Banking& financial institutions

Case study
 THE `BANK’-The Name of NGO Disappears

• “The name of our organization as promoter has been removed from the two
name boards of the Co-operative `Bank.’ This has been done by the `Bank’ at
the insistence of the office of the district registrar of co-operative societies,”
remarked Mr. Kunal of the NR Foundation who worked as an Extension Agent
in the International Labour Organisation (ILO) sponsored Project under which
the `Bank’ was promoted. The disappearance of the name of the Non-
Governmental Organisation (NGO) from the board appeared symbolic of the
real separation that has taken place between the `Bank’ and the NGO. As
remarked by the Director of the NGO, “We have no links with the `Bank’.”
They are working on their own. We cannot support them anymore.”
• The separation that has taken place between the NGO and the Co-operative
`Bank’ seemed to be a touchy issue. The NGO is known for its capacity to
build strong village level co-operatives and maintain a long-standing relation
with them through continued support and guidance
• The NR Foundation is a non-profit organization working since 1974 in
Western part of India for the upliftment of the tribal community. The
main thrust of NR Foundation is to improve the capacity of the local
natural resource base for supporting livelihoods on a sustainable basis. In
order to attain its objective, the NR Foundation takes up interventions
like lift irrigation schemes, construction of checkdams, watershed
development, forestry and income generating programmes in the
villages of its jurisdiction.
• The NR Foundation also promotes savings and credit self-help groups
(SHGs) mainly for the women in the intervention villages. The formation
of co-operatives to be managed by the participants is the major strategy
adopted by the NR Foundation for attaining success and sustainability of
its various interventions. In all the co-operatives, the NR Foundation
formally maintains ex-officio representation on the executive committee
in order to provide the necessary guidance and support. Till March 2002,
the NR Foundation has promoted over 260 village level co-operatives
under various interventions
• The `Bank’
• “It is actually a co-operative credit society. But all of us have been calling it a
`Bank’ as it was visualized that the co-operative society would emerge as a major
women’s bank in the area,” narrated the Director of the NR Foundation referring
to the vision they had for the Co-operative. The `Bank’ which is actually known
as the Adivasi Mahila Savings and Credit Co-operative Ltd., was established in
March, 1999. The establishment of the `Bank’ was the culmination of the efforts
to hand over 24 women’s SHGs formed since 1994 to a local co-operative
managed by the members. These SHGs had been formed under an ILO
supported Project implemented by the NR Foundation during 1994-99.
• The Project aimed at promoting self-reliance among the tribal community
through co-operatives and self-help organizations. The Project was implemented
in nine villages of one taluka where the NR Foundation had already made
interventions through lift irrigation schemes and checkdams. Besides the
formation of the SHGs, the ILO Project also supported the formation of four
women’s dairy co-operatives, capacity building of the lift irrigation co-operatives
through training, implementation of income generating schemes and promoting
non-formal education.
• The 24 women SHGs had been promoted with the main purpose of encouraging savings
and credit for attaining self-reliance. The SHGs with nearly 500 members had started
initially with a monthly savings of Rs. 10 per member. By 1999, some of the SHGs had
increased their monthly savings instalment to as much as Rs. 50. Being able to mobilise
capital through members’ savings, the SHGs went in for internal lending utilising their own
funds. The members’ savings were supplemented by additional capital provided to each
SHG from the revolving loan fund created under the Project. All the SHGs were recording
100 per cent recovery of the loans lent to the members. The members and the leaders of
the SHGs were trained by the NR Foundation in various aspects of SHG management.
While the SHGs were making impressive progress, the ILO Project was approaching its end
by 1999. It was visualised under the Project that the SHGs would be taken over by a co-
operative to be formed for the purpose.
• The exploration for creating such a local institution had started much before the
termination of the Project. The members of the SHGs were taken on exposure visits to
two organizations which had created women’s’ credit co-operatives. Inspired by the
exposure visit, the members decided to go in for the creation of a co-operative by pooling
the savings of all the 24 SHGs from nine villages. The effort which started in November
1998 finally ended with the registration of a co-operative credit society in March 1999.
The office of the Co-operative was located in a nearby town called Simdi. Ms. Savitaben
and Ms. Kantaben were selected by the members as the Chairperson and the Secretary of
the Co-operative.
• These two leaders were found to be quite articulate and talented by the SHG
members. Before the creation of the Co-operative, the SHG members used to
meet every month at the NR Foundation to discuss their progress and problems.
Ms. Savitaben who has been the Chairperson of the `Bank’ since its inception
remarked, “We decided to form a co-operative based on the idea we got during
the exposure visit. Our purpose was to meet our members’ need for loans by
pooling the savings of the SHGs and mobilizing funds through borrowing. Though
our SHGs had savings accounts with a commercial bank, the bank would not give
us any loan.” While the Co-operative came to be established, some of the plans
the NR Foundation had for the Co-operative did not materialize. As Mr. Kunal said,
“The SHGs were functioning only in nine villages.
• Our idea was to form a co-operative which can have jurisdiction over a large area.
However, this required taking no objection certificates from a large number of
credit co-operatives in the area. The district registrar of co-operative societies
limited the area of the co-operative only to the nine villages. At the same time,
the district registrar refused permission for ex-officio representation of the NR
Foundation on the executive committee of the co-operative. The reason given to
us was that the Co-operative is for the adivasi (tribal) women and the NR
Foundation does not have the status of an adivasi person.”
• “The refusal for the ex-officio representation was surprising as the NR Foundation is
represented on the committees of all the co-operatives promoted by us in the tribal areas”,
said the Director of the NR Foundation. He further said: “We could have insisted with the
district registrar for our representation, but some how we did not pursue it.” As Ms.
Savitaben, Chairperson of the Co-operative said, “Even we wanted the NR Foundation to be
on our committee but the registrar refused it.” There was all-round enthusiasm when the
`Bank’ started functioning. The NR Foundation staff and the women leaders wanted to take
the Co-operative to new heights through their joint efforts. Though the ILO Project came to
an end and staff were withdrawn from the Project, the NR Foundation decided to continue
with its support for the Co-operative as per the `continuation strategy’ followed with respect
to all its interventions.
• The staff working under other projects continued to interact with the ‘Bank’ on a regular
basis. The NR Foundation was reimbursing the Co-operative’s monthly rent for the building
and the honorarium for the staff. Ms. Sujatha, a social work post-graduate who had joined as
the Project Manager of a new government
• The project was entrusted with the task of co-ordinating with the Co-operative. Ms. Sujatha
remarked, “The leaders of the `Bank’ were regularly approaching us for help and guidance on
various issues; we actively helped in getting a site allotted to the Co-operative for the
construction of a building.” The NR Foundation also sanctioned a sum of Rs. 2.5 lakh to the
Co-operative from the revolving loan fund (RLF) of the ILO Project for meeting its additional
working capital needs. The ILO Project had visualised that the RLF would be finally transferred
to the local institutions created. The cash transactions of the Co-operative were carried out
through a joint account held with a commercial bank in the name of the Co-operative and the
NR Foundation
• The Separation
• The collaboration between the `Bank’ and the NR Foundation which was going quite smoothly took a `U-
turn’ within a year. The leaders of the `Bank’ refused to take any honorarium for their staff from the NR
Foundation and decided to be on their own. The long partnership which had started with the formation of
the SHGs came to an end as many differences cropped up between the leaders of the `Bank’ and the staff
of the NR Foundation. By July 2002, the `Bank’ and the Foundation had totally lost touch with each other.
As Ms. Parameet, a Senior Programme Executive of the NR Foundation remarked, “It had even become
difficult for us to obtain the annual balance sheet of the `Bank.’ We had to argue with the district registrar
to get a copy of the recent balance sheet.”
• How is the `Bank’ doing?
• To Ms. Parameet, “Going by the balance sheet there seems to be some problem with the `Bank.’” She
further elaborated, “Most of the loans of the Co-operative seem to have gone only to two villages from
where the Chairperson and the Secretary of the Co-operative come. Also there seems to be some internal
conflict and the leaders have come under local influence. The overdues are also growing. It is not good if
the `Bank’ gets derailed.”
• Mr. Kunal said, “When we were supporting it, the `Bank’ was nicely managed. Now even the premises is
not well kept”. The Director of the NR Foundation said, “I am not sure whether they would be able to get
the government funding for constructing their building. We would have given them the necessary support.
But if the co-operative is able to function well on its own, we are happy. Our ultimate purpose is to create
an institution which can become really autonomous.” Ms. Savitaben and Ms. Kantaben assessed the
performance of their co-operative in the following way: “We have expanded our area of operation recently
to six more villages to admit 300 more members.
• The Co-operative has got a cash credit loan of Rs. 50,000
from the District Central Co-operative Bank (DCCB), the limit
of which has now been enhanced to Rs. 80,000. We use
both the members’ savings and the loan from the DCCB. We
sanction loans on a yearly basis as we are a co-operative. A
member is given a loan up to Rs. 10,000 based on the
purpose and her savings with the Co-operative.
• The members have to apply directly to the Co-operative for
loans with two guarantors. The loan is approved by the
Executive Committee. The members save and repay through
their SHGs. Different SHGs have different savings rate. Many
members have been able to take up dairying and other
income generating activities through the loan support
received from the Co-operative.”
• “The same Executive Committee is continuing for the second
time. The Co-operative has implemented a government housing
scheme for some of the members. A watershed scheme also has
been sanctioned to the Co-operative. We will recruit new staff
for the watershed project. Currently, we have six staff members
and pay a monthly rent of Rs. 800 for the building. The Co-
operative has made profit every year. The auditor has given a `B’
grade to the Co-operative(meaning doing reasonably well).
• We have sanctioned loans for 400 members this year. The co-
operative has a total outstanding loan of Rs.7.14 lakh at the end
of March 2002. The loan recovery which was 100 per cent in the
earlier years has come down to 70 per cent during 2001-02
because of the drought. Some of the staff of the NR foundation
have also instigated our members in a village not to repay the
loan of the Co-operative.”
Table 1: Progress of the Co-operative
(Amount in Rs.) 1998-99 1999-00 2000-01 2001-02
Particulars
Share Capital 11,900 11,900 1,38,520 NA

Reserve Fund 595 595 595 NA

Revolving Loan 3,79,228 2,36,828 NA NA

Members Savings 3,25,749 3,89,597 2,83,669 2,90,544

Loan Outstanding 4,27,201 5,50,915 6,54,698 7,14,198

• Why the Separation?
• “We have received so much support and help from the NR Foundation,”
acknowledged Ms. Savitaben, who is the Chairperson of the co-operative since
inception. Continuing further she said, “But we got separated because we had so
many problems with the staff of the NR Foundation who were dealing with us.
After our Co-operative was registered, the staff of the NR Foundation started
telling us that we have to follow only their suggestions and systems. The district
registrar was telling us that we must follow the co-operative procedures. They
were not able to understand our problems. We had to change all our ledgers and
make new entries. We opened our own savings account with the DCCB. All these
steps were questioned by the NR Foundation staff. We felt insulted.”
• “We made a complaint to the NR Foundation to change the staff. A meeting was
held at the NR Foundation to thrash out the differences. But nothing changed
despite the promise. Hence we decided to part company.” Currently, the Co-
operative has changed the bye-laws to suit the co-operative system. The original
bye-laws were framed by the staff of the NR foundation. The auditor has made a
suggestion to close the savings account jointly held with the NR Foundation. The
leaders are now taking guidance from the DCCB and the district registrar.
• The reasons given from the side of the NR Foundation for the
separation are as follows: Ms. Sujatha, the Programme Manager
of a Government Project who was co-ordinating with the Co-
operative disagreed with the views expressed by the leaders. She
said, “All the things have been pre-planned, be it the changeover
into the co-operative system or opening a savings account with
the DCCB only in the name of the Chairperson and the Secretary
of the Co-operative.
• The revolving fund given to the Co-operative and the SHGs has to
be repaid. They were not repaying it. By insisting that it has to be
repaid, I was only doing my duty, though I was new. The two
leaders never changed and they started dominating the whole
‘Bank’. Moreover, the staff of the NR Foundation, the ‘Bank’
leaders and the registrar never held any joint meeting while
framing the rules. Hence there is also lack of some clarity and
consensus.”
•The Co-Director of the NR Foundation said, “The women leaders seem to have come under some
local influence. They are not interacting with us probably because they have not repaid the
revolving loan fund to us. They must be thinking that we will insist on repaying that money.”
•To Ms. Parameet, the Senior Programme Executive, the reasons for the separation are two-fold:
First, there were frequent changes in staff of the NR
•Foundation dealing with the Co-operative. The new staff were not able to deal with the Co-
operative. Differences came up between the Project staff and the leaders. Secondly, the leaders
must have been influenced by some local elements. The current Chairperson has become very
powerful. She has also become a member of the District Rural Development Agency (DRDA). The
Director of the NR Foundation summed up the whole episode in the following way: “To be fair to
everybody, our staff have not handled the relationship well. There was frequent change of staff.
The ILO Project had stopped, we could not continue with all the staff. We wanted to support them
as our own institution. We wanted it to expand to cover larger area. Some local people and
politicians would have influenced the women leaders by telling them that it is an adivasi
institution and hence they would get all the government support. Moreover, the women leaders
must have thought that they may lose control over the Co-operative, if the area of operation is
expanded as planned by us.”
•New MFI
•The NR Foundation has now promoted a large number of SHGs under various programmes. They
are planning to promote a new microfinance institution (MFI) to serve all the SHGs in the entire
district. They are exploring whether it should be a co-operative institution or a Non-Banking
Financial Company (NBFC).
Questions:
1. What seems to have gone wrong between the NGO
and the MFI (Co-operative)?

2. Who is to be blamed?
 
3. How to sort out the difference and re-establish the
relationship between the MFI and the NGO?
 
4. What precautions the NGO needs to take if they
launch a new MFI?
 
 Role of Indian Commercial banks in
economic development
• A commercial bank is a type of banks that provides services such as
accepting deposits, lending loans, and investing asset. A large number of
formal institutional agencies like Co-operatives Banks, Regional Rural Banks
(RRBs), Scheduled Commercial Banks (SCBs), Non– Banking Financial
Institutions (NBFIs), and Self-help Groups (SHGs), etc. are involved in
meeting the short-term and long-term needs of the customer. The
Commercial banks play an important and active role in the economic
development of a country, if the banking system in a country is effective,
efficient and prudent. India is an agricultural country. The agriculture is the
backbone of economy of any country like India. Both public and private
banks are now involving themselves in a lot of agri-based activities as well
as manufacturing industry activities. Due to liberalization, privatization and
globalization the role of banking sector changed dramatically. The credit is
one of the critical inputs for agricultural development
• History of Indian Banking Sector
• The Government of India initiated that banks play an vital role in the economic
roadmap of the nation, the Indian government was adopted the mixed economy
in 1948. Indian Government took big decision concerning the Indian Banking
Sector Reform after independence. Firstly, Indian government transformed
Imperial Bank of India converted into a nationalized bank and it became the
state bank of India with extensive banking facilities on a large scale especially in
rural and semi-urban areas. Government of India took many banking
initiatives. These were aimed to provide banking coverage to all section of the
society and every sector of the economy.
• Nationalization Process
• First phase of Indian Banks nationalization process was in 1969. The major
objective of nationalization process was to extend banking infrastructure in rural
areas. Fourteen banks were nationalized in 1969. Before 1969, State Bank of
India (SBI) was only the public sector bank in India. And second phase of Indian
banks nationalization process was in 1980. Seven more banks were nationalized
with deposits over 200 crores. Currently 20 public sector banks, 21 private
sector banks and 43 foreign banks are working in India
• Mobilizing Saving for Capital Formation:
The commercial banks help in mobilizing savings through network of branch banking.
People in developing countries have low incomes but the banks encourage them to
save by introducing variety of deposit schemes to suit the needs of individual
depositors. They also mobilize idle savings of the few rich. By mobilizing savings, the
banks channelize them into productive investments. Thus they help in the capital
formation of a developing country.
• Financing Industry:
The commercial banks finance the industrial sector in a number of ways. In
generally they provide short-term, medium-term and long-term loans to industry. In
India they provide mainly short-term loans as well medium-term loans for one to
three years. But in Korea, the commercial banks also advance long-term loans to
industry.
• Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a
number of ways. They provide loans to traders in agricultural commodities. They
provide finance directly to farmers for the marketing of their produce, for the
modernization and mechanization of their farms, for providing irrigation facilities,
for developing land, etc. They also provide financial assistance for animal husbandry,
dairy farming, sheep breeding, poultry farming, and horticulture
• Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a
number of ways. They provide loans to traders in agricultural commodities. They
provide finance directly to farmers for the marketing of their produce, for the
modernization and mechanization of their farms, for providing irrigation facilities,
for developing land, etc. They also provide financial assistance for animal
husbandry, dairy farming, sheep breeding, poultry farming, and horticulture.
• FACTS:
All the commercial banks in India provide loans in every sector. The banks have been
able to provide necessary capital support to the sectors for development in the
form of loans. However gradual decreased of loan availability was observed in
some of the dominant major sectors namely Textile, Construction, Petroleum,
Chemical sectors etc. The loan received by Textile sector in 2008 (12.56 %) was
reduced to 8.11 % in 2016. Its average value during the period was 9.60 %.
Similarly loan obtained by Construction, Petroleum and Chemical sectors (3.68 %,
5.48 % and 8.15 %) in 2008 were also reduced gradually to 2.94 %, 2.02 % and 6.49
% respectively in 2016. Fluctuation in the loan status could be observed in some of
the sectors like Rubber and Plastic, Gems and Jewellery and Basis Metal and Metal
Products etc.
Questions:
• What are the services which are given by
commercial banks?
• What is the role of the commercial banks in
supporting the economic development?
• Are the commercial banks suffering due to
globalization?
 Making a Lending Decision
Nirmal Kumar (Nirmal), Manager at the M/S Conservative Bank Ltd, a new age private
sector bank in India, had been working with the bank for five years. At present, he was
posted at the Indore branch.Nirmal Kumar, has been approached by a transport
operator named Sajjan Singh for a loan. Nirmal has collected and reviewed all the
relevant information. Now he has to calculate the debt service coverage ratio (DSCR)
and, taking into consideration the various bits of information available to him, take a
decision on whether to extend the loan to Sajjan.
Issues: 

(i) Lending decisions – How they are taken at the branch/unit level
(ii) The various issues and factors (such as security offered, repayment period, etc.) to
be considered in making a lending decision
(iii) The various factors to be considered in a prospective borrower (such as Age,
Constitution, Education, Family background, etc.) in order to make a lending decision
(iv) The concept of DSCR, how it is arrived at, and how it helps in making a lending
decision
Questions:

1. What are the various factors to be considered in

making a lending decision?
2. What are the various facets of the lending
proposal?
3. What is the significance of Financial Appraisal in
making a lending decision and how is it done?
4. What is the concept of DSCR? How is it arrived at
and how does it help in making a lending decision?
5. In this case, should Nirmal Kumar extend the loan
to Sajjan? Give reasons to support your answer.