the role of co-operative credit societies in...

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Chapter II THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES IN RURAL CREDIT The rural co-operative credit structure in India consists of two parts, one provides short-term and medium-term loans and the other provides long- term loans. The short-term co-operative credit structure is a three tier system consisting of the primary co-operative credit societies at village level, central co-operative banks at district level and state co-operative banks as apex banks at state level. On the other hand, the long-term credit structure at the moment is two-tier comprising primary co-operative agriculture and rural development banks at block and district level and state co-operative agriculture and rural development banks at top level. The organizational structure of rural co-operative credit institutions in India is given in chart 2.1. Chart 2.1. Structure of rural co-operative credit institutions in India Rural Co-operative Credit Structure in India Short-term and Medium-term [Three Tier System] State Co-operative Banks [Apex Level] Central Co-operative Banks [District Level] Primary Agricultural Credit Societies [Village Level] Long-term [Two Tier System] State Co-operative Agriculture and Rural Development Banks [At Top Level] Primary Co-operative Agriculture and Rural Development Banks [At District and Block Level]

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Page 1: THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES IN …shodhganga.inflibnet.ac.in/bitstream/10603/4831/10/10_chapter 2.pdf · co-operative banks at district level and state co-operative

Chapter II

THE ROLE OF CO-OPERATIVE CREDIT SOCIETIES

IN RURAL CREDIT

The rural co-operative credit structure in India consists of two parts,

one provides short-term and medium-term loans and the other provides long-

term loans. The short-term co-operative credit structure is a three tier system

consisting of the primary co-operative credit societies at village level, central

co-operative banks at district level and state co-operative banks as apex banks

at state level. On the other hand, the long-term credit structure at the moment

is two-tier comprising primary co-operative agriculture and rural development

banks at block and district level and state co-operative agriculture and rural

development banks at top level.

The organizational structure of rural co-operative credit institutions in

India is given in chart 2.1.

Chart 2.1. Structure of rural co-operative credit institutions in India

Rural Co-operative Credit Structure in India

Short-term and Medium-term [Three Tier System]

State Co-operative Banks [Apex Level]

Central Co-operative Banks [District Level]

Primary Agricultural Credit Societies [Village Level]

Long-term [Two Tier System]

State Co-operative Agriculture and Rural Development Banks

[At Top Level]

Primary Co-operative Agriculture and Rural Development Banks [At District and Block Level]

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Table 2.1 presents a profile of rural co-operative banks in India.

Table 2.1

A Profile of Rural Co-operative Banks in India (At end-March 2007)

(Rs. in crores)

S. No

Particulars Short-Term Long-Term

Total SCBs DCCBs PACSs SCARDBs PCARDBs

1. No. of Co-operative Banks 31 371 97,224 20 697 98,343

2. Balance Sheet Indicators

i) Owned fund (Capital + Reserves) 10,549 26,180 11,038 2,931 3,596 54,294

ii) Deposits 48,560 94,529 23,484 605 341 1,67,519

iii) Borrowings 22,256 29,912 43,715 16,662 12,751 1,25,296

iv) Loans and advances issued 52,777 82,963 49,614 2,436 1,970 1,89,759

v) Loans and advances

outstanding 47,354 89,038 58,620 18,644 12,114 2,25,770

vi) Investments 24,140 41,006 N.A. 1,916 824 67,886

vii) Total liabilities / assets 85,756 1,58,894 79,959 24,336 21,774 3,70,719

3. Financial Performance

i) Institutions in profit

a) Nos. 27 271 33,983 10 350 34,641

b) Amount of profit 319 754 749 280 419 2,521

ii) Institutions in loss

a) Nos. 4 97 48,078 8 342 48,529

b) Amount of loss (-) -44 -724 -2,402 -190 -566 -3,926

iii) Overall profit/loss (-) 275 30 -1,653 90 -147 -1,405

iv) Accumulated loss (-) -389 -5,712 N.A. -946 -2,870 -9,917

4. Non-performing Assets

i) Amount 6,704 16,495 11,558 5,643 4,316 44,716

ii) As percentage of loans outstanding 14.2 18.5 26.9 30.3 35.4 19.8

iii) Recovery of loans to demand (%)

(as on 30th June) 85.7 71.1 70.9 44 52

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : N.A. – Not available.

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As on 31st March 2007, the consolidated assets of the rural co-operative

credit institutions amounted to Rs.3,70,719 crores. The rural co-operative

sector, on aggregate, held Rs.1,67,519 crores of deposits and a loan portfolio

of Rs.2,25,770 crores. Their financial performance continued to deteriorate

during 2006-07 when compared to previous year. The number of loss-making

entities continued to far exceed the number of profit-making entities.

Institution-wise, the upper-tier of the short-term (SCBs and DCCBs) and

long-term structure (SCARDBs) made profit, while the lower-tier comprising

PACSs and PCARDBs made losses. The asset quality, however, improved as

reflected in decline in the NPA ratio (as percentage of loans outstanding)

during 2006-07 in respect of both the short-term and long-term rural

co-operative credit institutions.

Primary Agricultural Credit Societies

The agricultural credit societies were established in our country after

the enactment of Co-operative Societies Act 1904. PACSs are the grass root

level arms of the short-term credit structure. They deal directly with

individual borrowers, grant short-term as well as medium-term loans and also

supply of agricultural inputs, consumer articles and providing marketing

facilities.1 Primary agricultural credit societies are the pillars of the

co-operative credit system. The edifice of the co-operative credit structure has

been built on the foundation of PACSs. They occupy a predominant position

in the co-operative structure of India and are the backbone not only of the

co-operative credit structure, but also of the co-operative marketing set-up in

so far as their non credit activities are concerned. These societies, also known

1 S.S. Muley, “Role of co-operative banks in rural credit”, Cooperative Perspective,

Vol.42, no.1-2 (2007), p.33.

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as banks, constitute the base and vast network of credit institutions at the

village level. The higher agencies viz. SCBs and DCCBs operate and

channelise their credit flows downward through this base only. These

societies have by now covered more than 90 per cent of the country’s 5.8 lakh

villages.2 The role of PACSs assumes a greater significance in the operation of

the entire co-operative credit system for the successful implementation of

various rural development programmes.

The progress of PACSs in India has been given in table 2.2.

Table 2.2 The progress of PACSs in India

Particulars 1960-61 1970-71 31.3.1986 31.3.1994 31.3.2003

Number (in lakhs) 2.12 1.61 0.92 0.91 1.12

Membership (nos. in lakhs) 170.41 309.63 721 89,067 1,236

Deposits (Rs. in crores) 14.59 69.46 572 2,367.11 19,120.00

Loans issued (Rs. in crores) 202.75 577.88 3140 8,487.40 33,996.00

Loans outstanding (Rs. in crores) N.A. N.A. 4,323 N.A. 42,411

No. of PACSs in profit N.A. N.A. N.A. N.A. 58,683

No. of PACSs in loss N.A. N.A. N.A. N.A. 53,626

Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A - Note Available.

Table 2.2 reveals that the total number of PACSs stood at 1.12 lakhs by

the end of March 2003 when compared to 1960-61 as 2.12 lakhs. There was a

net fall of 1,00,000 PACSs within the period of 1960-61 to 2003. The number

of PACSs were decreased during the period due to the implementation of

reorganization programme of strengthening and the future development of

co-operative structure. The memberships of PACSs increased from 170.41 2 A. Seilan, “Primary agricultural credit societies – the bank of the rural masses”, Tamil

Nadu Journal of Cooperation, Vol.7, no.1 (2006), p.26.

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lakhs in 1960-61 to 1,236 lakhs in March 2003. The deposits in PACSs stood

at Rs.14.59 crores in 1960-61 and Rs.19120 crores at the end of March 2003.

It is evident from the data that PACSs have increasing trends in mobilizing the

deposits. Loans advanced increased from Rs.202.75 crores in 1960-61 to

Rs.577.88 crores in 1970-71 and further it was increased from Rs.8,487.40

crores in 1994 to Rs.33,996 crores in 2003. Besides as on 31st March 2003,

out of 1,12,309 PACSs 58,683 PACSs earned profit of Rs.404 crores and

53,626 PACSs incurred loss of Rs.1,862 crores.

Table 2.3 shows the select indicators of primary agricultural credit

societies in India (Statewise) on 2006-07.

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Table 2.3 Select indicators of Primary Agricultural Credit Societies in India - Statewise (2006-07)

S. No.

Name of the State No. of

PACSs

No. of

villages

covered

No. of

villages

per PACS

Average

deposits

(Rs.Lakh)

Working

capital

(Rs.Lakh)

Societies in profit Societies in loss

No. Amount

(Rs.Lakh) No.

Amount

(Rs.Lakh)

Northern Region 12,720 83,547 7 19.21 16,09,183 7,013 13,080 3,538 10,740 1. Chandigarh 16 22 1 0.19 23 14 5 1 12 2. Delhi - - - - - - - - - 3. Haryana 571 7,053 12 52.27 5,33,774 189 1,824 382 5,308 4. Himachal Pradesh 2,086 19,388 9 31.37 93,743 442 937 318 84

5. Jammu and

Kashmir 937 7,396 8 54.11 1,91,537 444 1,609 403 1,781

6. Punjab 3,981 12,329 3 19.17 4,66,489 2,330 4,562 1,183 1,458 7. Rajasthan 5,129 37,359 7 4.3 3,23,617 3,594 4,143 1,251 2,097 North-Eastern Region 3,540 33,527 9 3.83 77,407 615 7,871 850 10,703 8. Arunachal

Pradesh 31 3,649 118 - 1,636 20 25 6 8

9. Assam 809 23,422 29 0.63 7,533 309 7,639 419 9,909 10. Manipur 186 - - 34.95 45,904 - - 108 201 11. Meghalaya 184 3,761 20 0.45 1,797 51 47 128 512 12. Mizoram 175 660 4 0.09 175 59 70 4 10 13. Nagaland 1,719 969 1 3.73 11,246 - - - - 14. Sikkim 166 166 1 - 146 56 6 37 4 15. Tripura 270 900 3 0.12 8,970 120 84 148 59 Eastern Region 22,160 196,754 9 161.76 9,16,286 4,992 3,084 12,379 7,189 16. Andaman and

Nicobar Island 46 109 2 1.89 281 34 0.02 - -

17. Bihar 5,969 45,098 8 1.02 46,186 1,180 604 3,962 64 18. Jharkhand 208 5,185 25 6.1 1,523 60 91 - - 19. Orissa 3,860 43,303 11 59.27 5,09,046 1,380 1,134 2,387 5,062 20. West Bengal 12,077 103,059 9 8.35 3,59,250 2,338 1,255 6,030 2,063 Central Region 15,265 192,554 13 208.54 5,98,873 7,125 9,841 4,998 18,177 21. Chhattisgarh 1,257 19,899 16 16.59 98,165 779 1,848 474 3,873 22. Madhya Pradesh 4,633 53,951 12 9.35 3,62,951 1,786 6,112 2,456 14,114

23. Uttarakhand 446 5,900 13 6.56 11,830 24 107 100 37 24. Uttar Pradesh 8,929 112,804 13 0.76 1,25,927 4,536 1,774 1,968 153 Western Region 29,086 53,958 2 105.75 15,18,445 10,481 21,175 16,599 75,529 25. Goa 77 206 3 25.94 4,476 41 17 35 13 26. Gujarat 7,956 16,289 2 2.37 4,90,635 3,339 9,565 2,675 36,680 27. Maharashtra 21,045 37,462 2 0.65 10,23,270 7,095 11,593 13,889 38,836 28. Dadra and Nagar

Haveli 8 1 - - 64 6 0.01 - -

Southern Region 14,453 76,762 5 113.82 32,75,675 3,757 19,844 9,714 1,17,836 29. Andhra Pradesh 4,064 29,207 7 7.88 5,64,084 867 1,612 3,036 24,398

30. Karnataka 4,205 27,242 6 26.68 5,08,361 1,384 5,482 2,447 9,719 31. Kerala 1,624 1,464 1 767.57 13,82,666 811 6,213 754 14,879 32. Puducherry 52 320 6 90.92 8,177 26 0.9 26 3 33. Tamil Nadu 4,508 18,529 4 55.37 8,12,387 669 6,536 3,451 68,837

Total (All India) 97,224 637,102 7 120.82 79,95,869 33,983 74,895 48,078 2,40,174

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08.

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As shown in table 2.3, the number of both profit making and loss

making PACSs declined to 33,983 and 48,078 during 2006-07 from 44,321

and 53,050 respectively during 2005-06, mainly on account of reduction in the

total number of PACSs during 2006-07. The share of profit-making PACSs in

total PACS declined to 35.0 per cent at end-March 2007 from 41.7 per cent at

end-March 2006. While the total profits earned by profit-making PACSs

increased, the losses made by loss making PACSs also increased. In the

aggregate, 33.983 PACSs earned profits amounting to Rs.749 crores, while

48,078 PACSs incurred losses of Rs.2,402 crores.

For the country as a whole as at the end of March 2007, one PACS on

an average covered seven villages. While penetration of PACS (number of

village served by a PACS) was the highest in the western region, it was the

lowest in the central region. At the State / UTs level, only seven states, viz..

Chandigarh, Nagaland, Sikkim, Andaman and Nicobar Islands, Kerala,

Maharashtra and Gujarat have achieved high penetration of upto two villages.

Haryana, Arunachal Pradesh, Assam, Meghalaya, Jharkhand, Orissa,

Chhattisgarh, Madhya Pradesh, Uttarakhand and Uttar Pradesh are the states

with low penetration of more than ten villages.

The average size of deposits mobilized by PACSs was Rs.120.82 lakhs.

The average size of deposits of PACSs in Kerala at Rs.767.57 lakhs far

exceeded that of other States. In Puducherry, Orissa, Tamil Nadu, Jammu and

Kashmir and Haryana, the average size of deposits mobilized by PACSs was

Rs.90.92, Rs.59.27, Rs.55.37, Rs.54.11 and Rs.52.27 lakhs respectively.

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In eight states (that is Himachal Pradesh, Punjab, Rajasthan, Arunachal

Pradesh, Mizoram, Sikkim, Uttar Pradesh and Goa) the number of profit-

making PACSs as well as profits earned by them exceeded the number of loss

making PACSs and the amount of losses incurred by them. Puducherry has

equal number of profit-making and loss making PACSs. In ten states (that is

Haryana, Assam, Meghalaya, Orissa, West Bengal, Madhya Pradesh,

Maharashtra, Andhra Pardesh, Karnataka and Tamil Nadu), the number of loss

making PACSs as well as the amount of losses incurred by them exceeded the

number of profit-making PACSs and the amount of profits earned by them. In

five states/UTs (that is Chandigarh, Jammu and Kashmir, Chhattisgarh,

Gujarat and Kerala) PACSs incurred over-all loss even as the number of

profit-making PACSs were more than the number of loss making PACSs. In

three states (Tripura, Bihar and Uttarakhand), PACSs earned over-all profits

even as the number of loss making PACSs were more than the number of

profit-making PACSs.

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Table 2.4 Primary Agricultural Credit Societies in India - select indicators

(Rs. in crores)

Item As at end–March Percentage variations

2006 2007 2005-06 2006-07

A. Liabilities

1. Total resources (2+3+4) 69,871 78,237 2.1 12.0

2. Owned funds (a+b) 9,292 11,039 1.0 18.8

a) Paid-up capital of which : 5,644 6,138 1.3 8.8

Government contribution 622 648 0.2 4.2

b) Total Reserves 3,648 4,900 0.6 34.3

3. Deposits 19,561 23,484 3.1 20.1

4. Borrowings 41,018 43,714 1.9 6.6

5. Working capital 73,387 79,959 -2.7 9.0

B. Assets

1. Total Loans Issued (a+b) 42,920 49,613 9.5 15.6

a) Short-Term 35,624 40,796 11.7 14.5

b) Medium-Term 7,296 8,817 -0.4 20.8

2. Total loans outstanding (a+b) 51,779 58,620 6.1 13.2

a) Short-Term 34,140 37,764 5.1 10.6

b) Medium-Term 17,639 20,856 8.2 18.2

C. Overdues

1. Total demand 50,979 54,112 6.7 6.1

2. Total collection 35,503 38,359 11.9 8.0

3. Total balance (Overdues) (a+b) 15,476 15,753 -3.6 1.8

a) Short-Term 11,387 11,558 -2.3 1.5

b) Medium-Term 4,089 4,194 -7.0 2.6

4. Percentages of overdues to total demand

30.4 29.1

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08.

As revealed in table 2.4, the total resources of PACSs increased during

2006-07 mainly on account of the increase in owned funds and deposits. The

working capital of PACSs also registered a high growth of 9 per cent during

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2006-07. On the asset side, the loan portfolio expanded by 13.2 per cent

during the year as compared with 6.1 per cent during 2005-06. The loan

portfolio expanded on account of growth in both the short-term and medium-

term loans. Both the total demand made and the total collections increased in

the year 2006-07. Collections, however, grew relatively sharply, resulting in

total overdues as percentage of total demand declining to 29.1 in 2006-07

from 30.4 during 2005-06.

Central Co-operative Banks

The Central Co-operative Banks occupy a cardinal position in the

short-term co-operative credit structure. They form an important link between

the apex co-operative bank and primary agricultural co-operative banks.

When the Co-operative Societies Act was passed in 1904, there was no

provision for the formation of central banks. The sponsors of the co-operative

movement expected that the rural credit societies would be able to attract

substantial deposits from the members and well-to-do sections of the village

community and their savings would be available to meet the needs of the

needy in the villages. It was also contemplated that any deficiency in the funds

would be made good by loans from the government. But these expectations of

the promoters did not materialize. The isolated and poorly managed societies

failed in the first instance to tap funds from the more affluent and secondly

they could not augment their own capital base by encouraging thrift and self-

help among their members.

As the movement gained popularity, the societies started increasing in

number by leaps and bounds. But the financial arrangements envisaged did not

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yield enough money to meet their growing requirements. The

Co-operative Societies Act was, therefore, amended on 1912 with a view to

permitting the registration of Central Societies. It may be of interest to note

that even before the amendment some central banks had been established to

cater to the financial needs of the primary societies. The first central bank was

registered in Uttar Pradesh in 1906 as a primary society. But the first perfect

central bank in the modern sense saw the light of the day in the former Central

Provinces and Berar. In Rajasthan the first central co-operative bank was

started in 1910 at Ajmer. But the revised Act stimulated the growth of the

central financing agencies and within a few years a large number of such

banks were established.3

Objects and Functions

The chief object of central co-operative banks is to meet the credit

requirements of member societies. They finance agricultural credit societies

for production purposes, marketing societies for marketing and supply

operations and industrial and other societies for working expenses. They work

as an intermediary to link the primary societies with the money market.

Further, the central banks serve as the balancing centre for adjusting the

surplus and deficiency of the working capital of the primary credit societies.

Besides providing loans, the central co-operative banks also provide certain

normal banking facilities to the members such as acceptance of deposits,

remittance of funds, collection of cheques, etc. In some States, they are

responsible for supervision and inspection of primary societies. In brief, the

following are the main objects of a central co-operative bank:

3 B.S. Mathur (1996). Co-operation in India. Agra: Sahitya Bhawan,

pp.174-175.

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i. To act as a balancing centre of finance for the primary societies in the

district by providing them with funds when they have a shortage and by

serving as a clearing house for their funds, which are surplus.

ii. To encourage thrift and collect savings from members and others.

iii. To provide a safe place for investing the reserves of primary societies.

iv. To provide other banking facilities to the members.

v. To develop and extend banking facilities in rural areas.

vi. To develop the co-operative movement in the district on sound lines and

to act as a friend, philosopher and guide.

vii. To supervise, guide and control the working of member societies.

Progress of District Central Co-operative Banks

The central co-operative banks form an important link between the

apex co-operative bank and PACSs. The financial resources for the DCCBs

consist of share capital, reserve fund out of profit, membership fee from

primary societies, deposits from public and other institutions and loans from

the apex bank. The progress of DCCBs in India is given in table 2.5.

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Table 2.5 Progress of the District Central Co-operative Banks in India

(Rs. in crores)

Particulars 1991 1998 1999 2000 2001 2002 2003

Number of DCCBs 356 367 367 367 367 368 367

Owned funds N.A. 6,223 7,652 10,116 12,180 11,288 16,573

Deposits 10,250 36,228 40,112 54,248 61,786 68,586 73,879

Borrowings N.A. 11,547 12,871 14,658 16,935 18,772 19,635

Working capital N.A. 54,655 65,466 77,679 87,821 N.A. N.A.

Loans issued 11,070 34,780 40,397 46,619 45,019 55,915 64,665

Loans outstanding N.A. 31,516 36,949 44,538 52,491 59,283 64,068

Recovery performance (% of demand)

N.A. 70 70 70 67 66 61

No. of DCCBs in profit N.A. N.A. N.A. N.A. 247 243 237

No. of DCCBs in loss N.A. N.A. N.A. N.A. 120 125 130

Source: Cooperative Perspective, Vol.42, No.1-2 (2007).

Note : N.A. - Not Available.

Table 2.5 reveals that the total number of DCCBs stood at 356 in 1991

and increased to 368 in 2002, and came down to 367 in 2003. The deposits in

DCCBs stood at Rs.10,250 crores in 1991 and further it had gone up to

Rs.73,879 crores in 2003. The borrowing of DCCBs in India during 1998 was

recorded as Rs.11,547 crores, which further went up to Rs.12,871 crores in

1999, and further it had gone up to Rs.19,635 crores in 2003. The total loans

issued by DCCBs increased from Rs.11,070 crores in 1991 to Rs.64,665

crores in 2003 indicating tremendous increase in the loans issued by DCCBs

in India. The outstanding loans of DCCBs increased from Rs.31,516 crores in

1998 to Rs.64,068 crores in 2003. The recovery performance of DCCBs came

down from 70 per cent in 1998 to 61 per cent in 2003 to their total demands.

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Similarly in 2003, out of total DCCBs, 237 DCCBs earned profit and 130

DCCBs suffered losses.

Table 2.6 gives the liabilities and assets of DCCBs in India

Table 2.6

Liabilities and assets of DCCBs in India

(Rs. in crores)

Item

As at end-March Percentage variations

2006 2007 2005-06 2006-07

Liabilities

1. Capital 4,748 (3.3) 5,458 (3.4) 9.3 15.0

2. Reserves 18,702 (13.1) 20,722 (13.1) 15.8 10.8

3. Deposits 87,532 (61.2) 94,529 (59.5) 6.6 8.0

4. Borrowings 24,217 ((16.9) 29,912 (18.8) 7.3 23.5

5. Other liabilities 7,891 (5.5) 8,273 (5.2) -3.5 4.8

Total liabilities/assets 1,43,090 1,58,894 7.3 11.0

Assets

1. Cash and Bank balance 10,695 (7.5) 11,274 (7.1) 24.8 5.4

2. Investments 36,628 (25.6) 41,006 (25.8) 1.9 12.0

3. Loans and advances 79,202 (55.3) 89,038 (56.0) 8.3 12.4

4. Other assets 16,565 (11.6) 17,575 (11.1) 5.2 6.1

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total.

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The business operations of District Central Co-operative Banks

(Table 2.6) continued to expand. Assets of DCCBs grew by 11 per cent during

2006-07 as against 7.3 per cent growth achieved during 2005-06. The

composition of the liabilities/ assets of DCCBs remained broadly unchanged

between end-March 2006 and end-March 2007. Deposits continued to be the

principal source of funds for DCCBs, although their share declined.

Borrowings, however, increased sharply, implying growing reliance by the

DCCBs on outside sources for expansion. On the asset side, both the loans and

advances and investment portfolio grew at higher rates when compared to

previous year.

Table 2.7

Region-wise profit/loss making District Central Co-operative Banks

(As at end-March)

Region

2006 2007

Profit Loss Profit Loss

Nos. Amount

(Rs.crores) Nos.

Amount

(Rs.crores) Nos.

Amount

(Rs.crores) Nos.

Amount (Rs.crores)

Northern Region 64 213.64 5 19.45 55 119.39 16 44.01

Eastern Region 50 96.14 14 35.43 45 42.78 19 59.39

Central Region 74 158.91 30 174.01 71 121.16 33 186.00

Western Region 34 244.23 15 245.81 37 166.99 12 241.63

Southern Region 54 406.60 26 450.00 63 304.09 17 192.91

All India Total 276 1,119.52 90 924.7 271 754.41 97 723.94

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08.

During 2006-07, out of 368 reporting DCCBs, 271 made profits

amounting to Rs.754 crores, while 97 DCCBs made losses to the tune of

Rs.724 crores.

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State Co-operative Banks

Immediately after the launching of the co-operative movement in India,

the need for a strong and efficient bank at the apex level was felt. The

exigency was considerably pressing as the financial resources of the central

banks were inadequate. There were many central banks which had ample

surplus funds which they could not suitably invest, while other central banks

at times were confronted with a shortage of funds. The central banks could

overcome this difficulty by interlending between themselves, but the same

was not considered as a practical proposition, for it was likely to give rise to

the interlocking of liabilities which was dangerous. The only way to be out of

difficulty was the creation of a central institution at the provincial level which

would act as a clearing-house for capital, pool the resources and canalize the

surplus of one locality to meet the deficiency of another to the advantage of

the province as a whole. There was yet another difficulty which the central

banks had to face in the absence of an apex institution. They had to face the

problem of accommodation in the busy season and investment of idle money

during the slack season. In the absence of an apex institution they had to

invest their surplus money in government securities and postal savings which

generally yielded low returns. But these banks had to pay interest at

substantially high rates to obtain accommodation, due to low state of their

credit. Thus, the situation was that whereas they had to pay heavily for

obtaining accommodation during the busy season, the yield secured from

investment of idle funds in the slack season was very low. The central banks

were thus put to unnecessary loss. There was a need for a strong apex

institution at the provincial level to balance this seasonal excess and

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deficiency of funds and equate the demand and supply of capital.4 The

remedy lays in the formation of a central organization prepared always to take

off the idle money in the slack season and supply the affiliated societies and

co-operative banks with fluid resources in the busy season.

The Maclagan Committee emphasized the need for establishing an apex

bank in each major province.5 The apex co-operative banks were, therefore,

established at the provincial level with the chief object of co-ordinating the

work of central banks and linking up the co-operative credit organization with

the central money market and the Reserve Bank of India.

The apex co-operative bank occupies an important position in the entire

structure of co-operative short-term credit. It is the head of the

co-operative movement in the state and is expected to play a positive role with

regard to co-operative credit system. The apex bank is significant not only in

mobilizing the financial resources needed by the movement, but also for

deploying them appropriately among the various sectors of the movement.

4 B.S. Mathur (1996). Op.cit., pp.204-205. 5 Ibid., p.205.

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The progress of the State Co-operative Banks in India is presented in

table 2.8.

Table 2.8 Progress of the State Co-operative Banks in India

(Rs. in crores)

Particulars 1991 1998 1999 2000 2001 2002 2003

Number of SCBs 28 28 29 29 30 30 30

Owned funds N.A. 3,319 4,135 4,911 5,837 5,208 7,672

Deposits 6,708 22,189 25,788 29,557 32,606 36,260 39,335

Borrowings N.A. 8,558 9,739 10,859 11,685 11,673 12,208

Working capital 22,373 34,667 39,222 44,035 49,490 N.A. N.A.

Loans issued 6,593 29,523 32,834 37,368 34,307 34,663 38,642

Loans outstanding N.A. 19,588 21,909 25,709 29,848 32,710 34,758

Recovery performance [as % of demand]

N.A. 84 81 83 84 82 79

No.of SCBs in profit N.A. N.A. N.A. N.A. 24 24 25

No. of SCBs in loss N.A. N.A. N.A. N.A. 6 6 5

Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A. - Not Available.

Table 2.8 shows that there were 28 SCBs in 1991 and further raised to

30 in 2001 and since then it remained same upto 2003. The owned funds of

SCBs were increased from Rs.3,319 crores in 1998 to Rs.7,672 crores in 2003.

There has been a noticeable increase in the amount of owned funds of SCBs.

The deposits in SCBs stood at Rs.6,708 crores in 1991 and increased to

Rs.39,335 crores in 2003. It shows that progress made by SCBs in deposit

mobilization. During 1991, the issued loans of SCBs were Rs.6,593 crores

which increased to Rs.38,642 crores in 2003, but during 2001 the issued loan

comes down to Rs.34,307 crores. The recovery performance of SCBs

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decreased during the period from 1998 to 2003, except 2001. Out of the total,

5 SCBs suffered losses in 2003.

Table 2.9 shows the liabilities and assets of the State Co-operative

Banks in India.

Table 2.9

Liabilities and assets of State Co-operative Banks in India

(Rs. in crores)

Item

As at end-March Percentage variations

2006 2007 2005-06 2006-07

Liabilities

1. Capital 1,114 (1.5) 1,246 (1.5) 10.1 11.8

2. Reserves 9,431 (12.3) 9,303 (10.8) 11.1 -1.4

3. Deposits 45,405 (59.4) 48,560 (56.6) 2.4 6.9

4. Borrowings 16,989 (22.2) 22,256 (26.0) 16.3 31.0

5. Other liabilities 3,542 (4.6) 4,392 (5.1) 4.5 24.0

Total liabilities/assets 76,481 85,756 6.5 12.1

Assets

1. Cash and Bank balance 4,323 (5.7) 9,290 (10.8) -34.5 114.9

2. Investments 27,694 (36.2) 24,140 (28.2) 18.8 -12.8

3. Loans and advances 39,684 (51.9) 47,354 (55.2) 6.2 19.3

4. Other assets 4,781 (6.3) 4,971 (5.8) 4.6 4.0

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total.

The balance sheet of SCBs (Table 2.9) expanded significantly during

2006-07. On the liabilities side, deposits continued to account for the largest

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share of the resources of SCBs, despite the modest decline in the share during

the year 2006-07. However, the share of borrowings increased during the year.

High growth in borrowings, which outpaced the growth of other components

during the year, indicates that SCBs continued to rely heavily on outside

sources for their expansion. Capital and deposits also witnessed a higher

growth during the year 2006-07. On the asset side, while loans and advances

grew at an accelerated pace, investments declined by 12.8 per cent. Cash and

bank balances registered a sharp increase during the year.

In Tamil Nadu, the Tamil Nadu State Apex Co-operative Bank Limited

(TNSACB), over the last ten decades has played a stellar role in the service of

agriculture and rural development in Tamil Nadu through the district central

co-operative banks, primary agricultural co-operative banks and primary

weavers co-operative societies. The state co-operative bank extends short-term

and medium-term loans and advances primarily for agricultural and other

allied activities. It also provides credit for various rural development projects

through district central co-operative banks, consortium arrangements and

directly through its head office and branches. In addition to providing loans

and advances, it extends various other ancillary banking facilities such as

hiring of safe deposit lockers, accepting articles for safe custody, funds

transfer, etc.

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The bank takes up the following activities6 towards affiliated

development.

1. It forms consortium of district central co-operative banks for financing

various co-operative sugar mills in the state.

2. It helps the district central co-operative banks to channelise their

investments both for statutory and non-statutory purposes. It assists them

trading in securities by providing expertise for buying and selling of

securities.

3. The bank has constituted the “Primary Co-operative Development Fund”

for the purpose of providing financial assistance to primary agricultural

co-operative banks in Tamil Nadu for construction of strong rooms,

purchase of jewel safes, installation of defender doors, installation of

modern banking counters, etc.

4. The apex bank monitors the functioning of district central co-operative

banks in the state, inspects their activities periodically and provides

necessary guidance for the efficient running of the banks.

5. The bank has formulated the deposit guarantee scheme for primary

agricultural co-operative banks at the instance of Government of

India/Government of Tamil Nadu with a view to providing insurance

coverage for the deposits accepted by the primary agricultural

co-operative banks.

6. The bank has a separate cell for monitoring the progress made under

development action plans for all the district central co-operative banks

and primary agricultural co-operative banks in the state.

6 Government of Tamil Nadu, Co-operation Department Policy Note: 2004-2005, pp.2-3.

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7. The bank has created a technical cell for the purpose of providing

technical expertise on project evaluation to all the district central

co-operative banks for the purpose of clearing projects under non-farm

sector schemes of National Bank for Agriculture and Rural Development.

8. The bank convenes state level technical committee meeting every year

for fixing uniform scales of finance for all crops for each district in the

state.

Primary Co-operative Agriculture and Rural Development Bank

(PCARDBs)

The PCARDBs are at the lowest level of long-term co-operative credit

structure. They are at block level. They provide long-term loans to their

members for the purpose of minor irrigation, agricultural machinery,

development of land, etc. The primary banks obtained their finance from the

following sources:

a. Share capital

b. Deposits

c. Grants and subsidies from government bank.

d. Admission and other fees.

e. Grants and subsidies from government

f. Borrowings from other agencies.

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Table 2.10

Progress of Primary Co-operative Agriculture and Rural Development Banks in India

(Rs. in crores)

1998 1999 2000 2001 2002 2003

Number of PCARDBs 745 745 755 755 768 768

Owned funds 989 1167 1379 1628 2494 2730

Deposits 99 166 218 235 256 222

Borrowings 5,888 6,777 7,647 8,412 1,034 11,217

Working capital 7,285 8,824 9,982 10,838 N.A. N.A.

Loans issued 1,594 1,735 1,819 1,865 2,045 2,151

Loans outstanding 5,840 6,778 7,611 8,352 9,982 10,775

Recovery performance (% to demand) 55 60 58 53 56 59

No. of PCARDBs in Profit N.A. N.A. N.A. 183 191 226

No. of PCARDBs in Loss N.A. N.A. N.A. 572 577 542

Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A. - Not Available.

Table 2.10 indicates that the number of PCARDBs has slightly

increased from 745 in 1998 to 768 in 2003. Deposits of PCARDBs showed an

increasing trend. The loans issued stood at Rs.1,594 crores in 1998 and

increased to Rs.2,151 crores in 2003. It showed that there has been a

phenomenal raise in the amount of loan operations of PCARDBs. The loans

outstanding increased from Rs.5,840 crores in 1998 to Rs.10,775 crores in

2003. The recovery performance increased from 55 per cent in 1998 to

59 per cent in 2003.

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Table 2.11 presents the liabilities and assets of PCARDBs in India

Table 2.11

Liabilities and assets of PCARDBs in India (Rs. in crores)

Item As at end-March Percentage variations

2006 2007 2005-06 2006-07

Liabilities

1. Capital 922 (4.3) 918 (4.2) 0.2 -0.4

2. Reserves 2,665 (12.5) 2,678 (12.3) 21.4 0.5

3. Deposits 382 (1.8) 341 (1.6) 4.9 -10.7

4. Borrowings 13,066 (61.1) 12,751 (58.6) 2.5 -2.4

5. Other liabilities 4,331 (20.3) 5,085 (23.3) 3.5 17.4

Total liabilities/assets 21,365 (100) 21,774 (100) 4.7 1.9

Assets

1. Cash and Bank balance 224 (1.1) 223 (1.0) 7.3 -0.4

2. Investments 778 (3.6) 824 (3.8) -3.2 5.9

3. Loans and advances 12,740 (59.6) 12,114 (55.6) 0.9 -4.9

4. Other assets 7,623 (35.7) 8,612 (39.6) 12.5 13.0

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total.

The balance sheets (Table 2.11) of PCARDBs continued to expand

during 2006-07 but at a lower rate (1.9%) when compared to previous year

(4.7%). This could be attributed to the substantial decline in both deposits and

borrowings. The share of borrowings, the most important source of funds in

the overall liabilities also declined. Reserves of PCARDBs, after showing a

substantial increase during 2005-06, remained almost at the same level during

2006-07. On the asset side, investments recorded a sharp growth, reversing the

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trend of the last year, while loans and advances declined by 4.9 per cent

during 2006-07.

State Co-operative Agriculture and Rural Development Banks

(SCARDBs)

The State Co-operative Agriculture and Rural Development Banks are

the agencies for lending long-term credit to agriculture. They are working at

state level. The main function of SCARDBs is to raise long-term funds to

finance primary co-operative agricultural and rural development banks

affiliated to them or finance individuals directly through their branches and to

encourage thrift and co-operation amongst the ultimate members. The

SCARDBs get their finance from the following sources.

a. Share capital

b. Issue of debentures

c. Loans from State Bank of India on the guarantee of state

governments

d. Admission and other fees

e. Deposits

f. Grants and Subsidies

g. Other funds.

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Table 2.12 Progress of the State Co-operative Agriculture

and Rural Development Banks in India (Rs. in crores)

1998 1999 2000 2001 2002 2003

Number of SCARDBs 19 19 19 20 20 20

Owned funds 1,685 2,353 2,702 3,034 2,484 2,891

Deposits 203 240 422 535 572 545

Borrowings 9,772 1,051 12,390 13,431 14,845 4,189

Working capital 11,716 13,078 15,074 16,896 N.A. N.A.

Loans issued 2,295 2,439 2,532 2,586 2,747 2,964

Loans outstanding 9,182 10,441 11,565 12,596 14,147 15,385

Recovery performance (% to demand) 61 62 62 58 60 62

No. of SCARDBs in Profit N.A. N.A. N.A. 10 9 8

No. of SCARDBs in Loss N.A. N.A. N.A. 10 11 12

Source: Cooperative Perspective, Vol.42, no.1-2 (2007). Note : N.A.: Not available.

Table 2.12 reveals that the SCARDBs issued loans of Rs.2,295 crores

in 1998 and it increased upto Rs.2,964 crores in 2003. In 1998, loans

outstanding was found to be Rs.9,182 crores and further it had raised to

Rs.15,385 crores in 2003. The percentage of recovery of SCARDBs to

demand stood at 61 per cent in 1998 and it increased to 62 per cent in 2003.

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Table 2.13 shows the liabilities and assets of the SCARDBs in India.

Table 2.13

Liabilities and assets of SCARDBs in India

(Rs. in crores)

Item

As at end-March Percentage variations

2006 2007 2005-06 2006-07

Liabilities

1. Capital 801 (3.2) 794 (3.3) 1.3 -0.9

2. Reserves 2,354 (9.6) 2,137 (8.8) 8.7 -9.2

3. Deposits 636 (2.6) 605 (2.5) 4.6 -4.9

4. Borrowings 17,075 (69.4) 16,662 (68.5) -0.6 -2.4

5. Other liabilities 3,739 (15.2) 4,138 (17.0) 6.0 10.7

Total liabilities/assets 24,604 (100) 24,336 (100) 1.4 -1.1

Assets

1. Cash and Bank balance 365 (1.5) 279 (1.1) 1.4 -23.6

2. Investments 1,885 (7.6) 1,916 (7.9) 1.0 1.6

3. Loans and advances 17,713 (72.0) 18,644 (76.6) 1.8 5.3

4. Other assets 4,641 (18.9) 3,497 (14.4) 0.0 -24.6

Source: RBI, Report on Trend and Progress of Banking in India, 2007-08. Note : Figures in parentheses are percentages to total.

As shown in table 2.13, the assets and liabilities of the SCARDBs

declined (1.1%) during 2006-07. Borrowings, the main source of funds,

as well as deposits declined between 2.4 and 4.9 per cent. Net owned funds

also witnessed a decline. On the asset side, loans and advances grew

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by 5.3 per cent, while investments recorded a moderate growth of 1.6 per cent.

Cash and bank balances and other assets, however, witnessed a sharp decline.

Primary Agricultural Credit Societies in Tamil Nadu

The first agricultural credit society in Tamil Nadu was started in Tirur

in 1904 immediately after the passing of the Co-operative Credit Societies Act

1904. As on 30.06.1915, there were 1446 agricultural credit societies. Until

1918 about 300 societies came into existence every year. In 1918-1919 the

number of societies increased by more than 800 and till 1927-28 there was an

addition of primary agricultural credit societies between 750 and 1000. As on

30.06.1921, the number of societies was 5,199 and the membership was

2,74,808. The average membership per society works out to 53. The financial

particulars of the primary agricultural credit societies as on 30.6.1921 are

given below.

(Rs. in lakhs)

Borrowings 156.23

Loans outstanding against members 159.65

Reserve fund and other funds 9.58

Working capital 183.86

Profit 1.93

Loss 2.84

About thirty years later, the number of agricultural credit societies rose

to 10,887 with a membership of 6.66 lakhs and a paid up share capital of

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Rs.59.22 lakhs as on 30.06.1950.7 The other financial particulars of these

societies are given in the following statement.

(Rs. in lakhs)

Borrowings 652.36

Loans outstanding against members 831.62

Reserve fund and other funds 149.86

Working Capital 999.73

Profit 14.33

Loss 10.91

The average membership per society in 1949-50 was 61. There was,

thus, an increase of only eight members in the average membership during the

period from 1920-21 to 1949-50. This can be termed as poor progress. There

is however, an increase under borrowings, loans outstanding against members,

reserve fund and other funds and working capital as on 30.06.1950 when

compared to the corresponding figures as on 30.06.1921.8

Introduction of a scheme for expansion of rural credit in 1949-50

A scheme for the expansion of rural credit co-operatives

was introduced in February 1949 to cover at least 50 per cent of the villages

and 30 per cent of the population. In 1949-50, agricultural credit

co-operatives covered 41.40 per cent of the villages. During this year, 6,444

rural credit societies undertook some multi-purpose activity like distribution

7 K. Keshav Kini, “Primary Agricultural Credit Societies in Tamil Nadu” Tamil Nadu

Journal of Cooperation, Vol.1, no.1 (2000), p.34. 8 Ibid., pp.34-35.

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of seeds, manures, agricultural implements and controlled commodities like

rice, sugar, kerosene, etc.9

Co-operative Agricultural Banks

Following the recommendations of the Rural Credit Survey Committee,

twelve large sized societies known as co-operative agricultural banks whose

liability was limited to a multiple of the share capital subscribed by the

members were organized in 1955-56. More banks were organized

subsequently and as on 30th

June 1961, 329 co-operative agricultural banks

were functioning in the state. In November 1958, the National Development

Council enunciated the principle that agricultural credit co-operatives should

be organized on the basis of village community as a primary unit and that they

should not only disburse credit, but also undertake supply of agricultural

requisites to the members. The state government accepted the

recommendation and directed the Registrar of Co-operative Societies not to

organize agricultural banks any more.10

Intensive Agricultural District Programme

The intensive agricultural district programme popularly known as the

package scheme was introduced in Thanjavur district on 13th

April 1960 in 23

community development blocks. A compact group of villages (317) was

selected to cover 1/5 of the cultivated lands (about 2.23 lakh acres). In these

blocks one hundred and eighty-two rural credit co-operatives were to issue

credit and agricultural inputs to their members on the basis of farm production

9 K. Keshav Kini, Op.cit., p.35. 10 Ibid., p.36.

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plans which were prepared for them by the community development blocks.

The objective of the scheme was to maximize agricultural production by

providing timely credit with cash and kind components, consisting of mainly

chemical fertilizers, pesticides and seeds. The programmes were extended to

other areas on the subsequent years.11

Introduction of the crop loan scheme

In 1966-67, a rationalization of short-term lending policies was effected

by the introduction of the crop loan system. Under this system, the issue of

loans coincided with the commencement of agricultural operations and the

dates of the recoveries of the loans were fixed, a month or two after the

harvest. There were the cash and the kind components to a loan. The cash

portion was given for wages of labour, hire charges of plough bulls etc. The

kind portion consisted of chemical fertilizers, seeds and pesticides etc. Scales

of finance were fixed for each crop per acre. Landless tenants were also to be

issued loans under this scheme. The linking of credit with marketing was an

important plan of the crop loan system.

The following statement gives particulars of the issue of loans by

agricultural credit societies during the years 1978-79, 79-80 and 1980-81.

Year

Issue of Loans

(Rs. in crores)

1978-79 122.48

1979-80 68.61

1980-81 45.51

11 K. Keshav Kini, Op.cit., p.36.

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There was a decline in the issue of loans from 1978-79 onwards. The

decline in the issue of loan was mainly due to heavy overdues. As on

30.06.1962, the percentage of overdues to demand was 9.2 and as on

30.06.1981, it was 43.8 indicating that the collection drive was not particularly

effective.12

While as on 30.06.1951, the average membership and the paid up

share capital per society were 83 and Rs.1,033, as on 30.06.1981, the average

membership and the paid up share capital were 1,055 and Rs.88,635

respectively. It may be seen that the increase in membership and the paid up

share capital over the years has been quite satisfactory. The results were

achieved either by weeding out uneconomic units or amalgamating them with

viable and potentially viable societies.13

Primary Agricultural Co-operative Banks

The primary agricultural credit societies have been designated as

primary agricultural co-operative banks in Tamil Nadu. As on 30.06.1987,

there were 4,655 primary agricultural co-operative banks in the state. On that

date, the membership of these banks was 60.13 lakhs and the paid up share

capital was Rs.6,068.90 lakhs. As on 30.06.1981 the membership per society

was 1,055 while as on 30.06.1987 it went upto 1,292. The progress can be

termed as satisfactory.

12 K. Keshav Kini, “Primary Agricultural Credit Societies in Tamil Nadu”, Tamil Nadu

Journal of Cooperation, Vol.1, no.1 (2000), pp.41-42. 13 Ibid., p.42.

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As on 30.06.1981, the deposits per society worked out to Rs.36,485

whereas as on 30.06.1987, the deposits were Rs.1,19,795 per bank. Good

progress was registered by these banks in mobilizing deposits. Loan issues

also registered an increase in 1986-87 as compared with 1980-81. In 1986-87,

the loans issued were Rs.30,416.77 lakhs while in 1980-81 the loan issues

were Rs.4,550.65 lakhs.

Action plan for strengthening the primary co-operative agricultural

structure was launched on 1999. A memorandum of understanding was

entered into by the Tamil Nadu State Apex Co-operative Bank with

NABARD. The objective was making all the primary agricultural co-operative

banks viable. In each Regional Joint Registrar’s region, a task force was set

up under the chairmanship of the Regional Joint Registrar and 118 banks were

identified under the scheme. The scheme envisages that either the banks

amalgamate themselves with other banks or go into liquidation.

The details of the number of banks in which the state participated in the

share capital from 1994-95 to 1998-99 are given below.

Year No. of PACBs

1994-95 705

1995-96 1640

1996-97 851

1997-98 922

1998-99 973

In 1992, a deposit guarantee scheme was introduced to help the banks

to strengthen their deposit base. Under the scheme, the central co-operative

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banks guarantee the deposits of the primary banks. While as on 31.03.1993,

the banks had deposits of Rs.357 crores, on 31.03.1999 they increased to

Rs.2045.40 crores. The progress recorded was indeed spectacular.14

A fact that cannot escape our notice is that as on 31.03.1997, out of

4,957 primary agricultural co-operative banks, as many as 3,778 banks were

working on loss, the loss being Rs.6,814.13 lakhs. As on 30.06.1993 out of

the loans outstanding of Rs.1,435.79 crores, the overdues were Rs.398.71

crores. As on 30.06.1998 the overdues constituted 32.4 per cent of the loans

outstanding.15

The primary agricultural co-operative banks in the villages meet the

short-term agricultural credit requirements of the farmer members towards

their cultivation operations. The period of repayment of short-term loan

ranges between 12 and 15 months. The banks issue medium-term loan also to

the members for undertaking subsidiary occupation allied to agricultural

activities like purchase of milch animals, sheep rearing, poultry farming, etc.

The time of repayment of these loans is 3 to 5 years. These banks provide

loans for cultivation on personal surety basis as per the scales of finance

which are fixed by a state level committee.

As on 2003-04, there were 4,555 primary agricultural co-operative

banks in the state.16

During 2003-04, the Government has sanctioned

Rs.56.60 lakhs as share capital to 115 primary agricultural co-operative banks

14 K. Keshav Kini, “Primary Agricultural Co-operative Banks”, Tamil Nadu Journal of

Cooperation, Vol.1, no.1 (2000), pp.43-44. 15 Ibid., p.44. 16 Government of Tamil Nadu, Co-operation Department Policy Note, 2004-05.

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coming under the purview of Salem, Tiruchirapalli, Kumbakonam and

Sivagangai District Central Co-operative Banks for availing loan from

National Bank for Agriculture and Rural Development from its National

Rural Credit [LTO] Fund. A sum of Rs.500 is provided as interest free loan

to women members of primary agricultural co-operative banks to increase

their share capital for obtaining enhanced loan amount. In 2003-04, an

amount of Rs.10 lakhs has been sanctioned under this scheme benefitting 2000

women members.17

Rural co-operative banking sector in post economic reform period

The role of rural co-operative banking sector is inevitable in the

development of agriculture in India. Indian agriculture has been going through

a serious crisis during the post-reform period. Besides domestic concerns,

such as decline in productivity, high input-cost, declining public sector

investment, inadequate availability of institutional credit and raising

agricultural imports. Indian agriculture has also been facing external

challenges under the WTO regime.18

Now farmers have to face the challenge

of increased production with less production cost, so that their produce stands

competitively in global market, where prices will be the dictating factor.19

In

the wake of WTO Agreement on Agriculture and with the removal of

quantitative restrictions on imports of various agricultural commodities with

effect from 1st April, 2001, the co-operative marketing organizations have

been taking steps to improve their competitive edge in terms of cost-

17 Government of Tamil Nadu, Co-operation Department Policy Note, 2004-05. 18 S.P. Singh and M.R. Behera, “Indian Agriculture and WTO”, Yojana, Vol.50,

(September, 2006), p.24. 19 Prasoon Verma, “Agriculture as an Industry”, Yojana, Vol.50 (September, 2006), p.20.

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effectiveness, improvement in quality standards and control on management

and operational costs.20

The agriculture sector is the mainstay of Indian economy as it supports

more than half a billion people, by providing employment to nearly

52 per cent of the workforce in our country. However, the agriculture sector

faces many challenges which affect its growth. Recognizing the importance of

agricultural sector in the overall growth of the country, the Ministry of

Agriculture has initiated several policies and programmes to increase crop

production in the country and improve farm incomes. Fulfilling its

commitment towards farmers welfare, the government announced a Rs.71,680

crores agricultural debt waiver and debt relief scheme, which is the first of its

kind since independence for farmers covering direct agricultural loans.21

This is an age of co-operative reforms. Several reforms have already

made their way into the functioning of the co-operative banks of the nation.

However, a lot remains to be done. We cannot run away from the fact that the

co-operative banks have not realized their full potential. However, this does

not mean that the very model of co-operative behaviour is outdated. An

impartial assessment of the performance of the banks will lead to the

formulation of appropriate policy reforms.22

In order to face the challenges of

globalization and liberalization, which affect all major sectors of the economy,

the co-operative banking sector has to necessarily reinvent itself, by

20 G.H. Amin, “Development of Agriculture Co-operatives in India”, The Cooperator,

Vol.45, no.5 (2007), p.183. 21 Sharad Pawar, “Agriculture sector: some issues”, The Cooperator, Vol.46, no.8 (2009),

p.343. 22 Sharad Pawar, “Co-operative banks: some issues”, The Cooperator, Vol.45, no.4 (2007),

p.127.

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improving its operations, strengthening corporate governance, introducing

high level of technology and improving human resource quality.23

The main focus of the recommendations of the Task Force on Revival

of Rural Co-operative Credit Institutions headed by Prof. A. Vaidyanathan

was to restore the autonomy of the credit co-operatives by scaling down the

control and interference by the state governments through amendments to the

State Co-operative Societies Acts. Amendment to the Banking Regulation

Act, 1949 was also recommended. Further the recommendations of the Task

Force included provision of financial assistance for recapitalization to fund the

accumulated losses of the short-term co-operative credit structure, evolving

a common accounting system, management information system (MIS) and

computerization and HRD initiatives. The proposed financial assistance was

made contingent upon the introduction of institutional, legal and regulatory

reforms.

In January 2006, the central government announced a revival package

with an estimated outlay of Rs.13,596 crores, based on the recommendations

of the Task Force. Release of financial assistance was made conditional to

certain legal and institutional reforms, viz. amendments to Co-operative

Societies Acts, introduction of professionals on boards of co-operatives,

introduction of common accounting system (CAS) and management

information system (MIS).

23 Oscar Fernandes, “Co-operative banks: some issues”, The Cooperator, Vol.45, no.4

(2007), p.131.

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As on March 31, 2008, a special audit was completed in

59,294 PACSs affiliated to 279 DCCBs. State-level task forces were

constituted in the implementing states to review regulatory issues relating to

co-operative banks. By end-September 2008, Governments of nine states

passed bills to amend their Co-operative Societies Act. NABARD has

developed and circulated CAS and MIS to PACSs for adoption. These were to

be operationalised in all implementing states with effect from April 1, 2008. In

a move towards recapitalizing eligible PACSs, NABARD released Rs.3,980

crores as the Government of India’s share in recapitalization.24

In the revival of co-operative banking sector, the Government of

Tamilnadu is playing an important role. The decision of the Government to

waive all agricultural loans and interest thereon outstanding as on 31.3.2006

amounting to Rs.6,866 crores25

has given a new lease of life to the entire

co-operative sector. While the scheme has broken the shackles of indebtedness

among the farming community, it has greatly improved the cash flow within

the co-operative credit sector, facilitated greater provision of credit and other

inputs for agricultural production and improved their operational viability.

Tamilnadu Government has signed a Memorandum of Understanding

with Government of India and NABARD for implementation of the scheme of

revival of short-term co-operative credit structure based on the

recommendations of Prof. A. Vaidyanathan Committee. A special scheme was

launched by the government to rejuvenate about 1192 weak primary

agricultural co-operative banks with the help of primary co-operative

24 RBI, Report on Trend and Progress of Banking in India, 2007-08, pp.194-195. 25 Government of Tamil Nadu, Co-operation Department Policy Note: 2006-07.

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development fund. Most of the societies in the above category had fallen

dormant because of the lack of resources and had stopped lending and other

operations. To help them to restart lending, a special cash credit at the rate of

Rs.20 lakhs per society is being provided by DCCBs at a concessional rate of

interest. The government is taking all efforts to inculcate the habit of financial

discipline among the farmers. As a special measure, government has reduced

the interest rate from 9 to 7 per cent for the crop loans on 2006-07 and further

reduced to 5 per cent for all crop loans being repaid promptly by the farmers.

This has been further reduced to 4 per cent in 2008-09.26

Having examined the role of co-operative credit societies in rural

credit, the financial performance of the sample PACBs has been analysed in

the next chapter.

26 Government of Tamil Nadu, Co-operation Department Policy Note: 2008-09.