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Banking in India - Part 5 (Banking Structure)

Bankers Corner

Bank Nationalisation

  • By the early 1960s, the Government of India realized that a significant share of deposits coming from the masses of India was controlled by 14 privately owned commercial banks. Indian agriculture and industries were booming and the need for finance was high.
  • Financial regulations were also very important at that time since those would help shape the nature of the country’s economy for decades to come.
  • With Mrs. Indira Gandhi taking over as the Prime Minister of India, the Indian National Congress rallied for a state takeover of some of the major banks in the country.
  • In what can be deemed a rather hasty move, the government promulgated an ordinance - the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 - thereby nationalising all the 14 banks that were under consideration and having deposits of more than rupees 50 Crore, with effect from the midnight of 19 July 1969.
  • As a follow-up to passing the ordinance, the Banking Companies (Acquisition and Transfer of Undertaking) Bill was taken up by the Parliament for discussion. It received a clear majority as well as the assent of the President within a month of issuing the ordinance.
  • In 1980, when Mrs. Gandhi was re-elected as the Prime Minister for her third term at the PMO, she initiated a second spate of bank nationalization. This time about six banks were nationalised and the Government of India controlled over 90 percent of the banking business in the country. Of the 20 banks that were nationalised, New Bank of India was later (in 1993) merged with Punjab National Bank.

Banking Structure

Public Sector Bank

  • After 1969 Commercial Banks are broadly classified into Nationalised or Public Sector Banks and Private Sector Banks.
  • These Public Sector Banks are now managed by the Government of India through the Board of Directors appointed by it.

 State Bank of India

  • The State Bank of India was founded as the Imperial Bank of India in January 1921 through the merger of Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1955, the Reserve Bank of India bought a 60-percent stake in the bank and renamed it State Bank of India (SBI Act, 1955).
  • During the nationalisation of banks in 1969, and again in 1980, SBI was not added to the list of the ‘nationalised banks’ since it was already a state-owned financial institution. In 2008, the Government of India took over the RBI's stake in the bank to avoid any conflict of interests within the RBI (which both owned and regulated the SBI).
  • Now though the SBI and its subsidiaries are often referred to as a nationalised bank, it is a Public Sector Undertaking (PSU) and not one of the nationalised banks of India. It is India's largest banking and financial services enterprise as of now.
  • Similarly, IDBI Bank Ltd. is also a public sector bank but not one of the nationalised banks of India. IDBI Bank was established in 1964 (IDBI Act, 1964) to aid developmental finance in the country. Initially, it was a financial institution and did not participate in core banking activities. IDBI Bank was inducted into banking in 2003 and was merged with IDBI Ltd. - a company, in which the Government of India holds about 70-percent stake, in 2005.

 

Nationalised Banks

  • After nationalization in 1969, the Government imposed Social control on banks by introducing certain provisions in the Banking Regulation Act,1949. It imposed severe restrictions on the composition of the board of directors and internal management and administration of Banking Companies. It also introduced restrictions on advances by banking companies.
  • These were intended to ensure that the bank advances were not confined to large scale industries and big business houses, but were also directed, in due proportion to other important sectors like agriculture, small scale industries and exports.

Benefits of the Nationalisation of Banks

  • The nationalization of banks was a significant move undertaken by the government for the development of the country.
  • It instilled public confidence in the banking system encouraging the masses to save and invest.
  • It allowed for the elimination of regional bias and promoted opening up of branches in the remote areas of the country as well, thus strengthening the banking network.
  • By elimination of monopoly or credit competition, nationalization streamlined banking practices in the country, thereby directing funds where it was most necessary – towards industrial and sectoral development – as planned by the RBI and the Indian government.

Private Banks

  • All those banks where greater parts of Stake or equity are held by the private shareholders are called as Private Sector Banks. They are divided into
    1. Old Private Sector Banks
    2. New Private Sector Banks
  • The banks which were not nationalised at the time of nationalisation of banks that took place during 1969 and 1980 are known as the Old Private Sector Banks. These were not nationalised, because of their small size and regional focus.
  • The banks which came in operation after 1991, with the introduction of economic reforms and financial sector reforms are known as New Private Sector Banks. Banking regulation Act was then amended in 1993, which permitted the entry of new Private Sector Banks in the Indian banking sector.

Foreign Banks

  • Foreign Banks are banks from a foreign country working in India through branches.
  • Foreign Banks are allowed to operate in India through branches and representative offices. A new foreign Bank desirous of opening a branch in India is required to apply to Reserve Bank of India giving relevant information about its shareholders, financial position and the dealing with Indian parties. Foreign Banks applying for branch in India should met several condition which is mentioned below:
    1. Economic stability should be proved by the bank
    2. Bank must have a very good financial soundness
    3. The bank must provide necessary documents to show the proper ownership.
    4. The bank must be rated by any International rating agency
    5. Bank must have a risk management team.
    6. The largest branch network of foreign banks in India was that of Standard Chartered Bank (96) followed by HSBC Limited (50), Citibank (42) and the Royal Bank of Scotland (31).

 Regional Rural Bank

  • The nationalization of the banks in 1969 boosted the confidence of the public in the Banking system of the country. However, in the early 1970s, there was a feeling that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. This issue was taken up by the government and it set up Narasimham Working Group in 1975. On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
  • Regional Rural Banks Act, 1976 was enacted by Parliament to provide for the incorporation, regulation and winding up of Regional Rural Banks
  • Regional Rural Banks came into existence on Gandhi Jayanti in 1975 with the formation of a Prathama Grameen Bank. The rural banks had the legislative backing of the Regional Rural Banks Act 1976. This act allowed the government to set up banks from time to time wherever it considered necessary.
  • The RRBs were owned by three entities with their respective shares as follows:
    1. Central Government → 50%
    2. State government → 15%
    3. Sponsor bank → 35%
  • Regional Rural Banks are regulated by National Bank for Agriculture and Rural Development (NABARD). On the recommendation of M.Narasimham committee, first RRB was Prathama bank in Moradabad (Uttar Pradesh), sponsored by Syndicate Bank, established on 2nd October 1975 with a capital of Rs. 5 crores.
  • The states and UTs, where there is no presence of RRbs are Goa, Sikkim, Delhi, Chandigarh, Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu.
  • The objective of the RRBs is to develop the rural economy by providing for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs and for matters connected therewith and incidental thereto.
  • A Regional Rural Bank seeking permission of the Reserve Bank for opening branches has to obtain the recommendation of NABARD.

Scheduled Cooperative Banks

CO-OPERATIVE BANKS AND THEIR ROLE IN INDIA

  • The concept of cooperation is as old as mankind and it forms the basis for domestic and social life. The cooperation is nothing but group instinct in human which enable one to live with others, work with others and help each other in times of stress and strain. Without cooperation, the social and economic progress would not be possible.

Co-operative Banks

  • A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community of sharing a common interest.
  • Cooperative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts, etc.). Co-operative banks differ from stockholders bank by their organization, their goals, their values and their governance.

Co-operative Banking in India

  • The co-operative banks in India have a history of almost 100 years. The co-operative banks are an important constituent of the Indian Financial System, judging by their role assigned to them.
  • The co-operative movement was originated in the west, but the importance that such bank have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be an important event today, and their business in urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary cooperative banks.
  • Co-operative banks in India are registered under the Cooperative Societies Act. The co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955. A Regional Rural Bank seeking permission of the Reserve Bank for opening branches has to obtain the recommendation of NABARD.

Establishment of Co-operative Banks in India

  • The co-operative movements in the world and in India have grown well.
  • Though the first documented consumer cooperative was founded in 1769 in a barely furnished cottage in Fenwick, East Ayrshire, the co-operative movement in India is century old.
  • Despite the Co-operative Credit Societies Act was passed in 1904 based on the recommendations of Sir Frederick Nicholson (1899) and Sir Edward Law (1901), paving the way for the establishment of co-operative credit societies in rural and urban areas, during British rule, the co-operatives in India have made remarkable progress in the various segments of Indian economy only after 1950s.
  • In order to facilitate rural financing, the co-operative banks were started in India during 1950s.
  • The first urban cooperative bank in India was formed nearly 100 years back in Baroda.
  • The co-operative banks is an official effort to create a new type of institution based on the principles of co-operative organization and management, suitable for problems peculiar to Indian conditions.
  • These banks were conceived as substitutes for money lenders, to provide timely and adequate short-term and long-term institutional credit at reasonable rates of interest.
  • The concept of Urban Cooperative Bank was first spelt out by Mehta Bhansali Committee in 1939 which defined on Urban Co-operative Bank.
  • The Reserve Bank of India assists the co-operative structure by providing concessional finance through NABARD in the form of General Lines of Credit for lending to agricultural & allied activities. Thus, the whole system is integrated with the Banking structure of the country
  • The co-operative banking structure in India is bifurcated into Short-term structure and Long-term structure. While the short-term structure is three tier structures, long-term co-operative banking structure is the two tier structures as mentioned below:
    1. Short-Term Co-operative Bank Structure
      1. A State Co-operative Bank works at the apex level (works at state level).
      2. The Central Co-operative Bank works at the IntermediateØ Level(works at district level)
      3. Primary co-operative credit societies at base level (works at villageØ level)
    2. Long-Term Co-operative Bank Structure
      1. State Co-operative Agriculture and Rural Development BanksØ (SCARDBs) at the apex level.
      2. Primary Co-operative Agriculture and Rural DevelopmentØ Banks (PCARDBs) at the district level or block level.

Role of Co-operative Banks in India

  • The co-operative banks in India play an important role even today in rural financing. The businesses of co-operative banks in the urban areas also 70 have increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks. The co-operative banks are expected to perform some duties, namely, extend all types of credit facilities to customers in cash and kind, advance consumption loans, extend banking facilities in rural areas, mobilize deposits, supervise the use of loans etc. The needs of a co-operative bank are different.
  • Co-operative banks in India finance rural areas under:
    1. Farming
    2. Cattle
    3. Milk
    4. Hatchery
    5. Personal finance
    6. Co-operative banks in India finance urban areas under:
    7. Self-employment
    8. Industries
    9. Small scale units
    10. Home finance
    11. Consumer finance
    12. Personal finance

Types & Function of Co-operative Banks, India

  • The co-operative banks are small-sized units which operate both in urban and non-urban centers. They finance small borrowers in industrial and trade sectors besides professional and salary classes. The co-operative banking structure in India is divided into following 5 categories:
    1. Primary Co-operative Credit Society
    2. The primary co-operative credit society is an association of borrowers and non-borrowers residing in a particular locality.
    3. The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks.
    4. The borrowing powers of the members as well as of the society are fixed.
    5. The loans are given to members for the purchase of cattle, fodder, fertilizers and pesticides.
    6. Central Co-operative Banks
    7. These are the federations of primary credit societies in a district and are of two types-those having a membership of primary societies only and those having a membership of societies as well as individuals.
    8. The funds of the bank consist of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks.
    9. These banks provide finance to member societies within the limits of the borrowing capacity of societies. They also conduct all the business of a joint stock bank.
    10. State Co-operative Banks
    11. The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the co-operative banking structure in the state.
    12. Its funds are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of India. The state co-operative banks lend money to central co-operative banks and primary societies and not directly to the farmers.
    13. Land Development Banks
    14. The Land development banks are organized in 3 tiers namely; state, central, and primary level and they meet the long term credit requirements of the farmers for developmental purposes.
    15. The state land development banks oversee, the primary land development banks situated in the districts and tehsil areas in the state. They are governed both by the state government and Reserve Bank of India.
    16. Recently, the supervision of land development banks has been assumed by National Bank for Agriculture and Rural development (NABARD). The sources of funds for these banks are the debentures subscribed by both central and state government.
    17. These banks do not accept deposits from the general public.
    18. Urban Co-operative Banks
    19. The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary co-operative banks located in urban and semi urban areas.
    20. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centered on communities, localities, work place groups.
    21. They essentially lend to small borrowers and businesses. Today, their scope of operations has widened considerably.
  • The origins of the urban co-operative banking movement in India can be traced to the close of nineteenth century. Inspired by the success of the experiments related to the co-operative movement in Britain and the cooperative credit movement in Germany, such societies were set up in India.
  • Co-operative societies are based on the principles of cooperation, mutual help, democratic decision making, and open membership.
  • Co-operatives represented a new and alternative approach to organization as against proprietary firms, partnership firms, and joint stock companies which represent the dominant form of commercial organization.
  • They mainly rely upon deposits from members and non-members and in case of need, they get finance from either the District central co-operative bank to which they are affiliated or from the Apex co-operative bank if they work in big cities where the apex bank has its Head Office.
  • They provide credit to small scale industrialists, salaried employees, and other urban and semi-urban residents.

Functions of Co-operative Banks

  • Co-operative banks also perform the basic banking functions but they differ from commercial banks in the following respects:
    1. Commercial banks are joint-stock companies under the companies’ act of 1956, or public sector bank under a separate act of a parliament whereas co-operative banks were established under the co-operative societies acts of different states.
    2. Commercial bank structure is branch banking structure whereas Cooperative banks have a three tier setup, with State Co-operative Bank at Apex level, Central / District Co-operative Bank at district level, and Primary Co-operative Societies at rural level.
    3. Only some of the sections of Banking Regulation Act of 1949 (fully applicable to commercial banks), are applicable to co-operative banks, resulting only in partial control by RBI of co-operative banks.
    4. Co-operative banks function on the principle of cooperation and not entirely on commercial parameters.

 Credit Structure of Co-operative Banking in India

  • India's co-operative banking structure consists of two main segments:
    1. Agricultural and
    2. Non-agricultural credit
  • There are two separate structures in the case of agricultural credit - one for short and medium term credit and the other for long term credit. The co-operative credit structure for short and medium terms is a three tier, one with primary agricultural credit societies at the base level, the central co-operative bank at the district level and state co-operative bank at the apex level. Though the organisation of central and state co-operative banks was mainly for the benefit of the agricultural credit sector, they serve non-agricultural societies too. 

Primary Agricultural Credit Societies

  • Primary Agricultural Credit Societies (PACS) are the foundation of the co-operative credit structure and form the largest number of co-operative institutions in India.
  • Most of these societies have been organised mainly to provide credit facilities and to inculcate the habit of thrift and economy among their members.
  • The share capital of a society is divided into units, called shares, contributed by the members.
  • The most important source of finance of Primary Agricultural Credit Societies is members' deposits. Borrowings constitute the most important element of their working capital.
  • The criteria for borrowings differ from state to state according to their liability. Punctuality in the repayment of loans has hardly been observed by the members with the result that there has been a steep rise in the amount of over dues all over the country.

District Central Co-operative Banks

  • District Central Co-operative Banks (DCCBs) occupy the middle level position in the three tier co-operative credit structure of the country.
  • In the beginning of the formation of Primary Agricultural Credit Societies, they could not function effectively without gaining financial support from an outside agency. The formation of District Central Co-operative Banks was thus a felt need for mutual help.
  • The Co-operative Societies Act of 1912 permitted the registration of District Central Co-operative Banks. Even before the enactment of this Act, some District Central Co-operative Banks were established to cater to the needs of primary
  • In 1906, forerunner of the first District Central Co-operative Banks was established as a primary society in Uttar Pradesh. At Ajmer in Rajasthan the first District Central Co-operative Banks was established in 1910. But the first full-fledged DCCB as per the provisions of the Act of 1912 was started in Jabalpur District of the Central Province.
  • The major objectives of the District Central Co-operative Banks are:
    1. To provide loans to affiliated societies.
    2. To act as a balancing centre of finance for primary societies
    3. To arrange for the supervision and control of the affiliated societies
    4. To raise deposits from members and non-members
    5. To convene conferences of the member societies and also prescribe uniform procedure for the working of primary societies
    6. To open branches of the bank at important places with the permission of the Registrar of Co-operative Societies and
    7. To maintain and utilise state partnership.
  • Generally, the area of operation of a District Central Co-operative Banks is limited to one district.

State Co-operative Banks in India

  • The State Co-operative Banks (SCBs) or the Apex Banks occupy a crucial position in the three tier co-operative credit structure in India.
  • These Apex Banks or State Co-operative Banks are formed by federating District Central Co-operative Banks in each state. The Apex Banks assume a key-position in the co-operative credit structure because the financial assistance from RBI and the National Bank for Agriculture and Rural Development are invariably routed through them.
  • The major deficiencies in the working of the cooperative societies are as follows:
    1. The essence or basic features of cooperative banking system must be a larger reliance on resources mobilised locally and a lesser and lesser dependence on higher credit institutions. However, many PACSs are at present dependent on CCBs and have failed miserably in mobilising rural savings. Heavy dependence on outside funds has, on the one hand, made the members less vigilant not treating these funds as their own and on the other led to greater outside interference and control. Overall, this has made the cooperatives a "mediocre, inefficient and static system".
    2. The cooperative credit institutions are plagued by the problem of high level of over-dues. These over-dues have clogged the process of credit recycling since they have substantially reduced the capacity of cooperatives to grant loans.
    3. Rural Cooperative institutions have a high level of NPAs.
    4. A large number of rural cooperative credit institutions have incurred substantial losses.
    5. The Primary Agricultural Credit Societies is the most important link in the short-term cooperative credit structure. However, most of them are too small in size to be economical and viable. Besides, several of them are also dormant while some are defunct.
    6. Because of their strong socio-economic position and grip over the rural economy, big landowners have cornered greater benefits from cooperatives. This is the opposite of what the planners intended.
    7. There are considerable regional disparities in the distribution of credit by cooperative societies with six States (Gujarat, Maharashtra, Karnataka, Kerala, Punjab and Tamil Nadu) accounting for 70 per cent of the short- term loans provided by the PACSs as of end-March 2010.
    8. The powers which vest in the government under the cooperative laws and rules are all-pervasive. Over the years, State has come to gain almost total financial and administrative control over the cooperatives, in the process stifling their growth. Instead of strengthening the base, a weak base was vastly expanded as per plan targets and an immense governmental and semi governmental superstructure was created.

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