TOPIC: AN ANALYSIS OF THE CO- OPRATIVE BANKS

(SHEKHARI BANKS) AND FINANCIAL INSTITUTIONS

OPERATING IN DARJEELING DISTRICT W.R.T. TO THEIR
ORGANISATIONAL STRUCTURE AND FINANCING
METHODS.
 CHAPTER-1

INTRODUCTION
The recent Punjab and Maharashtra Co-operative Bank’s (PMC Bank) crisis has
created chaos among thousands of its depositors. PMC Bank is a multi-state
scheduled urban cooperative bank with its operations in Gujarat, Maharashtra,
Goa, Karnataka, Andhra Pradesh, Madhya Pradesh and New Delhi. With a network
of 137 branches, it ranks among the top 10 cooperative banks in the country.
Recently, due to some under-disclosed bad loans above the ceiling limit, the RBI
has imposed lending restrictions on PMCB, at Rs 10,000 per customer for six
months. The bank has also been brought under Directives which means it will be
directly overseen by the RBI for this period.

And a financial institution is It is a company that is engaged in the business of

dealing with monetary and financial transactions like loans, deposits, and
investments. It comprises various banking operations like trusting the companies,
brokerage firms, insurance companies, and dealers.

CHAPTER-2
What are cooperative banks and financial institution?
A co-operative bank is a financial entity which belongs to its members, who are at
the same time the owners and the customers of their bank. It is often established by
people belonging to the same local or professional community having a common
interest. It is formed to promote the upliftment of financially weaker sections of the
society and to protect them from the clutches of money lenders who provide loans
at an unreasonably high-interest rate to the needy. The co-operative structure is
designed on the principles of cooperation, mutual help, democratic decision
making and open membership. It follows the principle of ‘one shareholder, one
vote’ and ‘no profit, no loss’. Cooperatives Banks are registered under the
Cooperative Societies Act, 1912. These are regulated by the Reserve Bank of India
and National Bank for Agriculture and Rural Development (NABARD) under the
Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative
Societies) Act, 1965. Cooperative banks differ from commercial banks on the
grounds of organization, governance, interest rates, the scope of functioning,
objectives and values.

A financial institution is responsible for the supply of money to the market

through the transfer of funds from investors to the companies in the form of loans,
deposits, and investments. Large financial institutions such as JP Morgan Chase,
HSBC, Goldman Sachs or Morgan Stanley can even control the flow of money
in an economy. The most common types of financial institutions include
commercial banks, investment banks, brokerage firms, insurance companies, and
asset. management funds. Other types include credit unions and finance firms.
 CHAPTER-3

Characteristics of Cooperative Bank

Some of the main features or characteristics of cooperative banks are:

 Customer-owned entities

The members of cooperative banks are both the owners and the customers of the
bank. Thus, the aim of the cooperative bank is not to maximize profits but to
provide the best possible services to its members. Some of the cooperative banks
also admit non-members so as to provide them with banking services.

 Democratic member control

Cooperative banks are owned and controlled by members, who democratically

elect the board of directors. The basic principle of co-operatives “one man one
vote” is followed, irrespective of the number of shares held by a member, which
ensures that no member enjoys any arbitrary power over other members.

 Profit allocation

A specified portion of the profits are transferred to Statutory Reserve and other
reserves, and then a fair rate of interest is paid on the capital subscribed by the
members. A part of this profit can also be distributed to the co-operative members,
with legal and statutory limitations in most cases.
 CHAPTER-4
Functions & Structure of Cooperative Banks:

 It provides financial assistance to people with small means and protects

them from the latches of money lenders providing loans and other services at
a higher rate at the expense of the needy.
 It supervises and guides affiliated societies.
 Rural financing- It provides financing to rural sectors like cattle farming,
crop farming, hatching, etc. at comparatively lower rates.
 Urban financing- it provides financing for small scale industries, personal
finance, home finance, etc.
 It mobilizes funds from its members and provides interest on the invested
capital.

Short term structure has three levels

 A State Co-operative Bank works at the apex level (i.e. works at the state
level).
 The Central Co-operative Bank works at the Intermediate Level (i.e. works
at district level).
 Primary Co-operative Credit Societies at a base level (i.e. works at village
level).

Long term structure has two levels

 State Co-operative Agriculture and Rural Development Banks (SCARDBs)

at the apex level.
 Primary Co-operative Agriculture and Rural Development Banks
(PCARDBs) at the district level or block level.
 CHAPTER-5

Types of Cooperative Banks in India

1. Primary Co-operative Credit Society

 The Primary Co-operative Credit Society is an association of borrowers and

non-borrowers residing in a particular locality. The funds of the society are
derived from the share capital and deposits of members and loans from
central co-operative banks. The loans are given to members for the purchase
of cattle, fodder, fertilizers and pesticides.

2. Central Co-operative Banks

 The funds of the bank consist of share capital, deposits, loans and overdrafts
from state co-operative banks and joint stocks. These banks provide finance
to member societies within the limits of the borrowing capacity of societies.
They also conduct all the business of a joint-stock bank.

3. State Co-operative Banks

 The state co-operative bank is a federation of central co-operative bank and

acts as a watchdog of the co-operative banking structure in the state. It
procures funds from share capital, deposits, loans and overdrafts from the
Reserve Bank of India. The state co-operative banks lend money to central
co-operative banks and primary societies and not directly to the farmers.
4. Land Development Banks

 These are organized in 3 tiers, namely; state, central, and primary level with
the objective to meet the long-term credit requirements of the farmers for
developmental purposes. National Bank for Agriculture and Rural
Development (NABARD) supervises Land development banks. The sources
of funds for these banks are the debentures subscribed by both Central and
State government as these banks do not accept deposits from the general
public.

5. Urban Co-operative Banks

 It refers to primary cooperative banks located in urban and semi-urban areas.

They provide funds and services to small borrowers and small business.
 CHAPTER-6

Problems faced in the Indian Cooperative Banking System

Small capital base

Cooperative banks have a small capital base as it can start with a capital base of 25 lakhs,
making it difficult for them to account a portion of such capital as their working capital and
raising working capital has been a major hurdle for almost all cooperative banks.

Political interference

Politicians use them to increase their vote bank and usually get their
representatives elected over the board of directors in order to gain undue
advantages like sanctioning of loans which later gets written off.

Dual control

Cooperative banks are controlled under the dual system, i.e. by RBI and by their
respective State government which poses a problem in coordination and
management.

Dependence of finance

Cooperative banks depend heavily on RBI, NABARD and the government for
refinancing facilities. It depends on the government for capital rather than on its
members.

Overdue loans

Overdue loans of cooperative banks are increasing yearly, restricting the recycling
of funds which in turn affects the lending and borrowing capacity of the bank.
# Case of Punjab and Maharashtra Cooperative Bank (PMC Bank)

 The PMC Bank had Rs 11,617 crore in deposits as on March 31, 2019. It
had violated Reserve Bank of India (RBI) norms by lending heavily to one
client-real-estate firm Housing Development and Infrastructure Limited
(HDIL), which itself is facing bankruptcy proceedings. PMC Bank has
extended 73 per cent of their assets to HDIL.
 The former chiefs of the bank and the promoters of HDIL have been booked
for cheating, and lookout notices have also been issued against them.
 The PMC Bank crisis shows how the watchdogs -the bank’s auditors, the
RBI and the government were lousy in doing their jobs and taking
responsibility.
 An action was taken by RBI under sub-section (1) of Section 35A of the
Banking Regulation Act,1949 read with Section 56 of the Act which deals
with the power of RBI to give directions.
 PMC Bank cannot grant or renew any loans or advances or to make any
investments or accept any new deposits without the prior approval of RBI
for the next six months.
 CHAPTER-7

Measures to be taken

 Greater control and supervision of RBI upon the cooperative banks.

 These banks and other financial institutions should be professionally
managed, which means that the board of directors should be delegated
power similar to those delegated under commercial banks. Board of
directors should be able to question the shareholder’s representation.
 Changes in Banking Regulation Act,1949, to increase the ambit of power of
RBI to wind up and liquidate banks without involving other regulators under
the cooperative societies’ laws.
 Conversion of UCBs into small finance banks by RBI should be allowed
subject to fulfilment of certain conditions.
 Creation of umbrella organization for supervising and coordinating the
activities of all cooperatives. Such an organization should be over and above
the board of directors and should be reporting directly to RBI so as to bring
it under better control.
CONCLUSION