
aspects of audit and inspection. It covers system audit also.
Fully or partly computerized banks should introduce electronic data

processing (EDP) audit on a perpetual basis. The banks should develop a team
of competent and motivated EDP personnel. The EDP Auditors’ technical
knowledge should be developed on a continuing basis. The overall control and
supervision of the EDP audit needs to be vested with the Audit Committee of
the Board. There should be contingency/ disaster management plans in place
for system failures.
5.2.10 Disputes
Preliminary about Dispute
Whenever any dispute regarding the constitution, management or business

of Multi-State Co-operative Society arises, central registrar may decide the
dispute himself/ herself or may transfer it for a decision to such person and
upon such terms and condition as may be specified. The order passed under
this sub section shall be final and binding and shall not be called in question
in any court. Disputes could be related to:
a. A claim by the Multi-State Co-operative Society for any debt due

from a member or heir / legal representative of the deceased
member,
b. A claim by the surety against the principal debtor where the Multi-
State Co-operative Society has recovered its dues from the surety
and
c. Any dispute arising in connection with the election of any officer of

a Multi-State Co-operative Society.
The only exception to this is the dispute regarding disciplinary action taken
by a society against its paid employee or any dispute that comes under the
definition of ‘industrial dispute’ as defined in the Industrial Disputes Act 1947
{clause (k) Section 2}.
5.2.11 Bar of Jurisdiction of Courts
According to Sec 117 of the Multi-State Co-operative Society Act, no court

shall have jurisdiction in respect of
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• The registration of a society or its bye-laws or of an amendment of
the bye-laws , and
• Any matter concerning the winding up and the dissolution of the
society.
When a society is being wound up, no suit or other legal proceedings
relating to the business of such a society shall be proceeded with or
instituted against the liquidator or against the society or any member
thereof except by leave of the Central Registrar and subject to such
terms and conditions as he/she may impose.
5.2.12 Appeal
When due to sanction or requisition of the Reserve Bank of India, any co-
operative bank,
• Is being wound up, or

• In respect of which a scheme of amalgamation or reorganization
is given effect to, no appeal shall lie (Sec 100 of the Act).
Section 99 deals with appeals. Any appeal shall lie against
• An order by the Central Registrar under Sec 7 (3) refusing to

register a Society,
• An order by the Central Registrar under Sec 11 (9) refusing to
register an amendment of the bye-laws of a society,
• An order by the Central Registrar under Sec 81 apportioning the
costs of an inquiry held under Sec 78 or an inspection made
under Sec 80,
• An order by the Central Registrar under Sec 83 (2),
• An order by the Central Registrar under sec 86 directing winding
up of a society,
• An order by the liquidator of a society under Sec 90.
An appeal has to be filed within sixty days from the date of decision to the
appropriate appellate authority. The decision or order of the appellate
authority on the appeal shall be final.
Appellate Authority
Sec 31 of the Multi-State Co-operative Societies Rules 2002, lays down that
an appeal under Sec 99 (2) of the said Act can be filed:
318
• If the decision or order was made by the Central Registrar
appointed under Sec 4(1) of the said Act, appeal should be filed
to the officer not below the rank of Additional Secretary to the
Government of India in the Department of Agriculture and
Cooperation or as may be decided by the Central Government.
• If the decision or order was made by the Central Government or
a State Government of the rank of the Registrar on whom powers
of the Central Registrar conferred under Sec 4 (2) of the said Act,
appeal should be filed to the joint Secretary to the Government of
India in the Department of Agriculture and Cooperation.
• If the decision or order was made by any other officer on whom
powers of the Central Registrar have been conferred under Sec
4(2) of the said Act, appeal should be filed to the Chief Director,
Co-operation, in the Ministry of Agriculture and Cooperation or
any other officer authorized by the Central Government on this
behalf.
Review
Sec 101, of the said Act, deals with provisions relating to review. The Appellate
Authority empowered to entertain appeal under Sec 99 of the said Act can
review its own order under Sec 101. The application for review has to be made
within thirty days from the date of communication of the order of the Appellate
Authority sought to be reviewed.
Execution of Decisions / Orders
i. A certificate signed by the Central Registrar or any person

authorized by him/her in writing in this behalf would be deemed a
decree of a civil court and shall be executed in the same manner as
if it is a decree of such court. Such decree shall be executed by the
Central Registrar or any person authorized by him/her in writing in
this behalf, by attachment and sale or sale without attachment of
any property of the person or of a Multi-State Co-operative Society
against whom the decision or order has been made, or
ii. Where the decision or order provides for recovery of money, it should
be executed according to the law in force at the time for the recovery
of arrears of land revenue.
iii. Rule 37 of the Multi-State Co-operative Societies Rules 2002, deals
with the procedure in execution of decrees, orders and decisions:
a. Any decree holder, to submit an application under Sec 94 (c) of
the Multi-State Co-operative Societies Act 2002, has to apply to
the Recovery Officer in whose jurisdiction the cause of action has
319
arisen. He/she has to deposit necessary costs as fixed by the
Central Registrar.
b. The application has to be in the form specified by the Central
Registrar and has to be signed by the decree-holder. The decree
holder has to indicate whether he/she wishes to proceed against
the immovable property mortgaged to the decree-holder, or other
immovable property, or attach any movable property.
Recovery Officer has to verify the correctness and prepare a demand notice in
duplicate setting forth the names of the judgment debtor and amount due and
forward to the Sale Officer.
Attachment before Award
Sec 96 of the said Act deals with the procedure for attachment before award.
If the arbitrator is satisfied that a party that has been referred to him/her is
about to
• Dispose off whole or any part of the property , or
• Remove whole or any part of the property from its existing

location with intent to defeat or delay the execution, attachment
may be executed by the appropriate Civil Court having
jurisdiction. Sec 97 provides that the Central Registrar or
Arbitrator or any authorized person be treated as the Civil Court
under the Multi-State Co-operative Societies Act 2002 for
recovery of any amount or for taking step-in-aid of such recovery.
5.2.13 Winding up and liquidation of Multi-State Co-operative

Society
The Central Registrar has the authority to wind up the Multi-State Co-
operative Society if he/she is of the opinion to do so after:
i. Audit has been conducted under Sec 70.
ii. Special audit has been conducted under Sec 77.
iii. An inquiry has been conducted under Sec 78 by the Central

Registrar.
iv. An inspection has been made under Sec 79 by the Central Registrar.
v. Before passing an order, a reasonable opportunity to be provided to

the society to make its representation.
vi. An order can be passed by the Central Registrar, if
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vii. The number of members becomes less than fifty, where there was a
condition at the time of registration of society to have minimum fifty
members, or
viii. Where a Multi-State Co-operative Society has not commenced its

working within a period of six months or within such period
extended by the Central Registrar from date of registration, or
ix. The Multi-State Co-operative Society has ceased to function within

co-operative principles.
The Central Registrar has no authority to wind up a Multi-State Co-operative

Bank, without the prior written approval from the Reserve Bank of India.
Every order of winding up has to be in writing and be sent by the Central

Registrar to the society by registered post. The Central Registrar has the
authority to cancel the winding up order at any time, if in his/her opinion,
the society should exist.
Winding up of a Multi-State Co-operative Bank
If the Reserve Bank of India decides to wind up a Multi-State Co-operative

Bank, the Central Registrar has to follow the order and wind up such a Multi-
State Co-operative Bank. The circumstances under which the RBI takes such
a decision are given in Sec 13-D of the Deposit Insurance and Credit
Guarantee Corporation Act 1961. When the Multi-State Co-operative Bank is
wound up and the DICGC is required to pay to depositors of such banks, the
liquidator of the bank, under winding up process, has to reimburse the
DICGC as provided in the DICGC Act 1961.
Liquidator
When the Central Registrar makes an order for the winding up of a Multi-
State Co-operative Society, he/she may also order for the appointment of a
liquidator for the purpose of winding up. Remuneration will also be fixed by
him/her.
Liquidator will take all property in his/her possession and control and he/she
has the powers to realize such property by sale or otherwise.
When the affairs of the Multi-State Co-operative Society are wound up, the
liquidator has to make a report to the Central Registrar and deposit the
records of the society as the Central Registrar may direct.
On the basis of the report, the Central Registrar may cancel the registration
of the Multi-State Co-operative Society concerned. On such cancellation, the
society stands dissolved.
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A co-operative society works on the principles of co-operation and sharing.

The societies confining to an area are covered under the provisions of
respective State Acts. Whereas a Co-operative Society or an Urban Co-
operative Bank which has got its presence in more than one State, the
provisions of the Multi-State Co-operative Societies (MSCS) Act, 2002 are
applicable as amended from time to time. As of 2020, there were 1469 MSCS
in the country. The Central Registrar enjoys wide powers under the provisions
of this Act. Any one dealing with such societies is required to be thorough
about the contents of the Act and their meanings as well. Various aspects
pertaining to this Act viz., Members, Registration of a Multi- State Co-
operative Society, Management, Election, Powers and Functions of the board,
Meetings, Audit, Liquidation and related issues have been discussed.
5.2.15 Keywords
Multi-State Co-operative Society (MSCS), Central Registrar, Bye-laws, ,

Registration, Board of Directors, Members, Powers, Functions, Election,
General Management, Appeal, Dispute, Review, Appellate Authority , Winding
up, Liquidator.
State True or False:
01. Multi State Cooperative Society can be registered by Registrar of

Cooperative Societies of any state.
02. Registration of a Multi-State Co-operative Society is optional.
03. A nominal member of the Multi-State Co-operative Society is one who

becomes a member to avail services from the society for a temporary period
and is not issued share certificate.
04. The auditor is entitled to attend any general body meeting.
05. To become a member of a Multi-State Cooperative Society, the person

must be competent enough to enter into a legal contract.
06. A Multi State Cooperative Society can not be a Federation of Societies
07. An individual can not become member of Multi State Cooperative Society
08. Liquidation of a cooperative bank registered under Multi State Cooperative

Society Act can be initiated by RBI.
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01. False 02. False 03. True 04. True 05. True 06. False 07.
False 08. True
5.2.17 Terminal Questions /Multiple Choice Questions
1. Multi State Co-operative Act (MSCS) was enacted in the year ___ and
the amended in the year_____ and ____
a. 1984, 2002, 2010.
b. 1904, 2001, 2011.
c. 1947, 1951, 1991.
2. What does Multi State Cooperative Society mean?
a. Any Cooperative Society functioning in more than one district

within a state.
b. Any Cooperative Society functioning in more than one state.
c. Both (a) and (b) are correct.
3. National Cooperative Consumers’ Federation of India (NCCF) is an example of :
a. PACS.
b. DCCB
c. Multi-State Cooperative Society
d. State Cooperative Bank.
4. Which is the registration authority for Multi State Cooperative

Societies?
a. The Central Registrar under Government of India.
b. The Registrar of Cooperative Societies in states.
c. Any one of (a) or (b).
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5. What is the meaning of Multi State Cooperative Society being a ‘body
corporate’?
a. It has perpetual existence and succession
b. It has a legal entity, entitling it to enter into legal agreements,

acquire properties etc.
c. Both (a) and (b) are correct.
6. The ultimate authority for operational matters of a Multi-State Co-

operative Society is with ______?
a. Central Registrar of Government of India.
b. General body of its members
c. RCS of the State.
d. Board of Directors of the Society
7. What is the maximum number of Board of Directors of a Multi State

Cooperative Society have?
a. 09.
b. 21.
c. 51.
8. Annual General Meeting of the Society should be called within ____ close
of the financial year ?
a. Six months .
b. Three months .
c. One year
9. What is the Quorum for the General Body Meeting of the Multi State
Cooperative Society?
a. One tenth (10 %) of total members .
b. One fifth (20 %) of total members
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c. Half (50 %) of total members
10. If the Central Registrar is not disposing the application within the
______ (period), then it is presumed that the application has been
accepted and the society is treated as deemed to have been registered
a. 07 Days .
b. Four months .
c. One year
Key to MCQ
01- (a) 02- (b) 3-(c) 04. (a) 05- (c) 06-(b), 07 (b) 08- (a)
09-(b) 10. (b)
Co-operative Societies Act 2002 – Bare Act at website of GoI:

https://mscs.dac.gov.in/
Editorial Board of Professional Book Publishers (2020) Multi-State Co-

operative Societies Act 2002 along with Rules 2002
325
5.3 Lesson No.3 Self-Reliant Cooperative Societies Act
5.3.1 Objectives
5.3.2 Introduction
5.3.3 Purpose
5.3.4 Conversion of Cooperative society into Self Reliant Cooperative Society
5.3.5 Recommendations of the Task Force
5.3.6 Present status
5.3.7 Let Us Sum Up
5.3.8 Key words
5.3.9 Check Your Progress –questions
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5.3.1 Objectives
The objective of this lesson is to understand the importance of the

developments in the Co-operative field with special reference to the position
of Self-reliant Co-operative Societies.
5.3.2 Introduction
The Cooperative system has become an integral part of our country. The
liberalization of Indian Economy in the year 1991 also paved way for moving
towards building flexible co-operative legal framework by several states
against the erstwhile rigid co-operative legal regime remained in force before
1991. The Co-operative laws in force in India since 1904 contained several
rigid provisions and conferred enormous power upon the Registrar of Co-
operative Societies (RCS) and government. Hence, some of the state
governments thought that the stage has come that the new generation
cooperative based on self- help concept needed to be tried. Under this new
model, the societies would become more independent in handling various
issues associated with the respective societies and to empower them, there
was a need to move to the ‘self-reliant cooperative’ environment.
In this Chapter, important provisions of the Self-reliant Co-operative Societies

Act from a typical state have been reproduced from the original Act with some
effort to reduce the size of the text and remove some of the text which may
not be relevant in present context.
5.3.3 Purpose
The Co-operative Societies function among other aspects on the basis of

mutual understanding, sharing and extending support to one another among
its members. The time has come for the established co-operatives to be more
proactive in tune with the environment and time. Hence, there is a need to
adopt act according to the provisions of the Self-Reliant Cooperative Societies
Act.
The purpose or objective of such Self-Reliant Cooperative Societies Act (SRCS

Act) is to provide for the formation and transformation of co-operatives as self-
reliant, self-help, mutual-aid, autonomous, voluntary, democratic, business
enterprises, owned, managed and controlled by members for their economic
and social betterment, through the financially gainful provision of core
services which fulfill a common need felt by them and for connected and
incidental matters.
327
5.3.4 Conversion of Co-operative society into self-reliant Co-operative
society
Notwithstanding anything in the State cooperative Societies Act, a co-

operative society registered under the Co-operative Societies Act, may opt for
registration under the Self Reliant Cooperative Society Act through a special
resolution of the general body, provided that where the Central Government
or State Government has given Government aid to a cooperative society
intending to convert itself into this Act, the society must return such share
capital, loan or make full payment against the guarantee given by
Government, and Government shall accept such returned share capital, loan
etc.
An application for conversion has to be submitted to the Registrar, by the

elected board of such cooperative society which intends to convert itself into
a Self-Reliant Cooperative Society under this Act, on the basis of a resolution
passed by a majority of members present at a meeting of the general
body/delegate general body of the cooperative society making application;
provided that such meeting is attended by at least 25% of total members or
500 members, whichever is less.
The person by whom or on whose behalf such application is made shall

furnish such information in regard to the cooperative society applying or the
proposed Self-Reliant Co-operative Society as the Registrar may require.
Every such application shall be accompanied by:
a. A true copy of the resolution of such general body/delegate general body

expressing commitment to the cooperative identity specified in
Schedule A,
b. Evidence to show that the Cooperative Society is not in possession of
any Government aid from the central or the State Government,
c. The original byelaws of the proposed cooperative (two copies) as adopted
by such general body/delegate general body;
d. Certified copy of the resolution of such general body adopting the
byelaws;
e. A true copy of the latest annual report and audited statement of
accounts of such cooperative society;
f. A true copy of the resolution and such general body/delegate general
body along with particulars regarding the writing off of accumulated
losses, if any from various reserves or by debiting to the accounts of
members as decided at the meeting of such general body/delegate
general body,
328
g. A list of members who attended such general body/delegate general
body meeting.
h. Challan of the treasury for payment of registration fee.
The Registrar shall register the Self Reliant Cooperative Society and also take
on record its bye-laws and communicate, by registered post, a certificate of
registration and the original byelaws signed and sealed by him/her, within 30
days from the date of receipt of application for registration, as the case may
be, to such person as specified in the application for the purpose, subject to
the fulfillment of following, namely:-
1. The application is in conformity with requirements laid down by this

Act;
2. The objective of the proposed Self Reliant Cooperative Society is the
economic and social betterment of its members through the provisions
of core services to fulfill such common needs as specified in the
proposed byelaws
3. The proposed byelaws are
i. Not inconsistent with the provisions of this Act,
ii. Not against the aims and objects of the Self Reliant Cooperative
Society,
iii. In conformity with the cooperative identity specified in Schedule
A; and the registration fee has been paid as specified in section
18.
No order of refusal shall be passed without giving an opportunity of being

heard to the applicant.
The certificate of registration signed by the Registrar with seal shall be
conclusive evidence that the Self Reliant Cooperative Society mentioned
therein is a Self-Reliant Cooperative Society duly registered under this Act,
unless it is proved that the registration of the Self Reliant Cooperative Society
has been subsequently cancelled.
Where within 30 days of receipt of the application for registration, as the case
may be, an applicant receives neither the certificate of registration nor the
orders of refusal, the society shall be deemed to have been registered as a
Self-Reliant Cooperative Society under this act and the Registrar shall issue
Registration Certificate to the Self Reliant Cooperative Society within 10 days
thereafter.
Where a Self-Reliant Cooperative Society is registered under sub-section (4),

it shall send to the registrar of Cooperative Societies a copy of the registration
329
certificate under the Cooperative Societies Act, and the Registrar of
Cooperative Societies shall, within thirty days from the receipt of such
information, delete the name of such cooperative society from the register of
cooperative societies.
Where a Self-Reliant Cooperative Society is registered under sub-section (4),

the assets and liabilities, the rights and obligations, and the members of the
Self Reliant Co-operative Society registered under this Act, and all
transactions of the applicant cooperative society shall be deemed to have been
the transaction of the Self Reliant Cooperative Society registered under this
Act.
At the time of conversion, if the tenure of the elected board of Directors of

Cooperative Society has not expired and is in balance for more than one year
the same board of Directors shall continue to hold office till their tenure, even
after the conversion of Cooperative Society into Self Reliant Cooperative
Society, notwithstanding any provisions to the contrary contained in the
byelaws.
Basically there are two different kinds of cooperative institutions. One is aided
and supported by Government agencies. As such they work under a certain
set up. The other type of co-operatives are mainly run by the respective co-
operative unit members as a ‘Self-reliant cooperative’. They take care of the
needs of their members. They are formed as autonomous associations of
persons coming together voluntarily to take care of their common need based
on joint contribution on democratic basis, without government support.
The first kind of cooperatives carryout important public functions and handle
scarce public resources. As such they cannot be done away with, unless they
become totally unviable. It would be more appropriate to make the mutually
aided/ self-reliant and member-driven societies, autonomous to enable them
to achieve the desired results.
Hence, two different sets of legislations would serve better purpose.
5.3.5 Recommendations of the Task Force:
The Task Force on the Revival of Cooperative Credit Institutions in its report
(December, 2004) examined the enabling legislations for cooperatives in detail
and suggested a Model Mutually Aided Cooperative Societies (MACS) Act to be
adopted by all the States.
The salient features of the draft model law suggested by the Task Force are as
under:
330
a. The law is based on internationally accepted principles of cooperation
and ensures that cooperatives function in a democratic manner.
b. It is member-centric. The members to have control of the society.
Accountability factor is given due importance for those who are elected
by the members.
c. Members have the right to choose and also the responsibilities to carry
out.
d. Directors are elected and to the positions of responsibility.
Accountability of the Directors to the General Body is in-built, and any
lapse is treated seriously. A Director’s behavior is expected to be
reported to the General Body for its scrutiny.
e. Elections are to be considered as an internal affair and treated
accordingly.
f. Auditors’ role functions, responsibilities are covered.
g. Appointment of staff will be the responsibility of each cooperative
society. Labor laws are expected to be applied.
h. The manner of recovery of dues from members is required to be in-built
in the Articles of Association.
The Model Law suggested by the Task Force comprehensively addresses all
the issues relevant to cooperative societies and seeks to enable these
institutions to function as autonomous, voluntary, self-reliant and democratic
business enterprises which can serve the economic needs and aspirations of
their members.
Steps are being taken to implement the report of the Task Force.
Recommendations of the Task Force:
a. All States (other than Andhra Pradesh, Bihar, Jharkhand, Madhya

Pradesh, Chhattisgarh, Odisha, Uttarakhand, Karnataka and Jammu
and Kashmir) have to take steps to enact their own Mutually Aided /
Self-Reliant Cooperative Societies Act on the pattern of the Model Law
suggested by the Task Force on Revival of Cooperative Credit
Institutions.
b. Those States where such Acts are already in existence should also
examine and consider the Model Law suggested by the Task Force and
amendments in the existing legislations may be made, if so required.
c. Till settled, parallel laws to deal separately with (i) the Mutually Aided
/ Self-Reliant cooperative societies formed under the recent enactments
(post 1995), and (ii) societies formed under the old laws in which the
331
government still has financial stakes. The societies referred at (ii) above
should gradually be encouraged to clear off their liabilities and convert
into Mutually Aided Societies.
5.3.6 Present status:
As per the available information, 9 states viz Andhra Pradesh (being the first
to enact this Act in 1995), Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh,
Jammu and Kashmir, Karnataka, Odisha, and Uttarakhand have passed the
Self Reliant Coop Societies Act. In certain states, for example AP and Odisha
it is called ‘Mutually Aided Cooperative Societies Act’ (MACS Act), in
Karnataka it is called ‘Karnataka Souharda Sahakari Act’ and in others, it
continues to be called as Self Reliant Cooperative Societies Act. In all the
states, both the Acts are existing. The status varies in different states- they
are very active in states like Andhra Pradesh, Odisha, Uttarakhand and
Karnataka while not so active in other states. Many of these cooperatives are
involved in credit related activities also and some are recognized by RBI as
banks. In Karnataka, a federation of these self reliant cooperatives has been
formed with 4623 member cooperatives called Karnataka State Souharda
Federal Cooperative Ltd30. No patronage in the form of share capital or
financial support is available to these ‘self reliant’ cooperatives. However, in
some cases, like in Uttarakhand, Government support in the form of top
management being deputed from state government and support for business
is being provided. Despite the limited or no support, the movement of self-
reliant cooperative societies is moving forward with the voluntary involvement
and business focus.
5.3.7 Let us sum up
In view of the enormity of population size and the diversity in our country,
one model doesn’t work in all areas, sectors and people. Hence, innovative
models are required and are encouraged to be implemented. Self Reliant
Cooperative Societies Act is one such innovative model of the co-operative
societies where the support is not taken from the Government and self-reliant
& autonomous organisations are created. Introducing the Self-reliant concept
in the cooperative area is the right decision. With passage of time one can
expect more cooperative societies would adopt the self-reliant concept so as
to derive better benefits. Such societies would provide scope for more
members’ participation to ensure the principles of cooperation.
Karnataka State Souharda Federal Cooperative Ltd. Website:

30
http://www.souharda.coop
332
5.3.8 Key words
Self-reliant Co-operatives, Registrar of Cooperative Societies, Mutually Aided

Cooperative Societies, Souharda Sahakari Samiti Resolution, Bye-laws,
Mutually Aided Cooperative Societies Act
State True or False
1. The Self Reliant Co-operative Societies Act, has been adopted by all the
States
2. Self Reliant Co-operative Societies Act as well as the old Cooperative

Societies Act can coexist together in any state
3. Registrar of Coop Societies can refuse registration of a Self-Reliant Co-

operative Society
4. For converting the existing cooperative society into a self-reliant cooperative

society appropriate fee has to be paid
5. According to the Model Law elections are to be considered as an internal

affair and treated accordingly.
6. Any Cooperative Society registered under ‘old’ Cooperative Act, can ‘convert’
to ‘new’ Self Reliant Coop. Society subject to certain provisions
1. False 2. True 3.False 4.True 5.True 06. True
5.3.9 Multiple Choice Questions
01. An application for conversion into self-reliant cooperative society needs to

be submitted to the
a. Registrar of Companies
b. Registrar of Firms
c. Trustee
d. Registrar of Cooperative Societies
02. For conversion into a Self- Reliant Cooperative Society, the existing society
need to send a true copy of the latest annual report and audited statement of
accounts of such cooperative society
a. Correct
333
b. Not compulsory
c. At the discretion of the society concerned
d. Not correct
03. An existing cooperative society wish to convert into self-reliant co-

operative society. Whether an informal decision by the President with the
Secretary or one of the officials will serve the purpose?
a. True
b. False
c. Appropriate Resolution is mandatory
d. Resolution is not compulsory
04. Conversion of an existing society into a Self Reliant Coop. Society requires
participation of how many (in percentage of total members) in the General
Body Meeting?
a. 10%
b. 20%
c. 25%
d. 50%
05. Who has the power to take operational decision in Self Reliant Society?
a. Govt of India
b. State Government
c. Registrar Coop Society (RCS)
d. General Body of the Society
06. What is a true statement about Self Reliant Cooperative Societies?
a. These are new generation Cooperative Societies.
b. In these societies, the control and powers of RCS are less/ limited.
d. Both (a) and (b) are not correct
334
07. If an existing Cooperative Society has to convert to Self Reliant Cooperative
Society, what is the provision regarding Government funding support and
equity?
a. It can continue as it is, there is no problem
b. The new society should refund / repay the entire amount.
c. It can not only retain the old amount but also would expect more
support.
08. The Self Reliant Cooperative Society Act has been adopted by how many
states so far (till the year 2020-21)?
a. None
b. 5 states
c. 10 states
d. All the states
09. If a state adopts / approves Self Reliant Cooperative Societies Act, what
happens to the societies registered under the previous Act?
a. They will continue to carry on their activities
b. Both types of societies can co-exist in a state
10. What is correct statement about the Self Reliant Cooperative Societies?.
a. They do not receive NABARD refinance
b. They do not receive state government grants
c. . Both (a) and (b) are correct
11. If a state adopts / approves Self Reliant Cooperative Societies Act, what
happens to the existing Cooperative Societies Act?
a. It will continue to exist and any society has a choice to register in

either of the Acts
335
b. Both Acts (‘Old’ and ‘new’- Self Reliant Cooperative Societies Act can
co-exist in a state
Answers to MCQ
01. (d) 02. (a) 03. (c) 04. (c) 05. (d) 06. (c)
07. (b) 08. (c) 09. (c) 10. (c) 11. (c)
Co-operative Societies Acts –Bare Acts
A sample Self Reliant Cooperative Societies Act of Uttarakhand (earlier name

Uttaranchal) at website
http://www.fao.org/faolex/results/details/en/c/LEX-FAOC158180/
Karnataka State Souharda Federal Cooperative Ltd. Website:

http://www.souharda.coop
Paranjothi, T & Shefali Pardeshi (2019) self-Reliant co-operative societies Act:

A comparative study, KICMA Reach Journal of Management, Vol 5 No.2,
December 2019
336
5.4 Lesson No.4 The Banking Regulation Act, 1949 (As applicable to
Cooperative Societies) and recent amendments
5.4.1 Objectives
5.4.2 Introduction
5.4.3 Co-operative Banks
5.4.4 Business
5.4.5 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
5.4.6 Licensing
5.4.7 Inspection
5.4.8 Key points
5.4.9 Reforms in the BR Act 1949
5.4.10 Amendment to Banking regulation act 2020
5.4.12 Key words
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5.4.1 Objectives
At the end of the lesson the reader is able to describe the importance and
implications of the significant provisions of the Banking Regulations Act 1949
including the recent amendments.
5.4.2 Introduction -Banking Regulation Act, 1949: Application of the Act

to Cooperative Banks -- Important Provisions
Banking Regulation Act came into being in 1949. Prior to that, certain
provisions of the Companies' Act, 1913 were applicable to Banking Companies
as all the banks were joint stock companies only. The need for the Banking
Regulation Act was felt due to failure of many banks during pre-independence
era. The RBI, in their report of 2008, ‘Evolution of Banking in India’, has
quoted that 108 banks failed during the period 1913 to 192131. The number
of banks (all private banks) which failed was quoted at 736 between 1948 and
1968 by Mr. Thomas Franco, General Secretary of the All India Bank Officers’
Confederation (AIBOC)32. The failed banks included a famous ‘Travancore
National and Quilon Bank’- called ‘TN&QB’- the fourth largest bank of that
time, which failed in 1938. The bank failure was also disturbing because it
failed immediately after formation of Reserve Bank of India in 1935. In fact,
central banks in several other countries, including the US, were set up to also
address the problem of bank failure. The failure of the banks was due to
governance problems, fraudulent practices by the directors, poor
management especially of loan/investment portfolio, non- maintenance of
adequate liquidity and poor financial health. This was further complicated by
mushroom growth of banks and closure/ failure of several banks.
In this background the Banking Regulation Act was enacted in 1949 with
following broad objectives:
• To safeguard the interests of depositors through regulation of banking

in India
• To develop banking institutions on sound lines; and
• To attune the monetary and credit system to the larger interests and
priorities of the nation.
31
RBI(2008) Evolution of Banking in India, https://rbi.org.in/scripts/publicationsview.aspx?id=10487
32
Mr. Thomas Franco, General Secretary of the All India Bank Officers’ Confederation (AIBOC) quoted in
Newsclick on 28 Feb.2018- weblink: https://www.newsclick.in/efficient-private-banks-here-list-failed-private-
banks-india
338
• A comprehensive definition of “Banking” so as to bring within the scope
of the legislation all the institutions which receive deposits, repayable
on demand or otherwise for lending or incentives.
5.4.3 Co-operative Banks
The number of cooperative ‘banks’ had increased over time after passage of
the Cooperative Societies Act in 1904 and subsequently after independence.
They belonged to two categories- ‘Urban Cooperative Banks’ and ‘Rural
Cooperative Banks’. Although they were called as ‘banks’ and the word ‘bank’
was included in their name, they were registered as credit cooperative
societies under respective Cooperative Societies Acts and were not given
license by RBI. In view of massive deposit mobilization and disbursement of
loans by these banks and their importance in the economy, a need was felt to
regulate them more systematically by the RBI and the Government.
Accordingly in 1966, the Banking Regulation Act was made applicable to
cooperative banks by incorporating Section 56 therein- hence whenever a
reference is made about Banking Regulation Act in the context of cooperative
banks, it is referred as ‘As Applicable to Cooperative Societies’ or ‘AACS’.
In this Chapter, important provisions of the Banking Regulation Act have been
reproduced from the original Act with some effort to reduce the size of the
text.
The important provisions of Banking Regulation Act, 1949 (AACS) are given
below:
Section-3
• The Act shall not apply to (a) a primary agricultural credit society
and (b) a cooperative land development bank.
5.4.3.1 Business
Section- 5
Section 5(b)
• Banking means the accepting for the purpose of lending or

investments of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheque, draft or
otherwise;
• Banking Company means a Company which does business of
banking;
• Mere function of giving loans does not make a banking company;
339
• Power of receiving money or deposits from customers and
honouring their cheques is essential characteristic of banking.
Many Non-Banking Finance Companies are permitted to accept
deposits from public but cannot issue cheques in their own name,
besides not being licensed by RBI as a bank, hence they are not
banks.
Section - 6 - Forms of business which banking companies may engage in.
A bank is prohibited from doing any business other than those mentioned in
Section 6. The businesses a bank may carry on are summarised into three
categories:
• Main business of banking i.e., accepting deposits, lending,

borrowing, dealing in Bills of Exchange, Bills of lading (relating to
cargo in a ship) and Debentures, issuing letters of credit,
buying/selling foreign exchange etc.,
• Allied business: Acting as agent/trustee/administrator, carrying

on guarantee business, providing safe custody (like locker);
• Dealing in property is restricted to (i) property coming in

satisfaction of claims or as security and (ii) property necessary for
its own sake.
The Government of India has specified hire purchase, equipment leasing and
insurance as new forms of business for cooperative banks to be engaged in.
Reserve bank as empowered by the act, issues guidelines periodically for the
conduct of these types of business.
Section 6(1) gives an elaborate list of forms of business in addition to normal

business of banking that a banking company may engage in.
Section 6(2): - No banking company shall engage in any form of Business

other than those referred to in Section 6(1).
Section 11 - Requirement as to minimum paid-up capital and reserves
No cooperative bank shall commence or carry on the business of banking in

India unless the aggregate value of its paid-up capital and reserves is not less
than one lakh rupees. Value means "Real or Exchangeable Value" (REV) as
approved by RBI/NABARD during the inspection of the bank. The real or
exchangeable value of the bank could be calculated as Realizable Assets less
Outside Liabilities or Owned Funds less Erosion.
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5.4.4 Cash Reserve Ratio & Statutory Liquidity Ratio
Section-18 - Cash reserve
Every cooperative bank, not being a scheduled State Cooperative Bank

(StCB), shall maintain
• By way of cash reserve with itself, or

• By way of balance in current account with RBI or StCB of the
state concerned, or by way of net balance in current account, a
sum equivalent to at least such percent of its demand and time
liabilities (DTL) as on last Friday of the second preceding fortnight
as the RBI may specify from time to time.
• Shall submit to the RBI before 20th day of every month a return
showing the amounts held on alternate Fridays during a month
with particulars of its DTL on such Fridays.
Scheduled cooperative banks will have to maintain CRR as per RBI Act. The
scheduled cooperative banks, governed by section 42 (1) of Reserve Bank of
India Act, 1934 under which they have to maintain a minimum CRR 3% with
Reserve Bank of India, which can be increased to 20% of Net Demand and
Time Liabilities(NDTL).
Liabilities in India shall not include:-
• Paid-up capital, reserves, or any credit balance in the Profit &

Loss account;
• Any advances taken from a State Govt., RBI, IDBI, EXIM Bank,
NHB, SIDBI, NCDC, NABARD, etc.
• In case of a StCB or a District Central Cooperative Bank (CCB),
deposits representing reserve funds by any cooperative society
within its area of operation; in case of a CCB, any advance taken
from the concerned StCB.
• In case of any cooperative bank which has granted an advance
against any balance maintained with it, such balance to the
extent of the amount outstanding in respect of such advance
• In case of any cooperative bank, the amount of any advance or
other credit arrangement drawn and availed of against any
approved securities
Section 19- Restriction on holding shares in other cooperative societies
No cooperative bank shall hold shares in other cooperative societies except to

such extent and subject to such conditions as RBl may specify.
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Not applicable for:
• Shares acquired through funds provided by the State Govt. on

that behalf.
• DCCB to hold shares of StCB to which it is affiliated.
Section 20 - Restriction on loans and advances
No cooperative bank shall:
• Make any loans and advances on the security of its own shares;
• Grant unsecured loans or advances to any of its directors;
• Any firm or private company in which the director has interest.
This above clause shall not apply to grant of unsecured loans or advances
made by a cooperative bank:
• Against bills for supplies or services made or rendered to government

or bills of exchange arising out of bona fide commercial or trade
transactions
• Trust receipts furnished to the cooperative bank
• Made by a primary co-operative bank to any of its Directors or to any
other person within such limits and on such terms and conditions
as may be approved by the RBI in this behalf.
Every co-operative bank has to submit to RBI a monthly return showing
all unsecured loans and advances granted by it to companies in which
any of its Directors is interested as Director or Managing agent or
guarantor. If on examination of any return submitted by the bank, it
appears that any loans or advances are being granted to the detriment
of the interest of the depositors of the cooperative bank, RBI may
prohibit the cooperative bank from granting such further loans, or
impose other restrictions and also may direct the co-operative bank to
secure the re-payment of such loans or advance within a specified time.
5.4.5 Licensing
Section 22 - Licensing of banking company
No co-operative society shall carry on banking business in India unless it is a

co-operative bank and holds a license issued by the RBI subject to such
conditions, as the RBI may impose.
This Section shall not apply to a cooperative bank which is carrying on
banking business at the commencement of the Banking Laws for a period of
one year from such commencement. Cooperative banks functioning prior to
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the commencement of the Act were required to apply for license to RBI within
a stipulated period of three months.
The cooperative banks shall not be deemed to be prohibited from carrying on

banking business until they are notified by the Reserve Bank that license
cannot be granted.
RBI can cancel a license granted to a cooperative bank if;
• The bank closes banking business;

• The bank does not comply with any conditions imposed by RBI
while issuing license.
Section 22(3)
Before granting any license under this section, the Reserve Bank may require
to be satisfied by an inspection of the books of the bank or otherwise that the
following conditions are fulfilled, namely:—
(a) that the bank is or will be in a position to pay its present or future
depositors in full as their claims accrue;
(b) that the affairs of the bank are not being, or are not likely to be conducted
in a manner detrimental to the interests of its present or future depositors;
(c) that the general character of the proposed management of the bank will
not be prejudicial to the public interest or the interest of its depositors;
(d) that the bank has adequate capital structure and earning prospects;
(e) that the public interest will be served by the grant of a license to the bank
to carry on banking business in India;
(f) that having regard to the banking facilities available in the proposed
principal area of operations of the bank, the potential scope for expansion of
banks already in existence in the area and other relevant factors the grant of
the license would not be prejudicial to the operation and consolidation of the
banking system consistent with monetary stability and economic growth;
(g) any other condition, the fulfilment of which would, in the opinion of the
Reserve Bank, be necessary to ensure that the carrying on of banking
business in India by the bank will not be prejudicial to the public interest or
the interests of the depositors.
Section 23 (1)
• No Cooperative Bank, other than Central Cooperative Bank, shall
open a place of business or change otherwise than within the
same city, town or village, the location of an existing place of
business without obtaining the prior permission of RBI.
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Section 23 (4A)
• Any cooperative bank other than a primary cooperative bank

seeking permission of RBI for branch opening is required to
forward applications to RBI through NABARD;
• NABARD shall give its comments on the merit of the cases and
send to RBI.
• An advance copy of the application shall be sent by the
Cooperative bank directly to the RBI.
Section 24- Maintenance of statutory liquid assets for Statutory

Liquidity Ratio
• In addition to CRR, every cooperative bank is required to maintain

certain balances for Statutory Liquidity Ratio (SLR). The ratio of SLR
is notified by RBI from time to time but cannot exceed 40% of
demand and time liabilities (DTL). The eligible items for SLR
investments are as under:
▪ Cash maintained in India;
▪ Gold valued at a price not exceeding current market price;
and
▪ Unencumbered investment in approved securities as defined
in Section 5 (a) of the Banking Regulation Act, 1949 read with
Section 56 thereof. (Approved securities means the securities
issued by the Central Govt. or any State Govt. or such other
securities as may specified by RBI)
For the purpose of this section, cash maintained in India includes:-
• Any balance maintained by a scheduled State cooperative Bank with

the RBI in excess of the balance required to be maintained by it
under Section 42 of the RBI Act;
• Any net balances in current account.
For the purpose of this sub-section -
• Approved securities, or a portion thereof, representing investment of

monies of Agricultural Credit Stabilization Fund of a cooperative
bank shall not be deemed as unencumbered approved securities;
• In case of a cooperative bank which has taken an advance against
any balance maintained with the state cooperative bank of the state
concerned or with the central cooperative bank of the district
344
concerned, such balances to the extent to which it has drawn
against shall not be deemed to be cash maintained in India.
Section 24(3) - Ensuring compliance
• for ensuring compliance with the provisions, a bank has to furnish

to RBI, not later than 20 days after the close of the month, a monthly
return, showing particulars of its Liquid Assets maintained and its
Demand and Time liabilities at close of business of each alternate
Friday during the month;
• Cooperative banks to submit a copy of this return to NABARD also.
Section 24-A
RBI has power to exempt any cooperative bank from the whole or any part of
the provisions of Section 18 or Section 24 of the Act.
Sections 27 to 31 - Submission of returns
Copy of monthly returns and annual accounts required to be submitted by

the Cooperative banks to NABARD also as per the periodicity prescribed in
the relevant sections of the Act.
5.4.5.1 Inspection
Section 35 - Inspection
NABARD has been empowered to inspect the cooperative banks other than
primary cooperative banks, without prejudice to the powers of RBI, to conduct
such inspection.
Section 35 A : Powers of RBI to give directions; RBI is empowered to issue

directions to cooperative banks in general or to any cooperative bank in
particular on any aspect of working of such banks.
Section 45: Under this section, the Reserve Bank can recommend to the
Central Government, to order a moratorium in respect of a cooperative Bank.
The power to issue such a moratorium however rests with the Central
Government.
Section 46: In this section, various penalties that may be imposed on

cooperative banks, for non-compliance with the various provisions of the B.R.
Act, have been specified.
Section 53- Power to exempt; The Central Govt. may, on the recommendation
of RBI, exempt any bank or any class of banks from any or all provisions of
this Act.
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5.4.6 Key points
• Primary Agricultural credit societies (PACS) and Land Development

Banks/ Agriculture and Rural Development Banks (ARDBs) are
excluded from the scope of the banking regulation act 1949;
• The minimum capital requirement is only Rs. 1 lakh for banks.
Please note the concession available to the cooperative banks as the
minimum capital requirement for a private commercial bank it is at
least Rs 200 crore!33
• A cooperative bank can not engage in any trading activity (except of
government and approved securities);
• Cooperative banks have to maintain a cash reserve ratio of percent
as specified by RBI from time to time of NDTL in cash and current
accounts with RBI and other notified banks. Scheduled cooperative
banks have to maintain CRR under the RBI act in an account with
RBI.
• Cooperative banks need to maintain statutory liquidity ratio as
specified by RBI from time to time of NDTL in the form of cash, gold,
and in unencumbered approved securities;
• Cooperative banks, individually or all Cooperative banks taken
together, cannot hold more than 5% of subscribed capital of any
other cooperative society except the StCB to which they are attached;
• RBI can determine the banking policy for the advances to be made
by cooperative banks;
• Cooperative banks should have applied for a license from RBI to
carry on banking business;
• Cooperative banks and societies have to submit various returns to
RBI regarding CRR/SLR, assets and liabilities, unsecured loans to
directors, advances to priority and weaker sector, shareholding in
cooperative societies, non-performing assets and audited balance
sheet, profit and loss account of statutory audit report as per the
periodicity prescribed for different statements.
• NABARD is authorized to conduct inspections of StCBs and DCCBs
while inspections of Urban Cooperative Banks are conducted by RBI.
33
RBI, 22 Feb 2013 https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=28191
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5.4.7 Reforms in the BR Act 1949
Consequent upon the implementation of the recommendations of the

Committee on Revival of the Cooperatives, certain amendments to the BR Act
were required and these include the following aspects:
• All cooperative banks would be on par with the commercial banks as

far as regulatory norms are concerned;
• RBI will prescribe fit and proper criteria for election to Boards of
cooperative banks. Such criteria would however not be at variance with
the nature of membership of primary cooperatives which constitute the
membership of the DCCBs and StCBs;
• However, as financial institutions, these Boards would need minimum
support at the Board level. Hence, the RBI will prescribe criteria for
professionals to be on the Boards of cooperative banks. In case
members with such professional qualifications or experience do not get
elected in the normal electoral process, then the board will be required
to co-opt such professionals to the board and they would have full
voting rights.
• The CEOs of the cooperative banks would be appointed by the
respective banks themselves and not by the State government.
However, as these are banking institutions, RBI will prescribe the
minimum qualifications of the CEO to be appointed and the name
proposed by the cooperative bank for the position of CEO would have
to be approved by RBI.
• Cooperatives other than cooperative banks as approved by the RBI shall
not accept non-voting members’ deposits. Such cooperatives would also
not use words like “bank”, “banking”, “banker” or any other derivative
of the word “bank” in their registered name.
5.4.8 Amendment to Banking regulation act 2020
For bringing the cooperatives at par with other banks, in a landmark

development, the Banking Regulation Act, 1949, with regard to cooperative
banks has been amended in 2020. For this purpose, Banking Regulation
(Amendment) Bill, 2020 was introduced in Lok Sabha by the Union Finance
Minister, Smt Nirmala Sitharaman, on March 3, 2020 and the Banking
Regulation (Amendment) Act, 2020 was enacted on 29 September 2020.
Although the Act was passed in the background of the problems relating to
certain Urban Cooperative Banks, the amendments are important for all the
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cooperative banks i.e., urban cooperative banks as well as rural cooperative
banks (StCBs and DCCBs).
Following are the important amendments:
i. Date of Amendment becoming effective: The Amended Act is be

deemed to have come into force on the 26th June, 2020 (the date of
ordinance) but for primary co-operative banks, it is deemed to have
come into force on the 29th June, 2020 (the date of notification) and
with respect to State Co-operative Banks and District Central Co-
operative Banks, the Amendment provides that it will come into force
on such date as the Central Government may decide by notification.
ii. Wider participation of public in shareholding: The shareholding of

the cooperative banks, at present, is subscribed by the members- by
the PACS and State Government in case of DCCBs; and mostly the
DCCBs, UCBs, the state government and such other societies in case
of StCBs. The share capital thus subscribed is restrictive in nature
which contributes to limitations on the resource mobilization by these
banks. Further, as of now, common public can not participate in share
holding. The problem has been addressed by the Amendment to Section
12 of the Act. The Amendment provides that a cooperative bank may
issue equity shares, preference shares, special shares, unsecured
debentures or bonds or other like securities with initial or original
maturity of not less than ten years on face value or at a premium to its
members or to any other person residing within its area of
operation. Such issuance will be subject to the prior approval of the
RBI, and any other conditions as may be specified by RBI.
iii. Professionalization of Board of Directors: Section 10 A of Banking

Regulation Act is titled “Board of directors to include persons with
professional or other experience” and emphasizes importance of
professional BOD for the effective and efficient management of any
bank. It deals with the composition of the Board of Directors. Earlier
these provisions were not applicable to cooperative banks but the
Amendment has made those provisions applicable to these banks as
well. This would necessitate that the Board of Directors should have at
least 50% of the Directors with special knowledge or practical
experience in respect of one or more of the following matters, namely:—
(i) accountancy, (ii) agriculture and rural economy, (iii) banking, (iv) co-
operation, (v) economics, (vi) finance, (vii) law, (viii) small-scale industry,
(ix) any other matter the special knowledge of, and practical experience
in, which would, in the opinion of the Reserve Bank, be useful to the
banking company. Further, at least two persons shall be having special
knowledge or practical experience in respect of agriculture and rural
economy, co-operation or small-scale industry. The Amendment
prescribes that no Director of a bank, other than its chairman or whole-
time director, shall hold office continuously for a period exceeding 8
years. The Amendment also empowers RBI to reconstitute the Board to
fulfill the requirements of the Act.
348
iv. Control over management: Another important amendment is relating
to ‘Control over management’ as contained in Part II, Section 36AA of
the Act. This section gives power to RBI to remove managerial and other
persons from office (including chairman, director, chief executive officer
(by whatever name called) or other officer or employee of the bank)
where it is satisfied that in the public interest or for preventing the
affairs of a bank being conducted in a manner detrimental to the
interests of the depositors or for securing the proper management of
any bank, it is necessary so to do. The Act also gives power to RBI to
appoint a suitable person to replace the person who has been removed,
for a period of 3 years (maximum). In terms of Section 36AB, RBI has
the power to appoint additional Director(s) of the bank for a maximum
period of 3 years.
v. Supersession of Board of Directors: Besides the power of RBI to

remove or appoint one or more Directors, the Amendment grants
authority to the RBI of supersession of the Board in terms of Section
36ACA, Part IIAB-‘Supersession of Board of Directors of Banking
Company’. The power is in certain cases where the RBI is satisfied, in
consultation with the Central Government, that in the public interest
or for preventing the affairs of any banking company being conducted
in a manner detrimental to the interest of the depositors or for securing
the proper management of any bank, it is necessary to do so, the RBI
may supersede the Board of Directors of such bank for a period up to 6
months (extendable to 12 months). For managing the affairs under such
circumstances, the RBI may appoint an Administrator who will exercise
the power of the Board of Directors until the Board of Directors of such
banking company is reconstituted. The RBI may constitute, in
consultation with the Central Government, a committee of three or
more persons who have experience in law, finance, banking, economics
or accountancy to assist the Administrator in the discharge of his
duties. The committee shall meet at such times and places and observe
such rules of procedure as may be specified by the RBI. The salary and
allowances to the Administrator and the members of the committee
shall be specified by the RBI and be payable by the concerned bank.
vi. Bringing Parity with other banks: The Amendments have also
brought parity of cooperative banks with other banks by withdrawal of
exemptions granted to DCCBs in the opening of branches, extension of
time limits for disposal of assets and loans and advances granted to
Directors.
vii. Removing dual control: By the amendments, the control over

cooperative banks has now been shifted more towards RBI and
therefore, the problem of dual control would come down, if not get
abolished.
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5.4.9 Let us sum up
Banking Regulation Act, 1949 (AACS) is an important support document for

cooperative bankers to carry out their banking business. The Act covers
important aspects such as the business, Cash Reserve and Statutory
Liquidity ratios, Licensing, RBI control, Returns and so on. The relevant
sections and their contents provide scope for the bankers to discharge their
banking duties in an effective way.
The recent amendments to Banking Regulation Act of 2020 have also been
discussed in the Chapter. It would be observed that the purpose of the
amendments is to bring the cooperative banks at par with other banks,
remove dual control and make them professional. It is expected to enable
these banks to face the competition and other challenges in ever changing
scenario of banking in the country.
5.4.10 Key words
Banking Regulation Act, RBI, moratorium, amendment, administrator,

NABARD,
5.4.11 Check your progress- questions
State True or False
01. A State cooperative Bank seeking permission of RBI for branch opening is
required to forward applications to RBI through NABARD.
02. Section. 24 of Banking Regulation Act deals with maintenance of CRR
03. NABARD has been empowered to inspect the Cooperative banks other
than the primary cooperative banks
04. After the Amendment to BR Act in 2020, RBI can remove the Board of
Directors and post Administrator in respect of a cooperative bank
05. Banking Regulation Act was passed in the year 1947.
06. Minimum capital requirement of a bank is dealt in Section 18 of BR Act.
07. Banking Regulation Act was amended in the year 2020 with regard to
Cooperative banks.
08. The Section 56 of BR Act deals with applicability of BR Act to Cooperative

banks
09. Inspection of Cooperative Banks is conducted as per Section 35 of BR Act.
350
10. Land Development Banks / Agriculture and Rural Development Banks
are licensed by RBI as StCBs and DCCBs
01. True 02. False 03. True 04. True 05 False 06. False 07 True
08. True 09 True 10. False
01. The aggregate minimum value of the paid up capital and reserves of a
cooperative bank should be Rs. _____.
a. one lakh
b. two lakh
c. five hundred crore
d. one crore
02. The Banking Regulation Act, 1949 (AACS) is not applicable to which of
the following institutions?
(a). SCARDBs
(b). PCARDBs
(c). PACS
(d). All the above
03. Section 18 of Banking Regulation Act deals with:?
(a). CRR
(b). SLR
(c). Minimum Capital requirement
(d). Inspection of the bank
04. Section 24 of Banking Regulation Act deals with:?
(a). CRR
(b). SLR
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05. Section 11 of Banking Regulation Act deals with:
(a). CRR
(b). SLR
(c). Minimum paid up Capital and reserve requirement
06. Section 35 of Banking Regulation Act deals with:
(a). CRR
(b). SLR
07. What is the difference between banks and other NBFCs?
(a). Banks are licensed by RBI to conduct banking
(b). Banks can issue cheques
(c). Both (a) and (b)
(d). None of the above
08. Banking definition includes?
(a). Accepting deposits from public
(b). Lending the funds as loan
09. As per amendment of BR Act in 2020, what is the provision about

participation of public in cooperative banks?
(a). Cooperative Banks can issue equity shares on face value
(b). Cooperative Banks can issue equity shares on premium
352
10. As per amendment of BR Act in 2020, what is the provision about
professionalization of Board of Directors in cooperative banks?
(a). At least 50% of Directors should have knowledge of or experience of

relevant fields like banking, cooperation etc.
(b). No director should hold office for more than 15 years
Answer to Multiple Choice Questions
01- (a) 02- (d) 03- (a) 04- (b) 05- (c) 06- (d) 07- (c) 08- (c)
09- (c) 10- (a)
Indian GoI website for latest Acts: Indiacode.nic.in
Banking Regulation and Allied Banking Laws, Law Publishers (India) Pvt. Ltd
Allahabad
Master Circulars of RBI
RBI (2008) Evolution of Banking in India, https://rbi.org.in/scripts/
Shrivastava, Arvind Kumar (2021) The Banking Regulation (Amendment) Act

2020: Parity in Regulation for Cooperative Banks, The Indian Banker, Volume
VIII, Issue 10, May 2021, pp 40-43
353
5.5 Lesson No. 5 Negotiable Instruments Act, 1881
5.5.1 Objectives
5.5.2 Introduction
5.5.3 Basics of Negotiable Instruments
5.5.4 Main types of Negotiable Instruments
5.5.4.1 Promissory Note
5.5.4.2 Bill of Exchange
5.5.4.3 Cheque
5.5.4.4 Similarities and differences between Promissory Note, Bill of Exchange

and Cheque
5.5.4.5 Similarities and differences between a Cheque and a Bill of Exchange
5.5.5 Crossing of Cheques

5.5.6 Parties to a cheque
5.5.7 Important Aspects of Endorsements

5.5.8 Return of Cheques
5.5.9 Special instruments- Demand Draft and Banker's cheque
5.5.10 Paying Banker - Duties and Responsibilities
5.5.11 Collecting Banker - Duties and Responsibilities
5.5.12 Changes made by Amendment to the Act in 2002:
5.5.13 Changes made by Amendment to the Act in 2018

5.5.15 Key words
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5.5.1 Objective
By the end of the chapter, the reader would be able to explain the important
provisions of the Negotiable Instruments Act, 1881 (including the recent
amendments) and their significance to a banker.
5.5.2 Introduction
Bankers have to deal with ‘negotiable instruments’ in their ordinary course of

business. Most commonly used negotiable instrument is cheque. Bankers
also deal with Bankers Cheques (Pay orders), Demand Drafts, and certain
other instruments such as Promissory Notes and Bills of Exchange.
The Negotiable Instruments Act (NI Act) was passed in 1881 in India to meet
the requirements of the prevailing business conditions. Despite passage of
time and change in methods of doing business and technology changes, the
basic principles of the Act are still valid and the Act has stood test of time. It
has been amended to adjust to the changing methods of financial transactions
and technology adoption in banking. The Act extends to the whole of India
and continues to be very important for the commercial transactions.
5.5.3 Basics of Negotiable instruments
What do ‘negotiable instrument’ and ‘negotiability’ mean? Simply put, a

‘negotiable instrument’ is a signed document that promises payment of
specific amount to a specified person.
The word ‘Negotiability’ is connected with the verb, to negotiate, meaning

settlement of dispute by discussion, etc. But in the context of banking,
negotiability usually refers to the quality of the title or ownership of the
instrument (like cheque) whose ownership is easily transferable from one
party to another. Other words used to describe negotiable are marketable or
transferable. Thus the meaning of ‘negotiable instrument’ is the instrument,
ownership of which can be transferred to another person. This is generally
done through written instruction called as ‘endorsement’.
Negotiation refers to transfer of title (right to receive payment) from one person
to another. Such instruments which help the person to achieve this title
transfer are called Negotiable Instruments.
The title transfer can be effected based on the characteristics of respective

instruments and the nature of such instruments. Thus negotiation plays a
crucial role.
355
What is a Negotiable instrument?
a. It is an unconditional instrument in writing, signed by the maker

directing a certain person (including himself/herself in the case of a
promissory note) to pay a certain sum of money.
b. The money has to be paid to a certain person or as per direction (may
be a bearer or an order)
c. It has to be dated
d. It is valid only when it is supported by consideration (value received).
The requirements of negotiability
An instrument is negotiable if it meets the following 6 requirements:
• It must be in writing
• It must be signed by the maker or drawer.
• It must be an unconditional promise or order to pay.
• It must be for a fixed amount in money.
• It must be payable on demand or at a definite time.
• It must be payable to order or bearer.
5.5.4. Main types of Negotiable Instruments
Section 13 of Negotiable Instrument Act, 1881 defines three instruments as

Negotiable Instruments viz., Promissory Note (Sec 4), bill of exchange (Sec 5)
and Cheque (sec 6). These are briefly discussed below. Please note that a
Currency Note is not a negotiable instrument as per the NI Act.
5.5.4.1 Promissory Note (Sec 4) : It is an unconditional undertaking in

writing signed by the maker (promisor) undertaking (promises) to pay to a
certain person (promise) or his/her bearer or his/her order ( as the case may
be) a certain amount, for consideration received. (Banks use Promissory Notes
when they lend to their borrowers). A sample promissory note is presented in
Figure 5.4.1.
Figure 5.4.1: Sample Promissory note
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5.5.4.2 Bill of Exchange (Section 5) : A bill of exchange is an instrument
in writing, signed by the maker (drawer) directing a certain person (drawee)
to make the payment on the bill, a certain sum of money to a certain person
(payee) or to his/her bearer/ order. It is an unconditional instrument.
Consideration for the transaction is essential. The bill has to be dated. A
specimen of Bill of Exchange is presented in Figure 5.4.2. Cheque is also one
form of Bill of Exchage (being described below).
Figure 5.4.2: Sample Bill of Exchange
5.5.4.3 Cheque (Section 6): Section 6 of NI Act defines cheque as follows: ‘A

cheques is a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than on demand and it includes the electronic image
of a truncated cheque and a cheque in the electronic form’.
357
All the characteristics of a bill of exchange are applicable to a cheque. The
additional requirement is that it has to be drawn on a particular bank
(specified banker) and is always payable on demand. It is transferred based
on whether it is payable to a bearer or order. If payable to bearer, then transfer
to title (right to receive money) is effected by mere delivery. If it is payable to
order, then transfer is possible by way of an endorsement to be followed by
delivery. Crossing (both general as well as special) is applicable only to
cheques (Sec 123 & 124). A sample cheque is presented in Figure 5.4.3.
Figure 5.4.3: Sample Cheque of a Bank
As per the provisions of The Negotiable Instruments (Amendment & Misc.

Provisions) Act 2002, certain amendments have been made, the details of
which are as under:
• ‘The electronic image of a ‘truncated cheque’ and ‘a cheque in the

electronic form’ have been included in the definition of ‘cheque’.
• ‘A cheque in electronic form’ is the mirror image of a cheque generated
in the electronic medium with digital signature.
• ‘A truncated cheque’ is a cheque in physical form which is kept with the
banker and further movement of the cheque is done through the
electronic image, instead of sending physical cheque. “Truncated
Cheque” is a cheque which is modified/ shortened (Truncation means
shortening). For this purpose, Cheque truncation system (CTS) started
in the year 2010 and now on each cheque leaf ‘CTS 2010’ is printed.
The cheque also has a six digit cheque number in Magnetic Ink
Character Recognition (MICR) technology and a nine digit
city/bank/branch code, as can be seen in Figure 5.4.3.
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5.5.4.4 Similarities and differences between Promissory Note, Bill of
Exchange and Cheque
i. All the three are Negotiable Instruments.

ii. All must be in writing and signed by the maker.
iii. All should be supported by consideration.
iv. All will have to have a proper date of execution.
v. A Promissory Note has an unconditional undertaking to pay money.
vi. Both Bill of Exchange and Cheque will have an unconditional order
directing a certain person to make the payment of money.
vii. In all the three, the money payable should be certain.
viii. A Promissory Note has to bear a revenue stamp (as prescribed) whereas
a Bill of Exchange should also bear an appropriate stamp duty
(wherever applicable). But a cheque need not be stamped.
ix. A bill may be drawn on any person. A cheque has to be drawn on a
specified banker only.
x. A bill may be a demand bill or a usance (term) whereas a cheque cannot
be a usance bill. It is always a demand bill only. (A bill which is to be
payable on demand or in which no time is specified for payment, is
called demand bill. The Usance bill is one which is to be paid at a
specified future date). A usance bill can have a grace period of 3 days.
xi. ‘Crossing’ is not applicable to both Promissory Note as well as a Bill of
Exchange. It is applicable to cheques only.
xii. If a Bill of Exchange is dishonored, notice has to be given to the drawer.
This is not required for a dishonored cheque.
5.5.4.5 Similarities and differences between a Cheque and a Bill of

Exchange
i. Both are considered as Negotiable Instruments.

ii. Both are signed by the maker (drawer) directing the other person
(drawee) to make the payment to certain person or to the bearer or to
the order.
iii. Both should specify the amount.
iv. Both are required to be dated.
However, there are some differences as listed below:
i. A bill need be stamped whereas a cheque need not be stamped.
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ii. A bill may be drawn on any person, whereas a cheque has to be drawn
on a specified banker only.
iii. A bill may be a demand bill or a usance bill, whereas a cheque should
always be a demand instrument.
iv. A bill can have a grace period of 3 days if it is a usance bill. A cheque
cannot have any days of grace since it is only a demand instrument.
v. ‘Crossing’ is not applicable to bill of exchange. It is applicable only to
cheques.
vi. A Usance bill has maturity date. Cheque doesn’t have any maturity
date. It has only validity
vii. A cheque becomes stale cheque 3 months beyond the date of the
cheque.
viii. If a bill of exchange is dishonored notice has to be given to the drawer.
This is not required in the case of cheque.
Since the banker is handling a number of cheques daily, some more
information is to be understood on cheques.
An open cheque is different from a crossed cheque. An open cheque means

that it is not crossed. The intention of the drawer of the open cheque is that
his/her banker has to make a cash payment to the payee. It is also known
as payment over the counter. A crossed cheque means it is payable to the
account only.
Before making a payment on an uncrossed cheque (open Cheque), a drawee

banker has to examine certain points such as:
• The cheque is payable to bearer or if the same is payable to order, then

the banker may pay only after getting satisfied about the payee’s
identity.
• The cheque is neither a stale one (i.e. date on the cheque is not more
than three months old) nor post dated.
• Words and figures match.
• Signature of the drawer/ or authorised person matches with that of the
specimen signature (mandate) lodged with the banker.
• The account has sufficient balance to meet the cheque or proper
arrangement is made in this regard.
After satisfying the above, the paying banker may make the payment to get
necessary protection under the NI Act 1881.
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5.5.5 Crossing of cheques
A crossed cheque is one which bears the crossing on the cheque. A crossing
is drawing two parallel transverse lines on the face of the cheque. Generally,
it is drawn on the left hand top corner of a cheque. Once a cheque is crossed,
the paying banker is prevented from making the payment over the counter
(cash payment). A crossed cheque has to be routed through a bank account.
There are basically two types of crossings viz.
(a) General Crossing and
(b) Special Crossing.
The General Crossing is discussed in Sec 123 of the NI Act 1881. The
important requirement of a general crossing is that it must have two
transverse parallel lines. In addition, it may contain the words “and company”
or “Not Negotiable” or any other abbreviations (like Account payee or Account
payee only). Examples are:
_______________ _____________ ___________________
& Co Not Negotiable Account Payee only
_______________ ______________ ____________________
If the cheque is crossed generally, the same could be collected by any banker
who acts as a collecting banker.
The Special Crossing is discussed in Sec 124 of NI Act 1881. The extension
of general crossing leads to special crossing. In addition to the features of the
general crossing, when the name of a banker appears on the face of the
cheque, then it is said that the cheque has been crossed specially. Even a
mere name of the banker appearing on the cheque, without crossing also
amounts to special crossing. The addition of the name of a banker is essential
for a special crossing. This is to prevent other bankers acting as collecting
banker. If a cheque bears a special crossing, then the banker, whose name is
appearing on it has to be the collecting banker.
Example:
_________ ______________________ __________________
UCO Bank Account Payee – UTI Bank State Bank of India
_________ _______________________ __________________
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In the above cases, the cheques are to be collected or routed through the bank
accounts of respective banks. As compared to a general crossing, the special
crossing gives a better protection. The paying banker has to satisfy that the
bank, whose name is mentioned on the cheque (specially crossed) has
collected the cheque. If he/she overlooks this and makes the payment then
the same may not be treated as a payment in due course.
The popular crossing known as “Account Payee” crossing is not defined nor
discussed in any Act including that of NI Act 1881. However, in practice, the
courts have given due recognition to such type of crossing. Account payee
crossing is an indication that the payment has to go to the payee’s account.
Account payee crossing serves as a better protection. Both the collecting
banker as well as the paying banker have the responsibilities with regard to
this type of crossing. Collecting banker has to ensure that he/she is collecting
only for the payee mentioned. The paying banker has to see that the collecting
banker has not collected for other than the payee mentioned. RBI has issued
clear directions to all banks that the cheques having “Account Payee only”
should not be collected for other than the payee mentioned therein.
‘Not Negotiable’ crossing is discussed in Sec 130 of NI Act 1881. This crossing
serves as a caution to the persons who are dealing with the cheque. A cheque
with a ‘not negotiable’ crossing does not restrict the negotiability of the cheque
to another person. However, the transferee has to be careful. Otherwise,
he/she would carry the same title the transferor had at the time of
transferring to him/her. If the transferor had a bad title (if he/she was not
entitled to receive payment / had no title) then the same would be passed on
to the transferee.
Crossing can be done by the drawer or holder. If a cheque is uncrossed, the

holder may convert it into a crossed cheque. Likewise, when a cheque is
crossed generally, the holder may convert the same into a special crossing.
The holder may also add the word “Not negotiable” both in the generally
crossed or specially crossed cheques. The banker in whose favour cheque is
crossed specially, may cross it specially to another banker, as his/her agent
for collection purpose. (Sec125 of NI Act 1881)
In case the crossing has to be cancelled, then only the drawer has the right
to do it. He/she has the right to record that the crossing cancelled. He/she
should authenticate the same with his/her full signature. Though the
crossing cancelled in such a manner is valid, yet the bankers do insist
drawer’s presence to receive cash on such cancelled crossings.
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5.5.6 Parties to a cheque
The parties to a cheque are Drawer, Drawee, Payee, Holder, Endorser,

Endorsee and Banker. These are briefly discussed below:
Drawer is the account holder and issues a cheque. He/she directs the drawee
(his/her banker with whom he/she maintains his/her account) to make the
payment on his/her cheque.
Drawee is the banker on whom the cheque is drawn. He/she has to make the
payment provided the cheque is otherwise in order and funds are available to
honour the cheque. His/her duty is to act in good faith and without negligence
and pay according to the apparent tenor of the cheque.
Payee is the person who is entitled to receive payment on the cheque. Drawer
himself/herself may be the payee when it is a self cheque or payee may be a
third party. If the cheque is not paid (dishonoured) then the payee has the
right to claim (recover) the money from the drawer. The payee has the right to
endorse the cheque in favour of another person also, if need be.
Holder is the person who is holding (possessing) the instrument and has the
right to receive payment. He/she has got the right in a legal manner. A finder
of a lost cheque is not a holder. Further, if a person takes a cheque either
under a forged or invalid endorsement, then such as a person cannot be
treated as a holder. In case a promissory note, Bill of exchange or a cheque is
lost in transit, then the holder at that time of such happening has the right
to receive payment on such instruments. (Sec 8 of NI Act 1881). A holder need
not have the actual possession; he/she must be entitled to the possession of
a Negotiable Instrument. A holder is also entitled to obtain a duplicate
instrument if original is lost. He/she can cross the uncrossed cheque or
convert the ordinary (general crossing) into special crossing. He/she has the
legal right to sue in his or her own name. Simultaneously he/she can also be
sued by others.
Sec 9 of NI Act, 1881 deals with the Holder in Due Course aspect. Holder in
due course- definition is - one other than the original recipient who holds a
legally effective negotiable instrument. As per Sec 36 of NI Act 1881, each and
every prior party to a negotiable instrument is liable to the holder in due
course till the liability is discharged. For a “Holder in Due Course”, the
consideration is an essential aspect. Whereas for a “Holder”, consideration is
not a necessity. For a “Holder in Due Course”, the possession should be before
it becomes due. Whereas for a “Holder”, the possession may be even after the
maturity.
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The “bearer” cheques are transferred by way of mere delivery. However “order”
cheques require additional action of endorsement. It means that without
endorsement, an “order” cheque cannot be transferred. For order cheques,
the first step is endorsement which is to be followed by delivery, only then the
transfer of title is completed.
5.5.7 Important Aspects of Endorsements
Endorsement means “writing on the back of the instrument.” But under the
Negotiable Instruments Act, it means “writing of a person’s name on the back
of the instrument or on any paper attached to it for the purpose of negotiation,
i.e., for making the payment.” The one who signs the instrument for the
purpose is called the ‘endorser’. The person to whom the instrument is
endorsed or transferred is called “endorsee.”
The important aspects of endorsement are as follows:
a. It has to be in writing. Generally, it is done on the reverse (back side) of

the cheque, although endorsement on the face of the instrument is not
prohibited.
b. In case there is no sufficient space for further endorsements, the same
can be effected by attaching a piece of paper to the instrument. The
attached paper is known as “allonge”. In that case, while effecting
further endorsements, a portion of endorsement should appear on the
cheque and the other portion on the allonge.
c. For bearer instruments, transfer of title could be effected by way of mere
delivery. Hence the endorsements do not carry any importance for
bearer instruments.
d. For order instruments, title could be transferred only by endorsement,
followed by delivery. In other words without proper endorsements, title
(ownership) on an order instrument cannot be transferred (shifted).
e. Endorsement of a negotiable instrument supported by delivery
transfers the right on the property to an endorsee. He/she has the right
to negotiate further.
f. By affixing a mere signature on the reverse of the instrument without
mentioning any one’s name is known as blank endorsement (Sec 16)
g. Any one of drawer, payee or holder can endorse. There are no
restrictions to the number of endorsements.
h. Endorsements may or may not have dates as dating of an endorsement
is not a pre-condition but is optional.
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i. If more than one endorsement appear, then the paying banker has to
ensure the regularity of the endorsements, according to the order, in
which they appear on the instrument , unless proved contrary,
j. Full endorsement has a direction to pay to a specified person (whose
name is mentioned) or his/her order, above the signature of the
endorser. By doing so the endorser indicates his/her clear intention
that to whom the money has to go. (sec16)
k. Further endorsements are restricted [Restrictive endorsement (sec 50)].
Otherwise the endorser specifically mentions name of the person who
has to receive. Examples are: Pay to Mr. Radhakrishnan only. Further
transfer not possible in this case since it is a restrictive endorsement.
When an endorser transfers only a part of the amount of the NI to the
endorsee, it is known as partial endorsement. This is not considered as
valid negotiation. (sec56)
l. When an endorsement contains any condition, then it is called
conditional endorsement. The condition may be on the happening of a
certain event. It could be that the endorser would not like to take the
responsibility of paying (i.e. without recourse) in the event of
nonpayment (dishonour) (sec 52). Sans Recourse (without liability)
endorsement is more or less similar to conditional endorsement (Sans
means without). Here the endorser specifically makes others know
about his/her intention, that in case of any developments, he/she
would not take the responsibility (liability). One has to be careful while
dealing with such kinds of endorsements. For example: Pay to Mr. John
or order sans recourse to me.
m. If the endorser waives the right to give notice of non-payment
(dishonour) when he/she is supposed to give such notice, then it is
called facultative endorsement. However, he/she is liable to the
endorsee in case of dishonour. For example: Pay to Mr. Sen or order.
Notice of dishonour waived (signed by the endorser).
n. If the endorsements on the cheque are regular then the paying banker
is protected even if the endorsements are forged.
o. The banker has to check that the endorsements are proper and
representing their position / official capacity wherever applicable. For
example: A Director of the company or authorized person, who has to
endorse on behalf of the company, should sign if the endorsement is
done for the company. A trustee has to endorse in the capacity of a
trustee or a partner has to represent the firm while endorsing on behalf
of the partnership firm, etc.
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5.5.8 Return of Cheques or bouncing of Cheque
The circumstances under which a cheque is returned by a banker (called as

bouncing of a cheque):
a. Date: A stale cheque and a post dated cheque should not be honored.
For example: 1. A has issued a cheque dated 23rd September of last year.
Since it has already completed 3 months from the date of issue (cheque’s date)
it is now known as a ‘stale cheque’ and cannot be paid. It may be returned
with the reason ‘stale cheque’ by the drawee or paying banker to the collecting
banker.
2. Q has issued a cheque bearing a date of 7th of next month and but bank
has received this cheque on the 27th of this month. This is called a post dated
cheque. This should be returned with the reason “Post dated cheque”.
An ‘ante dated cheque’- the cheque having earlier date- for example if today
is 21st July and Cheque is dated 10th July- it is ‘ante-dated’- meaning before
today’s date. It may be paid provided the cheque is otherwise in order and the
account has sufficient balance. However, if an ante dated cheque has become
a stale one, as it is older than three months, then it cannot be paid.
For examples: D has issued a cheque dated 22nd of last month and bank
received the cheque for payment on 17th of this month. Though it is ante
dated, but it is not stale as it has not completed three months from the date
of the cheque, hence the same could be paid.
b. Words and Figures: If the words and figures do not match, generally
the paying banker/s would return such cheque/s with the reason
“words and figures differ”. However, as per the provisions of NI Act,
1881, the banker may consider paying the said cheque relying on the
amount mentioned in words. Thus the paying banker has to act
prudently.
c. Bearer or order: If the word bearer appears on the cheque, the same
would be paid provided the other aspects have been given due
importance. In case of an order instrument, the paying banker has to
ensure the regularity of the endorsements appearing on the reverse of
the cheque.
d. Crossing: If the cheque is crossed then the drawee bank need not make
cash payment or payment over the counter. If the cheque has an
‘Account Payee’ crossing, then the paying banker has to ensure that the
payment goes only to the person named as payee on the cheque and
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not to any other person. In such cases the endorsements on the reverse
of an ‘Account payee’ crossed cheque will not have any meaning.
If the cheque bears ‘special’ crossing, then the collecting bank should
be the bank whose name appears in the crossing. In case if two
crossings of different banks appears on the cheque, then the paying
bank has to return the cheque with the reason “cheque crossed in
favour of more than one bank”.
However, if one bank collects on behalf of the other bank as their agent,
then the paying banker can make the payment.
e. Material Alteration: If some alteration is done on the cheque and it is

not supported by the drawer’s full authentication,(signature) , then the
drawee bank can return the cheque with the reason “Material Alteration
requires drawer’s confirmation”.
Alterations as to date, payee’s name, amount in words and figures,

canceling of crossing, changing from ‘order’ to ‘bearer’ amount to
material alteration.
For example:
o Payee’s name is scored off and above it, another name is written.
o Date has been mentioned as 18th of June of a particular year

which is struck and re-written as 18th of April that year.
o Figures has been mentioned as Rs.1100 and cancelled then

inserted as 11011/-
o Cheque crossed ‘Account payee’ is cancelled and made as a

general crossing.
o If cheque originally printed as bearer was cut and written as

order, is again been changed into bearer by cutting the word
Order.
In all the above mentioned cases, if the drawer’s authentication is not

appearing with his/ her full signature, then the paying banker has to
return the cheque with the reason “Material alteration not
authenticated by the drawer”.
f. Signature Differs: While opening the bank account, the customer is

required to lodge (give) his/her signature. This is not only essential but
also vital. The bank will be carrying out the instructions of the customer
based on such signature only. It is called Mandate. If the signature on
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the cheque varies (differs) with that of the one lodged with them, then
the banker has to return the cheque with the reason “Drawer’s
signature differs”.
If the signatures on the cheque are forged, the banker cannot have the
mandate to debit the account of the customer and make the payment.
Forgery will not confer any right. In case the banker pays a cheque
bearing a forged signature, the banker will not get any protection.
g. Mutilated cheque: If a cheque is torn or mutilated, then the collecting

banker has to give his/her certificate on the reverse of the cheque
stating “Mutilation Guaranteed”. Otherwise, the paying banker has to
return the cheque asking for such a certificate from the collecting
banker.
h. Effects not cleared/ insufficient balance, please present again: At

times when the cheque is received by the drawee bank, there may not
be sufficient balance to meet the cheque amount but the account holder
might have given some other cheque/s for collection in his account
where payment is expected by the bank. In such cases, the paying bank
has the discretion to return the cheque with the reason either
‘Insufficient balance’ or ‘Effects not cleared, please present again’.
a. For example: R is the customer of bank T. He has given a cheque

on last Friday for collection (local clearing) for Rs. 22000/- which
his banker has sent in clearing. Before receipt of the money on
the cheque , the cheque issued by R favoring F has been received
from Bank O (collecting bank) by bank T (paying bank) on
immediate Monday for Rs.18000/-. At that time, the balance in
T’s account is Rs. 2000/- only. If the bank decides to return the
cheque, they may use the reason “Effects not cleared, please
present again” to the collecting banker. However, this type of
‘reason’ does not confer responsibility on the banker for making
payment of the cheque when it is presented again.
i. Stop Payment: If the drawer of the cheque has given instructions to

his/her banker to ‘Stop Payment’, i.e., not to honor a particular cheque
and the banker has noted the same in the records, then the bank will
dishonor the cheque as per his/her request, if received in clearing or
otherwise.
a. For example: A cheque has been issued by E, customer of Bank

L for Rs.2000/- favoring one J. After issuing the cheque E
approached his banker L and requested them not to make
payment on the said cheque. He gives a written request for the
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purpose, which is duly acknowledged by his banker L and
registered. When subsequently Bank L receives the cheque from
Bank T (Banker for J), Bank L is bound to return the cheque with
the reason “Payment Stopped”.
j. Refer to drawer: There may be certain circumstances, and

developments which cannot be revealed to any other person other than
drawer. In such cases, the banker has to use the reason “Refer to
Drawer”
a. For example: A bank has received an attachment order for

his/her customer’s account from the Court or Appropriate
Government Department. Under such circumstances, balance in
the account is frozen and if the cheque is presented for payment,
the banker has to return the cheque with the reason “Refer to
Drawer”.
k. Death of the customer: In case of individuals including joint

depositors, if an account holder expires then the cheque issued earlier
with his/ her signature (while he/she was alive) cannot be paid and the
bank has to return such cheques.
a. For example: B has issued a cheque in favor of H last month on

8th, received by his bank U on 7th of this month from Bank M
(H’s banker). Unfortunately on 6th of this month B had died. Then
Bank U has to return the cheque to collecting banker M with the
reason “Drawer Expired”. It should be written on the face of the
cheque in RED ink to avoid misuse.
l. Insufficient funds: As per the provisions of NI act, it is the duty of the

drawer to keep sufficient funds in his/her account before issuing a
cheque. Or, a proper arrangement with the banker should have been
made in this regard so that the cheque is honoured.
In case at the time of receiving the cheque by the drawee, if sufficient

funds are not available (or no proper arrangement of funds made) then
the bank has to return the cheque. Previously, banks were returning
such cheques with the reason “Refer to Drawer”. But now with the
amendment in NI Act, the term “Insufficient funds” is being used in
such cases. Section 138 to 142 stipulate that return of cheque with
insufficient fund is a criminal offence. Punishment is also there for such
persons whose cheques are returned for the above reason. Some of its
important aspects are:
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a. The maximum imprisonment has been extended to a term of 2 years
from the original 1 year.
b. Time for giving notice by the payee or the holder in due course of the
cheque to its drawer has been increased to 30 days (from the
original 15 days).
c. Court has been given the power to condone the delay, if the
complainant satisfies the Court that he/she had sufficient cause for
not making a complaint within prescribed period.
d. Bank’s slip/ memo bearing official mark denoting that cheque has
been dishonoured shall be the prima facie evidence for such
dishonour and Bank’s officials will not be called for evidence, unless
absolutely necessary.
e. If an account is closed and after that the cheque is received, then

the bank has to give two reasons, if applicable.
For example: X has issued a cheque in favor of Y for Rs.16189/-

Before the receipt of the cheque X had closed the account and
received the balance amount of Rs.770/- which was there in the
account at the time of closure. After two days the said cheque for
Rs.16189/- has been received by X’s bank from Y’s bank. Then X
bank has to return the cheque with the reason “Insufficient funds &
Account since closed”.
This is mainly to protect the interest of the payee and enable him/her to
proceed against X based on the provisions of relevant sections of NI Act,
otherwise the purpose will be defeated and the customers will take undue
advantage by closing their accounts, after issuing cheques to avoid criminal
liability.
m. Section 138 : Dishonour of cheques for insufficiency, etc., of funds

in the account
This is a very important section of NI Act for bankers and relates to dishonour
of cheque due to insufficiency of funds in the account. It has been reported
that almost 20% of all the cases in courts relate to this issue. The Section
states that- ‘Where any cheque drawn by a person on an account maintained
by him with a banker for payment of any amount to another person from that
account for the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of money standing
to the credit of that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement
made with that bank, such person shall be deemed to have committed an
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offence and shall, without prejudice to any other provision of this Act, be
punished with imprisonment for a term which may be extended to two years,
or with fine which may extend to twice the amount of the cheque, or with
both’. This is however, subject to 3 conditions:
i. The cheque has been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier;
ii. The payee makes a demand for the payment of the said amount of
money by giving a notice; in writing, to the drawer of the cheque within
thirty days of the receipt of information by him from the bank regarding
the return of the cheque as unpaid; and
iii. The drawer of such cheque fails to make the payment of the said
amount of money to the payee within 15 days of the receipt of the said
notice.
5.5.9 Special instruments- Demand Draft and Banker's cheque
Demand Draft: The Demand Draft is a pre-paid Negotiable Instrument,

wherein the drawee bank undertakes to make payment in full when the
instrument is presented by the payee for payment. The demand draft is made
payable on a specified branch of a bank. In order to obtain payment, the
beneficiary has to either present the instrument directly to the branch
concerned or have it collected by his/ her bank through the clearing
mechanism to his/her account.
Banker's cheque: The banker’s cheque is another payment instrument which

is used by banks to settle payment obligations on behalf of their customers.
This instrument is guaranteed by the bank for its full value and is similar to
a demand draft. In practice, these instruments are payable at the branch of
issue and were used for payment within the local clearing jurisdiction but
with the system of ‘at par cheque system’ and the core banking solution based
banking, that issue is no more relevant as the cheques can be collected from
any branch of the bank. All banker's cheque are pre-printed with "NOT
NEGOTIABLE".
5.5.10 Paying Banker – Duties and Responsibilities
The NI Act serves as an important base for the bankers to carry out their day
to day banking functions. Since the bankers are dealing with the Negotiable
Instruments like cheques regularly, both the paying banker as well as the
collecting banker will have to attach lot of importance to the provisions of this
Act.
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The paying banker should take the following aspects in account while making
payment of cheques:
Section 10 – Payment in due course.
According to sec 10, “Payment in due course means payment in accordance

with the apparent tenor of the instrument in good faith and without negligence
to any person in possession thereof under circumstances which do not afford
a reasonable ground for believing that he/she is not entitled to receive
payment of the amount therein mentioned”.
The important components of Sec 10 are:
a. Making payment: A cheque is a bill of exchange drawn on a specified

banker payable on demand. As such paying cheque is one of the
primary jobs of the banker. While making payment on a cheque,
he/she has to follow the directions given by the drawer. Adequate care
is to be taken while paying a cheque so as to protect the drawer’s
interest as well as that of the bank.
b. Apparent Tenor: Apparent tenor means that whatever is appearing on

the cheque should be visible with naked eyes. The directions appearing
on the face of the instrument (cheque) and the contents on the reverse
of the instrument (cheque) should be seen properly. The instructions
may be related to the payee’s name, as to the date, (its validity), bearer
or order, cheque amount (words and figures), crossing, etc. It is to be
seen that the alteration on the cheque are properly authenticated and
endorsements if any as appearing on the back of the cheque are regular.
When a cheque is crossed and cash payment is made over the counter
or a cheque is postdated and paid before the date or there is a material
alteration not supported by the drawer’s signature is paid, it will not be
payment in due course, since the paying banker ignored the apparent
tenor of the respective cheques.
c. ‘Good faith and without negligence’: Acting in ‘Good faith and

without negligence’ means that the paying banker has to discharge
his/her duty diligently and he/she should act in good faith. Since the
account holder (drawer) has kept his/her money with the paying
banker, he/she has every right to expect from the paying banker to
carry out his/her instructions properly. The faith reposed by him/her
should not be destroyed. Good faith means displaying honesty, while
carrying out the role of the paying banker. If a bearer cheque for a huge
amount is received on the counter and the person who has presented
appears to be a man of very small means, it is the duty of the bank
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(drawee) to refer the matter to the drawer and after making
proper/satisfactory enquiry, he/she has to make the payment. A
prudent banker has to take enough care to protect the interest of
his/her customer. Good faith is shown by action when the banker acts
without negligence. Both ‘Good faith and without negligence’, many a
times go together. If the banker acts negligently, the customer (drawer)
may have to lose his/her money and also reputation. Hence, a paying
banker has to ensure that the payment is made without negligence. The
negligence of the bank depends on the circumstances of each case.
For example: An account holder (drawer) had issued a cheque for

Rs.22750/- in favour of the dealer. After issuing the said cheque, the
drawer has given stop payment instructions. He/she has requested the
banker (drawee) not to honour the subject cheque. The banker gave
acknowledgement for the stop payment instructions. However, when
the cheque was presented through clearing, the banker has paid it, in
spite of the stop payment instructions. Here the banker has acted
negligently and hence he/she is responsible to the drawer.
d. Payment to a person in possession: The banker has to make the

payment of the cheque to the payee or the holder or the holder in due
course. While making payment, it is the duty or responsibility of the
drawee banker that payment is made to the correct receiver. In respect
of ‘order’ instrument, the payment has to be made after proper
identification of the payee or the endorsee. If it is a bearer instrument,
a reasonable care has to be shown while making payment to the right
person.
e. Not entitled to receive: Bank should ensure that the person who is
mentioned to receive (payee or holder or holder in due course or
endorsee) is the genuine and bona-fide person who is really entitled to
receive the payment of the cheque. The paying banker has to make
discreet enquiries wherever required to satisfy that the payment is not
going to the wrong person (who is not entitled to receive.)
f. The payment in due course: is applicable to any type of payment viz.,

cash payment (over the counter) or payment through an account or
through another bank. In short, the drawee (paying banker) has to
prove that the payment made is a payment in due course relying on the
contents of Sec10 of NI Act. The paying banker cannot act in a casual
manner.
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Sec 31 - Paying Banker’s Liability
The paying banker is expected to act on the instructions of the customers.

For this, the customer has to keep enough balance in his/her account to make
payment of the cheque issued by him/her. If sufficient balance is not in the
account to meet the cheque’s payment, the banker is justified in dishonoring
the said cheque (returning). On the other hand, when sufficient balance is
available, then the banker has to pay the cheque when received (either cash
payment or through account/bank) provided the said cheque is otherwise in
order. In the case of wrongful dishonour, paying banker will have to
compensate the drawer for any loss or damage caused by such default. The
banker need not make payment when:
a. Stop payment instructions for the said cheque has been accepted and
noted.
b. The intimation about the drawer’s death is received by the bank
(drawee).
c. The funds are attached by the court or the government (by way of
garnishee order/ income tax etc.,) and balance amount is insufficient
to make payment.
f. The account shows balance but cannot be utilized on account of the
fact that the same has uncleared items and funds are set aside for
particular purpose.
g. The funds are set off by the bank.
h. Cheque amount in words and figures differ. In such instances, as per
sec 18 of NI Act 1881, amount written in words to be relied upon as
compared to the figures. This is on account of the belief that the time
taken for writing in words is more as compared to writing the figures.
The banker has to act as prudently.
i. If the cheque is presented beyond banking hours the same may be
returned.
5.5.11 Collecting banker- duties and responsibilities
The collecting banker (who receives payment), collects various instruments

like cheques, dividend warrants, promissory notes, bills of exchange, and
others for and on behalf of his/her customers.
Sec 131 of the NI Act provides protection to the collecting banker if he/she
collects crossed cheques, generally or specially for a customer in good faith
and without negligence and ensures that the customer for whom he/she
collects is entitled to receive payment on such a cheque.
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To get protection under Sec 131, the banker has to comply with the following:
a. Collection of crossed cheques: The cheques should have been crossed,

when the bank receives it for collection. It means crossing has to be
done by the drawer or holder and not by the collecting banker.
b. Collection for Customers: The banker has to collect cheques for its
customers only. If the bank collects for a non-customer (who is not
his/her account holder nor the account opened without proper enquiry)
then the protection under section 131 is not available. This is very
important.
c. In good faith without negligence: The collecting bank has to act in good
faith. It should also take adequate precaution and ensure that the
interests of the true owner of the cheque are not affected.
Further, it is the duty of the Collecting Banker to present the cheque within
a reasonable time. Otherwise he/she will be liable to compensate the loss if
any, incurred by the customer on account of delay (collecting banker’s delayed
presentation amounting to his/her negligence). Again, it is the duty of the
bank to intimate about the non-receipt of money on the instrument presented
by it. It is the responsibility of the Collecting banker to credit the proceeds so
collected without any delay. Wherever the instant credit facility is applicable,
it is the duty of the collecting banker to offer such facility without fail.
Local usage prevails unless excluded: The Act does not affect any local
usage relating to any instrument in an oriental language. However, the local
usage can be excluded by any words in the body of the instrument, which
indicate an intention that the legal relations of the parties will be governed by
provisions of Negotiable Instruments Act and not by local usage. Thus, unless
specifically excluded, local usage prevails, if the instrument is in regional
language.
Bill of Exchange and Promissory Notes excluded from Information

Technology Act: Section (1)(4)(a) of Information Technology Act provides that
the Act will not apply to Bill of Exchange and Promissory Notes. Thus, a Bill
of Exchange or Promissory Note cannot be made by electronic means.
5.5.12 Changes made by Amendment to the Act in 2002:
The important changes made by Amendment to the NI Act in 2002, made

effective from 2003, were as under:
• Definition of ‘cheque’ and related provisions in respect of cheque

amended to facilitate electronic submission and/or electronic
clearance of cheque. Corresponding changes were also made in
Information Technology Act.
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• Returning of Cheques - Provisions amended
• Provision for imprisonment increased from one year to two years.
• Period for issuing notice to drawer increased from 15 days to 30
days.
• Government Nominee Directors excluded from liability.
• Court empowered to take cognizance of offence even if complaint
filed beyond one month.
• Summary trial procedure permitted for imposing punishment up to
one year and fine even exceeding Rs 5,000.
• Summons can be issued by speed post or courier service.
• Summons refused will be deemed to have been served.
• Evidence of complainant through affidavit permitted.
• Bank’s slip or memo indicating dishonour of cheque will be prima
facie evidence unless contrary proved.
• Offence can be compounded.
5.5.13 Changes made by Amendment to the Act in 2018
The Central Government through The Negotiable Instrument (Amendment)

Act, 2018 has notified amendments to the NI Act aimed at addressing the
issue of undue delay, efficacy and efficiency in cases related to dishonor of
cheques. Following are the main amendments in 2018:
Section 143A: Power to Direct Interim Compensation: A new section -
Section 143A has been inserted in the Act which empowers the Court while
trying an offence under Section 138 of the NI Act, to direct the drawer of the
cheque to pay interim compensation to the complainant. The intent behind
this provision is to provide aid to the Complainant during the pendency of the
proceedings under Section 138 of the NI Act. The quantum of such interim
compensation would be up to 20% of the amount of the cheque. If the Drawer
is found guilty under Section 138, the amount of interim compensation would
be deductible from the final compensation payable to Complainant. In case of
his acquittal by the Court, the Court shall order the Complainant to return
the amount of interim compensation to the Drawer within a period of 60-90
days along with interest thereon.
Section 148 – Power of Appellate Court to Order Payment Pending Appeal
against Conviction:
The amendment inserted another new section, i.e section 148 in the NI Act,
for cases where an appeal is filed against conviction of the drawer under
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Section 138 of NI Act. It provides that the Appellate Court may order the
Appellant to deposit such sum which shall be a minimum of twenty percent
of the fine or compensation awarded by the trial court.
It may be seen from above that the consequences of dishonour of a cheque for
insufficiency of funds in the account is an important development in the field
of banking. As per the relevant provisions of Sec 138 of the NI Act, it attracts
both civil and criminal liabilities on the part of the person who issues the
cheques without sufficient funds, thus an aggrieved party can file a civil as
well as criminal case for this matter.
Negotiable instruments, especially cheques, play an important part in trade

and other financial transactions and therefore are the backbone of the
economy. As bankers’ role is very crucial in these transactions, every banker
needs to know the significance of the important provisions of the Negotiable
Instruments Act, 1881. Although the Act is over 140 year old, it continues to
be relevant today and it is heartening to find that the Government has
amended the Act multiple times to keep pace with the changes in the
technology and the needs of the economy. Also the reasons for which the
banks generally return the cheques on account of technical and legal issues
assume significance. A banker acts as a Collecting and Paying banker, thus
attracts certain duties and responsibilities. A banker needs to be aware of all
these matters for effective and efficient service to the clients.
5.5.15 Key words
Negotiable instruments, Negotiable Instruments Act 1881, Promissory Note,

Bill of Exchange, Cheque, Endorsement, Bearer, Order, Return of Cheques,
Insufficient Funds, Payment in due course, Paying Banker, Collecting Banker,
Crossing, Consideration, Allonge, Account Payee, Demand Draft, Bankers
Cheque
State True or False
(1). It is the duty of the drawer to keep sufficient balance in the account before
issuing a cheque.
(2). If the cheque is mutilated then the paying bank has to give a certificate.
(3) “Not Negotiable crossing along with the Account payee mention” is a
general crossing.
377
(4). A bill of exchange to contain an unconditional undertaking to pay a
certain sum of money to certain person or to his/her bearer or to his/her
order for consideration.
(5). A cheque above Rs.500/- value now need not be stamped.
(6). After depositing the cheque in his/her favour in his/her bank, the payee
expired. Then the paying bank need not pay if the cheque has been presented
in clearing.
(7). If 3 cheques are received in clearing for Rs.1000/=,Rs.4467/= and

Rs.3589/= respectively and they are otherwise in order the banker has to
honour them when the balance in the account is Rs11244/-
(8) All cheques are bills of exchange but all bills of exchange are not cheques.
(9) Section 6 of Negotiable Instrument Act deals with return (bouncing) of

cheque due to insufficiency of funds
(10) Validity of cheque is 12 months from the date mentioned on it
Key to check your progress
(1). True (2) False (3) True (4) False (unconditional order)
(5) True (6) False (7) True (8) True (9) False (10) False (3 months)
(1) NI Act was passed in the year
(a).1947
(b) 1949
(c) 1857
(d) 1881
(2) CTS in banking means
(a) Cheque Truncation System
(b) Cash Transfer System
(c) Cheque Transfer System
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(3) The stop payment instruction to be given by
(a) drawer
(b) third party
(c) endorser
(d) none
(4) In a cheque the name of the payee has been struck and a new name is
inserted.
(a) it is not a material alteration
(b) it is a material alteration
(c) requires the authentication of the drawer
(d) both b & c
(5) A cheque has been wrongly returned when there has been sufficient
balance in the account with the reason “insufficient funds”
(a).collecting banker is not responsible
(b) paying banker is responsible
(c) it amounts to negligent of the drawee
(d) all
(6) The reverse of the cheque is filled with endorsements. The endorsee wish
to endorse further and there is no space. Then he/she can
(a) use another fresh cheque
(b) use an allonge
(c) not endorse further
(d) none
(7) The person who is entitled to receive payment of the cheque is called:
(a) Drawee
(b) Payee
(c) Drawer
(d) none of the above
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(8) The person who is account holder and issues cheque for payment to
another person is called.
(a) Drawee
(b) Payee
(c) Drawer
(d) Holder in due course
(9) The banker on whom the cheque is drawn is called:
(a) Drawee
(b) Payee
(c) Drawer
(d) none of the above
(10) As per Section 6 of NI Act, the Cheque means a physical bill of exchange
(cheque leaf) as well as::
(a) Internet image on Bank website
(b) Social media image of the account holder
(c) Electronic image of a truncated cheque
(d) Photocopy of the cheque
(1) d (2) a (3)a (drawer only) (4) d
(5) d (6) b (7) a (8) c (9) a (10) c
Khergamvala, J.S.; Parthasarathy, Madapusi Sankarampadi (1980) The

negotiable instruments act : Act XXVI of 1881
The Negotiable Instruments Act, 1881- Bare Act available at
www.indiacode.nic.in
RBI website: https://m.rbi.org.in/scripts/PublicationsView.aspx?id=156
Padmalatha Suresh and Justin Paul (2018) Management of Banking and
Financial Services, 4th Edition, Pearson.
IIBF (Indian Institute of Banking and Finance) (2008) Principles and Practices
of Banking, IIBF, Mumbai
380
5.6 Lesson No. 6 The Right to Information Act, 2005
5.6.1 Objective
5.6.2 Introduction
5.6.3 Applicability
5.6.4 Features
5.6.5 Powers
5.6.6 RTI Rates
5.6.7 Exclusions
5.6.8 Role of Government
5.6.9 Let Us Sum Up
5.6.10 Key words
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5.6.1 Objectives
The objectives of this unit are to enable you to describe:
• Salient features of the Right to Information Act, 2005.
• Its application to banks and financial institutions
5.6.2 Introduction and objective of the Act
The Right to Information Act 2005 (RTI) is an Act of the Parliament of India
and is applicable to whole of India to “provide for setting out the practical
regime of right to information for citizens." It replaced the former Freedom of
Information Act, 2002.
It has been enacted to provide a right for citizens to secure access to

information under the control of public authorities, in order to promote
transparency and accountability in the working of every public authority. It
led to constitution of a Central Information Commission and State
Information Commissions for matters connected therewith or incidental
thereto. These Acts also help in reducing corruption and malpractices in the
society.
The ‘Right to Know’ has been a public demand in several countries and in
response, the Governments in over 80 countries have enacted legislations or
laws to provide open access to the information. In view of the openness as
against secrecy, these laws (Called as Freedom of Information- ‘FOI’ Laws in
some countries) are popularly called ‘Sunshine laws’ also.
The basic objective of the Right to Information Act is to empower the citizens,
to promote transparency and accountability in the working of the
Government, to contain corruption, and to enhance people’s participation in
democratic process thereby making our democracy work for the people in a
real sense. An informed citizen is better equipped to keep necessary vigil on
the instruments of governance and make the government more accountable
to the people of the country. The Act is a big step towards making the citizens
informed about the activities of the Government.
5.6.3 Features
Under the provisions of the Act, any citizen may request information from a
"public authority" (a body of Government or "instrumentality of State") which
is required to reply expeditiously or within thirty days. In the categories of
‘Public Authority’, private organizations and cooperative banks are not
included explicitly. RBI also had confirmed in 2013 that cooperative banks
382
are not covered under RTI34. Even Supreme Court, in a case of Kerala
(Thalappalam-Cooperative -vs- State-of-Kerala), gave a decision that the
“Cooperative Societies registered under the Kerala Co-operative Societies Act
will not fall within the definition of “public authority” as defined under RTI
Act35. However, in 2017, Aurangabad bench of the Bombay High Court gave a
ruling in a case that everything which is mentioned in the definition of
information as per RTI Act needs to be provided by the cooperative
institutions. The High Court observation came in response to a petition filed
by the Association of Jalgaon Zilla Urban Cooperative Banks, Credit Societies
and others36. Though there is confusion, but it is quite possible that the
cooperative banks will have to abide by the RTI norms in future. This situation
makes study of RTI Act more important for the staff of cooperative banks.
The Act also requires every public authority to computerize their records for
wide dissemination and to proactively publish certain categories of
information so that the citizens need minimum recourse to request for
information formally.
This law was passed by Parliament on 15 June 2005 and came fully into force
on 13 October 2005. Information disclosure in India was hitherto restricted
by the Official Secrets Act 1923 and various other special laws, which have
been relaxed by the RTI Act.
5.6.4 Powers under the Act
The Act empowers every citizen to:
i. Ask any questions from the Government or seek any information.

ii. Take copies of any governmental document.
iii. Inspect any governmental document.
iv. Inspect any Governmental work.
v. Take samples of materials of any Governmental work.
Power to make rules
The Central Government, State Governments and the Competent Authorities

as defined in S.2 (e) are vested with powers to make rules to carry out the
provisions of the Right to Information Act, 2005. (S.27 & S.28)
34
RBI(2013) quoted in Business Standard dated 5 Feb.2013. Weblink: https://www.business-
standard.com/article/finance/co-op-banks-not-covered-by-rti-act-says-rbi-107042501107_1.html
35
https://righttoinformation.wiki/important-decisions/thalappalam-coop-vs-state-of-kerala
36
Times of India, 02 March 2017, Weblink: https://timesofindia.indiatimes.com/city/aurangabad/co-op-bodies-come-
under-rti-ambit-hc/articleshow/57418281.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
383
Residuary powers
If any difficulty arises in giving effect to the provisions in the Act, the Central
Government may, by Order published in the Official Gazette, make provisions
necessary/expedient for removing the difficulty. (S.30)
5.6.5 Process
Under the Act, the Central Government and State Government can constitute
a body called the Central Information Commission and the State Information
Commission respectively. Under the Act, all the authorities covered must
appoint their Public Information Officer (PIO). Any person may submit a
request to the PIO for information in writing. It is the PIO's obligation to
provide information to citizens of India who request information under the
Act. If the request pertains to another public authority (in whole or part), it is
the PIO's responsibility to transfer/forward the concerned portions of the
request to a PIO of the other authority within 5 working days. In addition,
every public authority is required to designate Assistant Public Information
Officers (APIOs) to receive RTI requests and appeals for forwarding to the PIOs
of their public authority. The applicant is not required to disclose any
information or reasons other than his/her name and contact particulars to
seek the information. Online systems have been created by GoI and state
governments which facilitate the filing of RTI applications online. For example
“https://rtionline.gov.in” is for Government of India and
“https://rtionline.maharashtra.gov.in” is for Maharashtra state government.
It aims primarily at minimizing the time taken and effort required in filing an
application. The Act specifies time limits for replying to the request:
i. If the request has been made to the PIO, the reply is to be given within
30 days of receipt.
ii. If the request has been made to an APIO, the reply is to be given within
35 days of receipt.
iii. If the PIO transfers the request to another public authority (better
concerned with the information requested), the time allowed to reply is
30 days but computed from the day after it is received by the PIO of the
transferred authority.
iv. Information concerning corruption and Human Rights violations by
scheduled Security agencies (those listed in the Second Schedule to the
Act) is to be provided within 45 days but with the prior approval of the
Central Information Commission.
v. However, if life or liberty of any person is involved, the PIO is expected
to reply within 48 hours.
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vi. Provision for appealing is also available under the Act.
Since the information is to be paid for, the reply of the PIO is necessarily
limited to either denying the request (in whole or part) and/or providing a
computation of "further fees". The time between the reply of the PIO and the
time taken to deposit the further fees for information is excluded from the
time allowed. If information is not provided within this period, it is treated as
deemed refusal. Refusal with or without reasons may be ground for appeal or
complaint. Further, information not provided in the time prescribed is to be
provided free of charge. For Central Govt. Departments as of 2006, there is a
fee of Rs.10 for filing the request, Rs. 2 per page of information and Rs.5 for
each hour of inspection after the first hour. If the applicant is a Below Poverty
Line Card holder (BPL), then no fee shall apply. Such BPL Card holders have
to provide a copy of their BPL card along with their application to the Public
Authority. States Government and High Courts fix their own rules.
5.6.6 RTI Fee Rates
1. Application Fee
The application for obtaining information under sub-section (1) of section

6 of RTI Act, 2005, must be accompanied by prescribed application fee.
Application fee: Rs. 10/- (Rupees ten only) (Subject to change).
Mode of payment: By cash against proper receipt or by demand

draft/banker's cheque/Indian Postal Order drawn in favor of the Public
Authority, payable at local office where the application is submitted.
Persons who belong to BPL category are not required to pay the application
fee provided necessary documents in support are produced.
2. Additional Fee
In case it is decided to provide the information, the applicant shall be

informed of the additional fees required to be deposited by him/her for the
information sought. The information shall be furnished after the deposit of
the fee by the applicant, as per the Act. In accordance with the directives
given in the above mentioned Gazette notification dated 16/09/2005, for
providing the information under sub-section (1) of Section 7, an additional
fee shall be charged. The additional rates will be applied-
a) For each page (in A-4 or A-3 size paper) created or copied
b) For a copy in larger size paper
c) For samples or models
d) For inspection of records

385
The mode of payment of additional fees shall be the same as application fee.
5.6.7 Exclusions
Organizations/departments excluded from RTI
Central Intelligence and Security agencies specified in the Second Schedule

like IB, Directorate General of Income Tax Investigation, RAW, Central Bureau
of Investigation (CBI), Directorate of Revenue Intelligence, Central Economic
Intelligence Bureau, Directorate of Enforcement, Narcotics Control Bureau,
Aviation Research Centre, Special Frontier Force, BSF, CRPF, ITBP, CISF,
NSG, Assam Rifles, Special Service Bureau, Special Branch (CID), Andaman
and Nicobar, the Crime Branch-CID-CB, Dadra and Nagar Haveli and Special
Branch, Lakshadweep Police are excluded from disclosures. Agencies
specified by the State Governments through a Notification will also be
excluded. The exclusion, however, is not absolute and these organizations
have an obligation to provide information pertaining to allegations of
corruption and human rights violations. Further, information relating to
allegations of human rights violation could be given but only with the approval
of the Central or State Information Commission.
Information Exclusions
The following types of Information are exempt from disclosure:
1. Information, disclosure of which would prejudicially affect the

sovereignty and integrity of India, the security, "strategic, scientific or
economic" interests of the State, relation with foreign State or would
lead to incitement of an offense;
2. Information which has been expressly forbidden to be published by any
court of law or tribunal or the disclosure of which may constitute
contempt of court;
3. Information, the disclosure of which would cause a breach of privilege
of Parliament or the State Legislature;
4. Information including commercial confidence, trade secrets or
intellectual property, the disclosure of which would harm the
competitive position of a third party, unless the competent authority is
satisfied that larger public interest warrants the disclosure of such
information;
5. Information available to a person in his/her fiduciary relationship,
unless the competent authority is satisfied that the larger public
interest warrants the disclosure of such information;
6. Information received in confidence from foreign Government;
386
7. Information, the disclosure of which would endanger the life or physical
safety of any person or identify the source of information or assistance
given in confidence for law enforcement or security purposes;
8. Information which would impede the process of investigation or
apprehension or prosecution of offenders;
9. Cabinet papers including records of deliberations of the Council of
Ministers, Secretaries and other officers;
10. Information which relates to personal information the disclosure
of which has no relationship to any public activity or interest, or which
would cause unwarranted invasion of the privacy of the individual.
5.6.8 Role of Government
Section 26 of the Act urges the central government and state governments to
initiate necessary steps to:
i. Develop educational programs for the public especially disadvantaged

communities on RTI.
ii. Encourage Public Authorities to participate in the development and
organization of such programs.
iii. Promote timely dissemination of accurate information to the public.
iv. Train officers and develop training materials.
v. Compile and disseminate a User Guide for the public in the respective
official language.
vi. Publish names, designation postal addresses and contact details of
PIOs and other information such as notices regarding fees to be paid,
remedies available in law if request is rejected etc.
5.6.9 Let us sum up
The Right to Information Act, 2005 provides scope and support for the general
public to seek information about various issues discussed in the Act and their
present state of affairs from the Central and State Government Authorities.
The introduction of this Act provides for transparency in the functioning of
these Government departments. Regarding coverage of Cooperative Banks
under the Act as of now, RBI guidelines and a Supreme Court judgment of
2013 have ruled that Cooperatives are not covered under the Act. However,
Bombay High Court decision of 2017 has ruled that the cooperatives have to
furnish the information under RTI. Thus there is possibility that in future the
cooperative banks may be covered under this Act. In this background as well
as in view of the importance of this Act, it is for the benefit of the staff of
cooperative banks, if they are aware about the provisions of this Act and
387
perform their duty in a transparent manner to provide best possible service
to the customers and the society.
5.6.10 Key words
RTI, Right to Information, RTI Act 2005, Central Information Commission,

State Information Commission, Public Relations Officer, Assistant Public
Officer, Residuary Powers, Application fees, exclusions
State True or False
01. The Right to Information Act 2005 not applicable to the State of
Karnataka
02. The Right to Information Act2005 came into force on 31st December 2009
03. The Right to Information Act 2005 does not apply to all organizations
04. A person seeking information has to disclose the reason for seeking
information
05. The RTI empowers the citizens to seek any information including
confidential information from foreign Government
01. False 02. False 03. True 04. False 05. False
01. What is expansion of RTI?

a. Regional Transport Institute
b. Real Time Information
c. Real Time Innovation
d. Right to Information
02. For the application submitted
a. No fees is collected
b. Appropriate fees to be remitted
c. Fee remitting is at the discretion of the applicant
d. Fee remitting is at the discretion of the authority
03. RTI Act was passed in the year
a. 1991
b. 1949
c. 2005
d. 2011
388
04. Based on the Right to Information Act, 2005, an applicant can seek
information relating to the official matters handled by the Central Bureau of
Investigation
a. True
b. Central Bureau of Investigation excluded
c. True but only for certain matters
d. False
05. The provisions of the Right to Information Act 2005 provides for collection
of additional fees
a. Wherever applicable as per the Act
b. Additional fee not to be collected
c. at the discretion of the official concerned
d. under special circumstances only
06 "Consider the following. A Principal Information Officer : i) malafidely
denies information. ii) obstructed furnishing information. iii) knowingly gave
incorrect, incomplete or misleading information. For which of these actions
can he / she be penalised by an Information Commission."
a. only i)
b. only ii)
c. & ii) both
d. "i), ii) & iii)"
07. Right to information includes the right to taking:
a. Notes
b. Extracts
c. Certified copies of documents or records
d. All the above
08. The Act requires the designation of ____.within a `Public Authority`
a. Public Information Officer(s) [PIO(s)]
b. Assistant Public Information Officer(s) [APIO(s)]
c. Senior Officer(s) to hear appeals made against unsatisfactory
decisions of PIO(s)
d. All the above
09. "Right to information is available under the `Right to Information Act,
2005`"
a. Only to all Parliamentarians
b. Only to all officers and employees of GoI and state government
c. Only to people above 18 years of age.
d. To all Indian citizens.
10. Freedom of Information (FoI)/Right to Information (RTI) laws are also
referred to as
a. anti-government laws
b. open-government laws and sunshine laws
c. black laws
389
d. anti-development laws
11 How many countries in the world have Freedom of Information or Right to
Information legislations / Acts?
a. None
b. All
c. Less than a dozen
d. Over 80
12.The RTI Act gives right to seek information from the following:
a. Private companies
b. Public Limited Companies
c. Public authorities
d. Multi-National Corporations (MNC) having business in India
13. An RTI application can be sent
a. by post
b. by e-Mail
c. delivered personally
d. Through any of the above means .
Key to Terminal questions
01. (d) 02. (b) 03. (c) 04. ( b ) 05. (a) 06. (d) 07. (d) 08. (d ) 09. (d) 10. (b)
11. (d) 12. ( c ) 13. (d)
The Right to Information Act, 2005 – Bare Act available at

www.indiacode.nic.in
The Right to Information Rules
GoI Website: https://rti.gov.in/index.asp
Yashada- Yashwantrao Chavan Academy of Development (2009), “Handbook

on Right to Information Act, 2005”
390

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crr

Certified Professional in Cooperative

Module 1: Indian Financial

Centre for Professional Excellence in Cooperative (C-PEC),

Bankers Institute of Rural Development (BIRD)

Unit 1: Indian Economy ....................................................................................... 1

AGM Annual General Meeting

ICA International Cooperative Alliance

PPP Public- Private- Partnership

SRMS Scheme for Rehabilitation of Manual Scavengers

1.1 Lesson No.1 Indian Economy and its Structure

The objective of this lesson is to understand the system and structure of

Any nation’s development is measured and understood on the basis of its

Overview of Economic Scenario

After more fundamental reforms since 1991- termed as “LPG”- “Liberalization,

For the purpose of understanding the composition of economy, it is classified

Table 1.1: Changing sectoral composition of Indian Economy in terms

Sector 1950-51 1990-91 2020-21

Agriculture 59.0 34.9 16.38

Industry 13.0 24.6 29.34

Services 28.0 40.5 54.27

India ranks 2nd in the world in respect of agricultural production, 6th in

India is blessed with wide variety of agro-climatic regions as well as natural

Table 1.2: India’s Position in the World in 2019

Item India World % Share India's Rank Next to

One important parameter of assessing agricultural development in any

Some of the recent initiatives for agricultural development are:

1. Establishment of agricultural universities for professional education in

2. Establishment of network of extension institutions like Krishi Vigyan

3. Establishment of National Bank for Agriculture and Rural Development

4. Mission for “Doubling Farmers’ Income” by 2022

5. The schemes for Farmer Producers Organisation (FPO)

1.1.4.1 Research and Development

The Indian Agricultural Research Institute (IARI), established in 1905, was

Secondary sector comprises of manufacturing industries in addition to

Post-liberalization, the Indian industrial sector faced foreign competition,

In the economic development context, ‘Services’ means Tertiary sector which

Productive employment is the key to economic development of a country like

Notwithstanding the COVID situation, the Government of India and State

1.1.8 Mixed Economy

India followed a ‘mixed economy’ model since independence, which is an

In a mixed economy there is a degree of freedom for private economic

A "mixed economy" being a combination of governmental enterprise and free-

India is regarded as a good example of ‘Mixed Economy’. The concept of mixed

Mixed economy, sectoral composition of economy, primary, secondary and

1.1.11 Check your progress-questions

State True or False

Terminal/ Multiple Choice questions

1. Overall economic development of a country calls for support from the

a. Agriculture (Primary Sector)

b. Industry (Secondary Sector)

c. Services (Tertiary Sector)

2. In a Mixed Economy scenario, there is no place for Private sector

c. Private sector participation is optional

d. Public sector participation is optional

c. In fact there has been reduction in development

d. No progress is seen in any areas.

4. The size of Indian economy now in 2021-22 is around _____

a. US$ 0.1 trillion

b. US$ 1.0 trillion.

c. US$ 3.53 trillion.

d. US$ 10.0 trillion.

5. The share of agriculture in India’s national income / GDP is at present