1. I have great pleasure in being with you this evening and participate
in the function organised to declare the A.P. Mahesh Co-operative
Urban Bank Ltd. as a scheduled urban co-operative bank. It is
heartening to note that the A.P. Mahesh Co-operative Urban Bank
Ltd. is the first urban co-operative bank in the Southern India to
acquire the scheduled status. The successive Boards of Management
deserve complements for making significant strides in building up a
strong capital base aggregatingRs.18.5 crore with deposits to the tune
of Rs.149.7 crore and credit portfolio of Rs.85.6 crore as on 31st
March 1997 and ultimately to attain scheduled status in less than two
decades.
2. Andhra Pradesh has always been receptive to progressive ideas in the
field of co-operation. It was due to the untiring efforts of some
farsighted people of Ganjam district of the then undivided Madras
province, that the Chatrapur and Parlakimidi Urban Co-operative Bank
was set up as early as in 1915. At present, I understand there are 69
urban co-operative banks operating in Andhra Pradesh with a deposit
base of around Rs. 650 crore.
3. Today in my address I would like to briefly touch on the importance of
urban co-operative banks in the country in the context of changed
banking scenario.
Urban Co-operative Banking Scenario
4. The urban co-operative banks cater primarily to the needs of lower
and middle income strata of our society. Their strength is reflected
in the network of outlets with 1653 urban banks and over 4951 of their
offices as on 31st March 1997. Since the urban co-operative banks
broughtunder the purview of Banking Regulation Act three decades ago,
they have registered rapid progress both in terms of business and
spread. The total deposit resources mobilised by the UCBs aggregated
Rs.27738.40 crore and their cumulative credit stood at Rs.19086.42
crore on 30th September 1996. The UCBs capital structure was also
found to be quite impressive with the owned funds aggregating
Rs.4343.46 crore. Notwithstanding the impressive growth of UCBs,
urban co-operative banking movement is characterised by regional
imbalances. Of the 1653 banks in the country nearly 75 per cent of
them are located in four States viz. Gujarat, Karnataka, Maharashtra
and Tamil Nadu. Further, these four States also account for 85 per
cent of the deposits and advances of UCBs. Heterogeneity is another
pronounced characteristic feature of urban banking sector. While
there are only 45 urban banks which have a deposit base of Rs.100
crore and above, 863 banks have deposit resources less than Rs.10
crore. As of today, 24 banks have been accorded scheduled status.
Seven urban co-operative banks are operating beyond their states of
registration.
Reform measures initiated by the RBI
5. RBI has initiated series of policy measures during the last 5
years. Essentially the two-pronged reforms are in regulatory and
operational spheres. Pursuant to therecommendations of the Marathe
Committee (1993) which examined the licensing policy of new UCBs and
other related matters, RBI has been liberal in the licensing of new
UCBs. The earlier dictum `one district one bank' is no longer the
determining factor for giving licences to new UCBs. The criteria for
issue of licence to a new bank is based on the need for the
institution and potential in the proposed centre for mobilisation of
deposits, purveying of credit and ultimately the ability to attain the
viability standards within a reasonable period. As a result during the
period between May 1993 and March 1997, over 412 proposals were
cleared for setting up of new UCBs. Similarly, norms for issue of
licences to existing UCBs have significantly been liberalised. The
branch licensing policy for UCBs has undergone radical changes. Under
the liberalised Branch Expansion Policy over 2070 licences were issued
for opening of new branches. RBI has permitted the banks to extend
their areas of operation to the entire district inclusive of rural
areas in which they are registered. Well managed banks with strong
deposits base could, with prior permission, operate from other States
also.
6. The thrust on priority sector lending, observance of prudential
exposure norms; acceptance of NRI/NRO deposits continues. Urban
Co-op. Banks have been permitted toinvest in public sector bonds and
equity of All India Financial Institutions. UCBs could now subscribe
to the units of Unit Trust of India. Recognising the existence of
credit gap in the agricultural sector, the UCBs are now permitted to
finance value based and other agricultural operations also. Some of
the scheduled urban co-operative banks have been permitted to finance
equipment leasing and hire purchase activities.
7. I am sure, all these measures will help to increase the operational
efficiency of UCBs and facilitate effective participation in allround
growth of the economy.
Causes of concerns
8. I may be failing in my duty if I do not dwell on some of the issues
which are impeding the growth of urban bank's movement.
Bureaucratisation of co-operative sector
9. The UCBs as they are conceived, must be run on democratic lines so
that they truly function as people's institutions. The Brahama Prakash
Committee dwelling on this vexatious issue has strongly recommended
autonomy for the co-operative institutions and minimising the role
ofGovernment officials in the governance of these institutions. I am
indeed delighted to note that the Andhra Pradesh Government has taken
a lead in legislating the Andhra Pradesh Mutually Aided Co-operative
Societies Act, 1995, in granting greater degree of freedom to the
co-operatives. This may be followed by the other States so that, among
others, the posting of officials on deputation from various
departments to the top management of the co-operative banks could be
replaced by professional managers.
Weak banks
10. Existence of a large number of weak UCBs has become constant cause
of anxiety for RBI. Of the 1653 UCBs as on 31 March 1997, 222 banks
have been declared as weak on account of erosion of capital base and
part of deposits, unsustainable level of non-performing assets,
accumulated losses and non-attainment of viability standards. I may
clarify here that the weakness of banks is not a sudden occurrence but
the end result of a gradual process of financial deterioration coupled
with ineffective management. Hence the weakness has to be identified
at the incipient stage itself by the Boards of Management so as to
bring about a turn around in the banks' financial position before the
malady corrodes the vitals of the institutions. Except in States like
Maharashtra and Gujarat, the State Level Review Committees constituted
to review the weak banks and formulate the rehabilitation packages,
have been quite inactive. Unless a well defined time bound revival
plan for a weak bank is prepared and followed by the State/Local Level
Review Committees, the extreme steps of winding up/liquidating these
institutions may have to be taken.
Professionalising the management
11. Another weak link in urban co-operative banking sector is lack of
professionalism. In a competitive financial milieu, where the
customers look for innovative products and efficient service, the UCBs
cannot insulate themselves from the rising demands of their
clientele. They must, therefore, scout for professionals to man the
junior and middle levels in management cadres and simultaneously,
impart training to all cadres of staff. RBI at its College of
Agricultural Banking, Pune has regularly been providing training to
the middle and top management of UCBs on various facets of
banking. RBI Regional Offices have also been extending faculty support
for the training establishments run by UCBs/Federations.
Internal control systems and audit
12. Another related area which has been engaging our attention is the
ineffective internal control and audit systems prevailing in
UCBs. Over a period of time, the existing systems and procedures have
come under severe strain because of multiplicity of factors such as
expansion of branches, growth of volume of operations and
diversification of business. As you are aware, a weak internal
control mechanism is a potential source for perpetration of frauds,
the issue cannot be ignored any longer. Sensing the imperative need
for strengthening the internal control system, RBI has from time to
time issuing detailed guidelines for activating internal control
machinery in UCBs. Recognising the felt need for a thorough revamp of
existing audit systems prevalent in UCBs, RBI has, in the recent past,
appointed a Committee under the Chairmanship of Shri Uday M. Chitale,
a prominent Chartered Accountant, for reviewing the audit systems in
UCBs and suggesting appropriate model. The Committee has strongly
recommended for induction of professionals to carry out the audit of
UCBs as the latter are distinctly different from other co-operative
institutions. The Committee, among others, suggested for
commissioning Chartered Accountants to carry out statutory audit of
large size urban banks with deposits over Rs.25 crore. RBI hasaccepted
the Committee's recommendations and advised the State Governments for
expeditious implementation of the recommendations.
Technological upgradation
13. The question of absorption of computers in UCBs has also assumed
significant importance in the backdrop of financial sector reforms.
Although RBI has advised the UCBs with working capital over Rs.5 crore
to mechanise their operations, many UCBs are still to register visible
progress in this direction. As technological upgradation is sine
qua non for a bank's survival in a competitive environment, any
delay in computerising the operations of UCBs will only retard their
growth. I am happy that Mahesh Co-operative Urban Bank has already
successfully completed total automation of eleven branches.
14. The Indian banking and financial system has been undergoing some
significant changes in the recent years. The aim of the financial
sector reform that is currently under way is to create a system that
is both viable and efficient. With the reductions in the reserve
requirements, the lendable resources of banks have expanded. They
have also greater freedom to determine interest rates. Banks are
operating in a more competitiveenvironment and therefore the need to
take care of customer requirements has become more urgent. The urban
co-operative banks are an integral part of our financial system. They
meet a felt need. They have a local touch and meet the requirements of
small and medium borrowers. It is however important that they remain
financially sound. Efficiency is not a function of size. Small and
medium size banks can be efficient and customer friendly as Mahesh
Co-operative Bank has shown. The urban co-operative banks must prove
the adage 'small is beautiful'. |