Current Developments in Corporate Banking in India

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Current Developments in Cooperative Banking in India
Mandira Sarma

Indian Council for Research on International Economic Relations (ICRIER) Core 6A, India Habitat Centre, Lodi Road, New Delhi 110 003 India

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• The cooperative banks/credit institutions constitutes the second segment of Indian banking system, comprising of about 14% of the total banking sector asset (March 2007).

• Bulk of the cooperative banks operate in the rural regions with rural coop banks accounting for 67% of the total asset and 67% of the total branches of all cooperative banks.

• Share of rural cooperatives in total institutional credit was 62% in 1992-93, 34% in 2002-03 and 53% in 2006-07.

• Cooperative banks have an impressive network of outlets for institutional credit in India, particularly in rural India (1 PACS per 7 villages).

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• In March 2007, there were 97,224 PACS in rural India against 30,393 branches of commercial banks (more than 3 times of outlet of coop banks).

• In March 2007, there were 102 savings A/C and 113 cooperative bank members per 1000 rural in India.

• Cooperative banks (both rural and urban) cater to small and marginal clients. • Financial health of the cooperative credit institutions, particularly the rural cooperatives, has been found to be poor by several Committees.

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Structure of Cooperative Banking (March 2007) Institution A. Rural Cooperative Credit Structure (i) Short Term (ST) • State Coop Banks (StCB) • District Central Coop Banks (DCCB) • Primary Agri Coop Societies (PACS) (ii) Long Term (LT) • State Coop Agri and Rural Dev Banks • Primary Coop Agri and Rural Dev Banks B. Urban Cooperative Banks (i) Primary Coop Banks (PCB) (ii) Primary Non-Agri Coop Societies Number No. of br. Asst Share (%) 107497 106781 31 369 97224 716 20 696 49805 1770 48035 112891 111090 938 12928 97224 1800 1104 696 56600 8565 48035 67 58 15 29 14 8.3 4.4 3.9 33 29 4

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Issues facing the cooperative banking segment in India
• Governance Issues – Dual Control and Borrower driven structure • Management and HR Issues • Issues relating to Finance

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Governance Issues - Dual Control
• “Cooperation” is a State subject under the Indian Constitution; hence all cooperative societies are governed by the Cooperative Societies Act of the State. Registration, incorporation, management, amalgamation etc are governed by the RCS of the particular State.

• At the same time, certain provisions of the Banking Regulation (BR) Act, 1949, are applicable to the cooperative banks that accept public deposit. In the rural structure, StCBs and the DCCBs and in the urban structure, PCBs are covered by these provisions of the BR Act.

• This “duality” of control and regulation has given rise to serious problems in the governance structure (such as interference by the State Govt. due to its combined role as dominant shareholder, manager, regulator, supervisor and auditor; further the precise demarcation of the powers between the two regulators is ambiguous.)

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Governance Issues - Borrower Driven Structure
• The rural cooperative structure in India is focused mainly on credit. The upper tiers refinance the lower tiers hence the structure is driven by borrowers at all levels.

• Depositors are either non-members or “nominal” members without voting rights while the borrowers have full voting rights.

• This is inconsistent to the concept of mutuality (thrift and credit going hand in hand).

• This also prevents any incentive for good governance since the depositors, whose money is being intermediated, have no say in the management of...
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