This chapter analyses the financial performance of urban cooperative banks during the year 2008-09 and that of rural credit cooperatives for the year 2007-08 (given the lagged availability of data for these institutions) in the context of various policy initiatives by the Reserve Bank as discussed in Chapter III. During the year, there has been a continued progress towards consolidation of the urban cooperative banking sector with a growth in financially stronger entities and exit of weaker ones. Urban Cooperative Banks (UCBs) have posted high growth in credit and deposits during the year unlike their rural counterparts. Further, credit to small enterprises as part of priority sector lending of UCBs too has increased significantly during the year contrary to the expectations of a decline following the global crisis. However, both urban and rural cooperatives remain geographically concentrated having a dominant presence in the western region. In the case of urban cooperatives, there has been an increase in the concentration of banking business in few large entities. Moreover, high levels of Non-Performing Assets (NPAs) for UCBs and rural credit cooperative institutions continue to be the major area of concern and thus, cooperative sector, as observed by the Committee on Financial Sector Assessment (CFSA) 2009, remains 'one of the weak links in the Indian financial landscape'.

1. Introduction

5.1 Cooperatives occupy an important position in the Indian financial system. Cooperatives were the first formal institution to be conceived and developed to purvey credit to rural India. Thus far, cooperatives have been a key instrument of financial inclusion in reaching out to the last mile in rural areas. The urban counterparts of rural cooperatives, the Urban Cooperative Banks (UCBs), too have traditionally been an important channel of financial inclusion for the middle and low income sections in the semi-urban and urban areas.

5.2 Notwithstanding the important role played by cooperatives in financial inclusion, their financial viability and soundness remain some of the key areas of concern. Expectedly, enhancing the financial health of these institutions would further strengthen their efforts towards financial inclusion.

5.3 While there has been an improvement in the financial performance of the urban cooperative banking sector in recent times, the high levels of NPAs of UCBs continue to pose a threat to the financial soundness of these institutions. Rural credit cooperative institutions both of the short- and long-term nature too are beset with several structural weaknesses, such as poor resource base and high levels of accumulated losses. Besides, both rural and urban cooperatives have traditionally been subjected to a multiplicity of control from the Reserve Bank and State Governments. The CFSA (2009) characterises the dual control as “the single most important regulatory and supervisory weakness” in the cooperative banking sector.

5.4 In order to deal with the issue of dual control, the Reserve Bank has taken several steps to develop a stronger and unified regulatory framework for the cooperative sector. These steps include the preparation of a Vision Document by the Reserve Bank in 2005, which recommended a State-specific strategy of the State Governments entering into a Memorandum of Understanding (MoU) with the Reserve Bank to deal with the dual regulatory control over UCBs and the establishment of a Task Force for UCBs in these States as already discussed in Chapter III of the Report. Similarly, the Task Force on Revival of Cooperative Credit Institutions constituted by the Government of India in 2004 recommended the State Governments to enter into MoU with the Central Government and National Bank for Agriculture and Rural Development (NABARD) for implementation of the revival package for rural cooperative institutions.

5.5 This chapter provides an analysis of the recent trends in the operations and performance of the urban and rural cooperative credit institutions. This chapter is organised into six sections. Section 2 discusses the existing structure of the cooperative credit institutions in India. Section 3 discusses the business operations and performance of UCBs during 2008-09, while Section 4 focuses on the performance of rural cooperative credit institutions during 2007-08. Section 5 discusses the initiatives taken by NABARD in the development of rural credit cooperatives during 2008-09 followed by conclusions in Section 6.

2. Structure of Cooperative Credit Institutions in India

5.6 The distinctive feature of the cooperative credit structure in India is its heterogeneity. The structure differs across rural and urban areas as well as across States and tenures of loans (Chart V.1). The urban areas are served by Urban Cooperative Banks (UCBs), which are further sub-divided into scheduled and non-scheduled UCBs. Scheduled UCBs form a small proportion of the total number of UCBs. The operations of both scheduled and non-scheduled UCBs are limited to either one State (single-State) or stretch across States (multi-State). Most of the non-scheduled UCBs are primarily single State UCBs having a single tier structure^1.

5.7 Rural cooperatives structure is bifurcated into short-term and long-term structure. The short-term cooperative structure is a three tier structure having State Cooperative Banks (StCBs) at the apex level followed by District Central Cooperative Banks (DCCBs) at the intermediate district level followed by Primary Agricultural Credit Societies (PACS) at the village level. This structure is often referred to as federal structure of the short-term credit cooperatives. The unitary structure is mainly observed in the North-eastern region, wherein the StCBs provide credit directly to PACS instead of any district level intermediary.

5.8 The long-term cooperative structure has the State Cooperative Agriculture and Rural Development Banks (SCARDBs) at the apex level followed by the Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) at the district or block level. This is often referred to as the federal structure of long-term credit cooperatives. There is also a unitary structure under which the SCARDBs channel credit through their own branches. Finally, in some States, there is also a mixed structure under which both unitary and federal structures co-exist. In the States that do not have the long-term structure, separate sections of the StCBs look after the long-term credit requirements of rural areas. In 2008, this was the case with all States from the north-eastern region except Assam, Manipur and Tripura, which had a separate long-term structure. In 2008, 10 States had a federal structure, while two States namely, West Bengal and Himachal Pradesh had a mixed structure of long-term cooperative credit. Further, eight States had a unitary structure of long-term cooperative credit institutions.

3. Urban Cooperative Banks

A Profile of UCBs

Grade-wise Distribution of UCBs

5.9 UCBs are graded into four categories on the basis of their financial performance. This financial performance is determined by various parameters including capital adequacy, level of NPAs and history of profit/loss. While UCBs from Grades I and II can be considered as relatively stronger banks, the banks belonging to Grades III and IV can be classified as sick or weak banks.

5.10 There was a decline in the number of UCBs from 1,770 at end-March 2008 to 1,721 at end-March 2009. This decline was an outcome of the process of consolidation of this sector as evident from a fall in the number of sick/weak banks belonging to Grade III and IV (Table V. 1 read with Box V.1). On the other hand, the number of UCBs in Grade I increased over the year. On account of the increase, the percentage share of UCBs, which were financially more sound belonging to Grades I and II, increased further to 77.2 per cent at end-March 2009.

5.11 More importantly, the percentage share of UCBs from Grade I in total deposits increased significantly from 53.3 per cent at end-March 2008 to 65.2 per cent at end-March 2009. A similar increase could also be seen in the percentage share of advances of UCBs from Grade I. This increase for the Grade I UCBs in deposits and advances meant a decline in the shares of UCBs from all the remaining categories of UCBs. The changing composition of deposits and advances of UCBs across grades implied the growing concentration of banking business in UCBs with sound financial performance (Table V.2)

Box V.1 : Impact of MoUs and TAFCUBs on the UCB Sector: Exit of Weak Banks

Pursuant to the announcement in the Mid-Term Review of the Annual Policy Statement for 2004-05, a Vision Document for UCBs was prepared and placed in public domain in March 2005. Based on the feedback received on this Document, a Medium-Term Framework (MTF) for UCBs was put into place. The Vision Document and MTF envisaged regulatory coordination between the two main regulatory authorities of the urban cooperative banking sector, viz., the Reserve Bank and the respective State Governments (Central Government for multi-State UCBs). This coordination was to be achieved by signing of a Memorandum of Understanding (MoU) in each State to address the problems of dual control, within the existing legal framework.

As on July 20, 2009, MoUs were signed with 26 States. MoU has also been entered into with the Central Government in respect of multi-State UCBs. As such, over 99 per cent of total number of UCBs have been covered under MoUs accounting for 99.2 per cent of total deposits as well advances of the sector. Following the MoUs, the Reserve Bank is committed to constituting State level Task Force for Cooperative Urban Banks (TAFCUB) comprising representatives of the Reserve Bank, State Government and the UCB sector. Accordingly, TAFCUBs have been constituted in all States with which MoUs have been signed. A Central TAFCUB has also been constituted for the multi-State UCBs. TAFCUBs identify potentially viable and non-viable UCBs in the States and suggest revival path for the viable and non-disruptive exit route for the non-viable ones. The exit of non-viable banks could be through merger/amalgamation with stronger banks, conversion into societies or liquidation, as the last option. The supervisory actions taken on the basis of the recommendations of the TAFCUBs include exiting banks through mergers with other UCBs, cancellation of licenses of non-viable UCBs and rejection of license applications of unlicensed UCBs.

There has been a distinct positive impact of the MoUs and TAFCUBs on the UCB sector. This is evident from a decline in the number of UCBs in Grade III and Grade IV taken together, signifying weak or sick banks from 725 as at end-March 2005 to 392 as on end-March 2009. In particular, there has been a steady decline in the number of UCBs in Grade III after 2004. Although UCBs in Grade IV increased at end-March 2005 and 2006, the number declined thereafter – from 270 as at end-March 2006 to 173 at end-March 2009 (Table 1).

Distribution of UCBs by Size of Business and Assets

5.12 For the analysis in this section, UCBs were classified on the basis of the size of their business (deposits and advances) and assets. The distribution of UCBs by the size of their deposits was highly skewed with few UCBs commanding a large percentage of the total deposit base of the UCB sector. At end-March 2009, only 1.2 per cent of the total number of UCBs had a deposit base exceeding Rs.1,000 crore and these UCBs together accounted for 33.6 per cent of the total deposits of the entire UCB sector (Table V.3). Moreover, the distribution of deposits of UCBs has become increasingly skewed in the recent years. This is evident from the fact that as at end-March 2008, only 0.9 per cent of UCBs had a deposit base exceeding Rs.1,000 crore and these UCBs held about 28.8 per cent of the total deposits of the UCB sector.

5.13 The pattern of distribution of advances of UCBs was similar to that of deposits (Table V.4). At end-March 2009, less than one per cent of the total UCBs accounted for about one-fourth of the total advances. As advances constituted about half of the total assets of these banks, the pattern of distribution of advances was comparable with that of assets (Table V.5). Evidently, as the consolidation has been in progress in the UCB sector, there has been a growing concentration of banking business in favour of a few UCBs.

Distribution of UCBs as Scheduled and Non-Scheduled Banks

5.14 The non-scheduled UCBs outnumber scheduled UCBs. At end-March 2009, the number of scheduled UCBs remained unchanged at 53, while the number of non-scheduled UCBs declined to 1,668 from 1,717 in the previous year. In other words, all the UCBs from Grade III/IV that wound up their business between 2008 and 2009 were non-scheduled UCBs.

5.15 At end-March 2009, non-scheduled UCBs had a relatively larger share in total deposits as well as advances of all UCBs (Table V.6). However, there has been a fall in the share of non-scheduled UCBs in total deposits and advances in the recent years. Scheduled UCBs accounted for 42.8 per cent of total deposits at end-March 2009 as compared to 41.8 per cent at end-March2008. Further, the share of scheduled UCBs in total advances was 40.0 per cent at end-March 2008, which increased to 43.1 per cent at end-March 2009.

Tier-wise Distribution of UCBs

5.16 UCBs are categorised into two tiers, namely Tier I and Tier II, for regulatory purposes. As at end-March 2009, the number of Tier I UCBs far exceeded the number of Tier II UCBs. However, the share of Tier I UCBs in total deposits and advances ranged less than 24 per cent; the remaining was accounted for by Tier II UCBs (Table V.7).

Balance Sheet Operations of UCBs

5.17 There was a slowdown in the rate of growth of total assets of UCBs during 2008-09. The growth in total assets of UCBs declined from 11.1 per cent during 2007-08 to 9.5 per cent during 2008-09 (Table V.8). Loans and advances, which constituted about half of the total assets of UCBs, posted a growth of 8.3 per cent during the year. The most important driving factor on the assets side during 2008-09 were investments of UCBs, which grew at the rate of 12.8 per cent. On the liabilities side, the major
source of expansion was from deposits, which grew at the rate of 13.5 per cent during the year down by 1.7 percentage points from the growth of 15.2 per cent during the previous year. However, the sustained double digit growth in deposits during the last two years as compared with the growth of 6.1 per cent recorded during 2006-07 indicated the growing public confidence in this sector (Chart V.2).

5.18 UCBs relied heavily on deposits as a source of funds, which accounted for 80.8 per cent of their total liabilities in 2009. Borrowings on the other hand formed only 1.3 per cent of their liabilities. This dependence on deposits over borrowings marked the striking difference between the operations of the urban and rural cooperative banks.

5.19 Similar to rural cooperative banks and also SCBs, SLR investment was the most preferred form of investment for UCBs. SLR investments accounted for the bulk of total investments of UCBs with a share of 91.4 per cent at end-March 2009 (Table V.9). As noted in Chapter III, UCBs are also allowed to treat the term deposits held by them with DCCBs of the district concerned and StCBs of the State concerned as SLR investments. During 2008-09, term deposits with StCBs and DCCBs together were the second most important form of SLR investments for UCBs after investments in Central Government securities.

Balance Sheet Operations of Scheduled and Non-Scheduled UCBs

5.20 The year 2008-09 was a year of considerable expansion in the size of the balance sheet of scheduled UCBs as compared to non-scheduled UCBs (Tables V.10 and V.11)². The decline in balance sheet size of non-scheduled UCBs came about from its two important components on the assets and liabilities side, namely, advances and deposits. Despite a decline in deposit growth during 2008-09 for non-scheduled UCBs, there was a rise in the share of deposits in the total liabilities of these banks. For scheduled UCBs, there was an increase in the growth as well as share of deposits in total liabilities. Borrowings constituted a relatively small source of funds for both scheduled and non-scheduled UCBs.

5.21 Loans and advances accounted for a relatively smaller share in the balance sheets of scheduled UCBs as compared to non-scheduled UCBs. The annual rate of growth of loans and advances for scheduled UCBs, however, was observed to be significantly higher than that for non-scheduled UCBs during 2008-09.

5.22 The importance of SLR investments could be seen in the investment profile of both scheduled and non-scheduled UCBs (Table V.12). However, in the case of scheduled UCBs, SLR investments posted a higher rate of growth during 2008-09 than non-scheduled UCBs. Moreover, during the year, the share of SLR investments in total investments of non- scheduled UCBs posted a fall, while that for scheduled UCBs remained unchanged.

Financial Performance of UCBs

5.23 During 2008-09, there was a slowdown in the growth of operating profits of UCBs. The decline in the growth of net profits was relatively starker on account of an increase in provisions and contingencies. However, it is noteworthy that net profits of UCBs have consistently posted positive growth during the last two years. Moreover, with respect to profitability, UCBs have outperformed rural cooperatives during 2007-08 (the comparable year for which data are available for rural cooperatives) (Table V.13 read with Tables V.26 and V.29).

Financial Performance of Scheduled and Non-Scheduled UCBs

5.24 The net interest income for non- scheduled UCBs increased significantly during the year. As a result, net profits registered a growth of 37.3 per cent during the year. In contrast, scheduled UCBs experienced a small reduction in their profitability during the year (Tables V.14 and V.15).

Asset Quality

5.25 Notwithstanding the slowdown in economic activity and expectations about higher loan defaults following the global crisis, there was a decline in the (gross) NPA ratio of the UCB sector in 2008-09. Further, during the year, there was a decline in the amount of (gross) NPAs as well (Table V.16). It is also noteworthy that the NPA ratio for UCBs was on a decline between 2005 and 2009 reflecting the growing financial soundness of this sector (Chart V.3)^3.

5.26 Though there has been a decline in the NPA ratio for UCBs, the ratio still remains much higher than that of SCBs. The ratio for UCBs, however, is fairly lower than their rural counterparts, namely, rural cooperatives (Table V.16 read with Table V.23).

Capital Adequacy

5.27 At present, the regulatory minimum CRAR for UCBs stands at 9 per cent. As at end-March  2009, 1,485 UCBs of the total 1,721 were complying with the regulatory minimum (Table V.17). There has been an improvement in capital adequacy for UCBs as evident from an increasing proportion of banks having CRAR of 9 per cent and above; as at end-March 2008, their proportion was 82.3 per cent, which had risen to 86.3 per cent at end-March 2009.

5.28 Notwithstanding the overall improvement in capital adequacy, it is noteworthy that about 8 per cent of the non-scheduled UCBs and 15 per cent of the scheduled UCBs had CRAR below 3 per cent signifying serious inadequacy of capital for these banks to cushion any potential loss. The stress test carried out by the CFSA for UCBs also revealed the underlying fragility of this sector (Box V.2).

Box V.2 : Financial Assessment of the UCB Sector by the CFSA

The Committee on Financial Sector Assessment (CFSA) undertook a comprehensive self-assessment of the Indian financial system. Among other sectors, the CFSA assessed the financial health of the UCB sector. Apart from discussing some of the major concerns related to the UCBs sector, such as duality of control and high levels of NPAs, the Committee also carried out stress tests on this sector, which highlighted the weak financial health of this sector.

On account of data limitations, the stress tests were carried out on 52 scheduled UCBs accounting for 43 per cent of the total assets at end-March 2007 of all scheduled UCBs. The tests were restricted to the credit portfolio of these banks. The credit portfolios of the UCBs were given shocks in the form of an increase in the provisioning requirement and an increase of 25 per cent and 50 per cent in the non-performing assets.

The tests revealed that as at end-March 2007, 27 banks (accounting for 38 per cent of scheduled UCBs’ assets) would not have been able to comply with the 9 per cent CRAR norm with an increase in NPA levels by 25 per cent. At the system level, the CRAR declined from 11.4 per cent to 5.6 per cent at 25 per cent stress in NPAS. Further, with an increase in NPA levels by 50 per cent, the number of banks that would not have been able to comply with the stipulated minimum increased to 31. Moreover, at the system level, the CRAR dipped sharply to 2.8 per cent (Chart below).

Priority Sector Advances

5.29 UCBs were subjected to priority sector lending targets in 1983 on account of the important role played by these institutions in purveying banking facilities to low and middle income groups from urban and semi-urban areas. Presently, UCBs have to extend 40 per cent of their Adjusted Net Bank Credit (ANBC) or credit equivalent of Off-Balance Sheet Exposure (OBE), whichever is higher, as on March 31 of the previous year, to priority sectors. Of this target, at least 25 per cent needs to be given to ‘weaker sections’. However, unlike SCBs, UCBs are not bound by any separate target for agriculture given the primarily urban focus of these banks.

5.30 As at end-March 2009, a large part (38.5 per cent) of the priority sector advances of UCBs was towards small enterprises closely followed by housing loans (with a share of 25.1 per cent). Further, UCB credit to small enterprises recorded a phenomenal growth of 41.7 per cent during 2008-09 contrary to the concerns about a slowdown in bank credit to these enterprises following the global crisis. As a result, loans to small enterprises, which had a share of 16.9 per cent in total advances of UCBs as at end-March 2008 increased 21.7 per cent at end-March 2009 (Table V.18).

Regional Profile of UCBs

5.31 The operations of UCBs were largely concentrated in three States, viz., Maharashtra (including Goa), Gujarat and Karnataka. These three States together accounted for 64.8 per cent of the total number of UCBs operational in the country as at end-March 2009 (Table V.19). The State-wise distribution of advances and deposits of UCBs was even more skewed with Maharashtra alone accounting for over 60 per cent of the total advances and deposits of all UCBs (Table V.20). Across all centres in the country, the percentage of sound UCBs belonging to Grades I and II was more than 50 per cent (Table V.21).

4. Rural Cooperatives

Supervision of Rural Cooperatives

5.32 The supervision of StCBs and DCCBs rests with NABARD in accordance with the powers vested with it under Section 35(6) of the B. R. Act, 1949 (AACS). For effective regulation, NABARD’s inspections are focussed on ensuring conformity with banking regulations and facilitating internalisation of prudential norms.

5.35 The Board of Supervision (BoS) was constituted by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal Committee to the Board of Directors of NABARD. The Board primarily gives directions and guidance in respect of policies and matters relating to supervision and inspection of StCBs, DCCBs and RRBs. The Board met three times during the year. Among other issues, it reviewed the following: (i) functioning of StCBs and SCARDBs; (ii) functioning of cooperative credit institutions and RRBs of Kerala, Bihar and Rajasthan; (iii) functioning of insolvent, weak DCCBs and RRBs; (iv) impact of supervision on banks’ performance; (v) scheduling of amalgamated RRBs; and (vi) supervisory trends pertaining to rating of banks.

5.36 NABARD revised the inspection guidelines for all banks keeping in view the latest developments and policy environment. The revised guidelines stressed inter alia on the following: (i) asset liability management; (ii) Codes of Standards and Fair Practices; (iii) lenders’ financial discipline and (iv) CRAR norms.

Management of Cooperatives

5.37 The phenomenon of supersession of elected Boards continued during the year in some States despite the policy of NABARD to emphasise on the need for cooperative banks to be managed by duly elected Boards of Management. However, there was a decline in the percentage of institutions where such supersession was observed. As on March 31, 2008, the percentage of (reporting) institutions where the elected boards were superseded was 41.9 per cent as compared to 46.4 per cent last year (Table V.22). The phenomenon of supersession was most prominent among SCARDBs and DCCBs.

Operations and Financial Performance of Rural Cooperatives

5.38 Data for rural credit cooperatives (comprising StCBs, DCCBs, PACS, SCARDBs and PCARDBs) are available with a lag of one year and hence, the analysis in the present section relates to 2007-08.

5.39 During 2007-08, there was a fall in the total number of rural credit cooperatives by 2,282; this was attributable primarily to the fall in the number of PACS (Table V.23). Further, there was a considerable deterioration in the asset quality of both short-term and long-term cooperative institutions during 2007-08. The overall ratio of NPAs to loans outstanding for all credit cooperatives moved up to 25.9 per cent as at end-March 2008 from 19.8 per cent as at end-March 2007. Also, the number of loss
making credit cooperatives far exceeded the number of profit making entities at end-March 2008, which has been a regular feature of credit cooperatives in the past. All credit cooperatives taken together booked an overall loss of Rs.3,954 crore during the year.

Short-term Structure of Rural Cooperatives

5.40 The short-term structure comprising State, district and primary cooperative credit institutions caters primarily to the various short/ medium-term production and marketing credit needs in agriculture. Of the total credit outstanding with the cooperative structure as a whole in 2007-08, short-term credit structure had a dominant share of about 88 per cent (Table V.23). Further, of the total deposits mobilised though the rural cooperative structure as a whole, about 99 per cent were mobilised by the short-term cooperative credit institutions.

State Cooperative Banks

5.41 The growth in the balance sheets of StCBs slowed down during 2007-08 with the total assets/liabilities growing at a decelerated rate of 5.1 per cent as compared to 12.1 per cent during the previous year (Table V.24). This slowdown came about mainly from a sharp fall in the growth of loans and advances of StCBs on the assets side. This fall in growth resulted in bringing down the share of loans and advances in the total assets of StCBs albeit marginally. Loans and advances continued to constitute more than half of the total assets of these institutions. As a major part of the loans from StCBs being apex level institutions go towards the lower tier institutions in short-term credit structure, a decline in the growth of loans from StCBs implied reduced lending to the lower tier institutions. Compensating for a fall in the share of loans and advances were investments by StCBs, which grew at high rate of 20.4 per cent in 2007-08. Consequently, their share in total assets rose by about four percentage points during the year. This increase in investments of StCBs was in the form of SLR investments, which constituted over 60 per cent of the total investments of these institutions in 2007-08.

5.42 Section 42(2) data are available on some of the major heads of assets and liabilities for 16 scheduled StCBs as on the last reporting Friday of March 2009. These data indicate a steep increase in aggregate deposits of StCBs, which is the most important component of liabilities of these institutions. Aggregate deposits grew by 24.0 per cent during 2008-09 over and above a growth of 16.0 per cent during 2007-08 (Table V.25). During 2008-09, there was a fall in bank credit of these institutions at the rate of 9.6 per cent as compared to an increase by 5.0 per cent during 2007-08.

StCBs - Financial Performance

5.43 Unlike Scheduled Commercial Banks, sources of non-interest income are relatively weak for StCBs. Interest income constituted the largest component having a share of 98.4 per cent in the total income of StCBs in 2007-08 (Table V.26). Moreover, the growth as well as share of interest income was on a rise for these institutions. Similarly, on the expenditure side, the most important component was interest expended by StCBs. Like interest earned, interest expended too posted an increase in terms of growth and share during 2007-08. In the entire short-term structure, StCBs were the only institutions that made net profits during the year (Table V.23). About 82 per cent of the total number of reporting StCBs were in profit in 2007-08. Although StCBs booked net profits during the year, there was a decline in the rate of growth of their profits (Table V.26).

StCBs - Asset Quality and Recovery Performance

5.44 During 2007-08, NPAs of StCBs posted a decline in absolute terms (Table V.27). The ratio of NPAs (to loans outstanding) also stood at a lower level of 12.8 per cent at end-March 2008 as compared to its corresponding level of 14.2 per cent at end-March 2007. Recent trends in the asset quality of these institutions are summarised in Box V.3.

5.45 A cursory comparison of the NPA ratio of StCBs with that of scheduled commercial banks reveals that the asset quality of StCBs was considerably weaker with a (gross) NPA ratio of 12.8 per cent at end-March 2008. Nevertheless, StCBs seemed better placed in terms of asset quality than their urban counterparts namely the UCBs, which had a higher (gross) NPA ratio of 15.5 per cent at end-March 2008 (reference to Table V.16).

5.46 Of the various categories of NPAs, ‘sub­ standard’ and ‘doubtful’ assets each constituted over 40 per cent of the total NPAs of StCBs at end- March 2008. The third category of ‘loss’ assets had a share of 11.9 per cent at end-March 2008. There was a fall in terms of both growth and share of ‘loss’ assets between 2007 and 2008 (Chart V.4).

StCBs - Regional Profile

5.47 There was considerable variation in the profitability and asset quality of StCBs across States (Appendix Table V.3). While on the one hand, StCBs from the northern region had the lowest NPA ratio of around 3per cent during 2007-08, the StCBs from the north-eastern region had as high as 40 per cent of their total loan assets classified as non-performing in nature. However, it is noteworthy that the NPA ratio for the north-eastern region as a whole has been on a decline in the recent past signifying relative improvement in the asset quality of these banks over the years. The improvement in asset quality was particularly discernible in the case of StCB of Assam. In the northern region, the NPA ratio was exceptionally low for StCBs of Haryana and Punjab ranging less than 2 per cent. More importantly, this trend of low NPA ratio for Haryana and Punjab StCBs was not a one-year phenomenon but has been observed consistently over the years. StCBs, which had high NPA ratios, such as those from the north-eastern region, reported net losses during the year.

Box V.3: Recent Trends in Asset Quality of StCBs and DCCBs

The application of prudential regulations in 1996-97 for StCBs and DCCBs introduced the norms for income recognition, asset classification and provisioning. In a study, Sharma et al (2001) attempted to analyse the trends in asset quality of StCBs taking data for two years (1996-97 and 1997-98) after the prudential regulations were made applicable to these institutions. During the short span of two years, they found a substantial increase in absolute terms in NPA levels for StCBs and DCCBs. Taking the same exercise forward for the years after 2000-01, it can be seen that there was a rising trend in the NPA ratio for StCBs till 2002-03. Thereafter, there was a falling trend in this ratio (Table 1). The ratio has continued to be significantly higher than the corresponding ratio for Scheduled Commercial Banks (SCBs). The amount of NPAs has grown at a positive rate between 2000-01 and 2007-08, which has been lower than the rate of growth of total loans outstanding of these institutions over the corresponding period. However, there has been particularly high growth in assets classified as loss making assets of StCBs over this period.

The NPA ratio for DCCBs has shown a by and large increasing trend between 2000-01 and 2007-08 (Table 2). The rate of growth of NPAs has been relatively higher than the growth in total advances of DCCBs over this period. The growth in ‘loss’ assets has also been comparatively higher than the other two asset categories for DCCBs. In other words, there has been a considerable deterioration in the asset quality of DCCBs as compared to StCBs in the recent period.

Reference:

Sharma, K. C., P. Josh, J.C. Mishra, Sanjay Kumar (2001), “Recovery Management in Rural  Credit”, NABARD Occasional Paper No. 21.

District Central Cooperative Banks

5.48 The balance sheets of District Central Cooperative Banks (DCCBs) seem fairly comparable with that of StCBs (Table V.28 read with Table V.24). Loans and advances constitute the most important form of assets for DCCBs; the share of loans and advances worked out to 56.4 per cent at end-March 2008. Investments were next in line with a share of 27.4 per cent. Similarly, deposits made up the largest portion of the total liabilities of DCCBs; the share of deposits at end-March 2008 was about 63.6 per cent.

5.49 Notwithstanding the broad similarities, there are certain features about the balance sheet of DCCBs which set them apart from StCBs. First, the dependence of DCCBs on deposits was relatively more than StCBs. DCCBs relied less on borrowings. Needless to say, borrowings of DCCBs are primarily from the StCBs given that StCBs are the apex institutions in the short-term cooperative hierarchy providing finance to the lower tiers. It is also noteworthy that the deposits of DCCBs have shown a consistent rise in the recent past with their rate of growth picking from 3.8 per cent in 2004-05 to 8.9 per cent in 2007-08. Borrowings, on the other hand, have been a fairly variable component of the liabilities of DCCBs showing considerable fluctuations in terms of growth year after year but with their share showing by and large a declining trend.

DCCBs - Financial Performance

5.50 The most salient feature of the financial performance of DCCBs is their relatively high share of ‘other’ (non-interest) income in comparison with StCBs (Table V.29 read with Table V.26). In 2007-08, other income had a share of 7.8 per cent for DCCBs vis-à-vis 1.6 per cent in the case of StCBs. Further, wage bill was a more important constituent of the operating expenses of DCCBs as compared to StCBs. During the year, share of wage bill in the total expenses of DCCBs worked out to 15.9 per cent vis-à-vis 7.6 per cent for StCBs.

5.51 DCCBs recorded overall losses during 2007-08 as against profits in the previous year. What is more, profits of DCCBs have been on a decline in the recent past falling rapidly from Rs.971 crore in 2004-05 to (-) Rs.65 crore in 2007-08. Notwithstanding the overall losses at the aggregate level, it needs to be noted that about 73 per cent of the total number of (reporting) DCCBs were in profits during 2007-08 (reference to Table V.23). One of the reasons for the deterioration in the overall profitability of DCCBs during 2007-08 was a steep fall in their ‘other’ income.

DCCBs - Asset Quality and Recovery Performance

5.52 There was deterioration in the NPAs to loans ratio in 2007-08 for DCCBs (Table V.30). However, the increased NPAs were primarily in the ‘sub-standard’ category, while there was a reduction in the NPAs in the ‘doubtful’ and ‘loss’ category (Chart V.5). Hence, there was a migration of loan assets towards sub-standard category during 2007-08 as was also the case with StCBs. This was a positive development with regards to the NPA profile of DCCBs.

Further, DCCBs like StCBs made more provisions than what was required for their NPAs levels during 2007-08.

DCCBs - Regional Profile

5.53 Similar to StCBs, the profitability and asset quality of DCCBs varied widely across regions/States (Appendix Table V.4)⁴. The DCCBs from the northern region in general outperformed other regions in terms of the number of (reporting) DCCBs that were earning profits during 2007-08. The percentage of DCCBs from the northern region that made profits during the year was about 78 per cent in comparison with the all-India average of 73 per cent. Furthermore, DCCBs from each region except the northern and southern regions booked an overall loss during the year. The NPA ratio too was the lowest for the DCCBs from the northern region in general and Haryana in particular, in 2007-08. For DCCBs from Haryana, only 5.1 per cent of their loans outstanding were classified non-performing in 2007-08. It needs to be reiterated that the NPA ratio was also the lowest in the country for the StCB from Haryana (0.1 per cent) (Appendix Table V.3). In contrast with Haryana, the DCCBs from Jharkhand (at 75.9 per cent) followed by Bihar (at 54.5 per cent) had the highest NPA ratio in the country.

Primary Agricultural Credit Societies

5.54 Primary Agricultural Credit Societies (PACS) form the third and lowest tier in the short-term credit cooperative structure that operates directly at the grassroots i.e. in villages. As these institutions are the direct purveyors of credit to the rural borrowers, both the coverage and viability of PACS needs to be strengthened in order to ensure inclusive finance from the cooperative structure as well as to enhance the stability of the short-term cooperative structure, itself. Further, given that the business of the short-term cooperative credit and banking structure - in terms of both credit and deposits - is a more dominant constituent of the rural cooperative structure, the stability of the short-term structure has major implications for the stability of the entire rural cooperative structure and thereby, of the rural financial system as a whole.

5.55 Borrowings constituted about 56.7 per cent of the total resources of PACs during 2007-08 (Table V.31). In 2007-08, borrowings registered a growth of 9.5 per cent while deposits posted a growth of 8.4 per cent. Consequently, borrowings by PACS in 2007-08 were almost double of their deposits.

5.56 The percentage of overdues to total loans outstanding, which is a rough indicator of the non-performing assets of PACS, worked out to be the highest among all three tiers of the short-term cooperative credit structure (Table V.31 read with Table V.30 and Table V.27). Moreover, there was a sharp increase in this ratio from 26.9 per cent at end-March 2007 to 36.6 per cent at end-March 2008.

5.57 Of the total number of (reporting) PACS, 44 per cent were making profits, while the remaining 56 per cent were in losses during 2007-08 (Table V.23). During the year, PACS reported an overall loss of Rs.3,481 crore.

PACS - Profile of Members and Borrowers

5.58 The profile of members and borrowers of PACS provides an insight into whether or not the PACS are able to cater to the credit needs of the vulnerable sections of the rural population as they are expected to. It is thus a reflection of the role of PACS in the financial inclusion process.