Wednesday, December 27, 2017

Can Cooperative banks be better alternatives?

Cooperative Banking – Hopes on the rise

Banking environment in India structurally has become more dispersed than before with the Small Finance Banks, Payment Banks, Postal Bank emerging on the scene. Mergers and amalgamations in the private and public sector banks and ever increasing NPAs in the commercial banks are threatening the stability of the system. Seemingly strong macro-economic fundamentals notwithstanding, disruptive technologies are also adding fuel to fire. FRDI Bill poses a threat to the security of depositors and leaders’ promises cannot be insurance to what the bill itself holds for the banking clientele. Senior citizens, differently abled citizens, women and several customers of small means feel distanced from the services they were expecting at the hands of the banks.



Cooperative Banks – both rural and urban, seem to provide better alternative to the customers who are seeing big void between promise and performance of the rest of the banking system if one were to go by the Report of Trend and Progress of Banking in India released by the RBI this month

The largest constituency of these cooperatives is marginalised sections of population, illiterate and semi-literate, and heavily influenced by politics. While one segment – Rural Credit Cooperatives – is now in the throes of change: accounting practices; technology change; regulatory changes; and structural changes in some places, all others beg for an effective reform process to join the mainstream of financial inclusion agenda. Legal reforms still elude them, with none of the States keen on adopting them. In the wake of a series of failures, the Urban Cooperative Banks (UCBs) that are akin to the community savings and credit banks in the US have been subject to the rigours of the financial discipline. These UCBs undergoing the needed technological changes have joined the National Payment and Settlement system.[i]

Financial inclusion demands customer centricity and smart technology applications apart from financial learning at the institutional and client level. Several developing economies like those in South Africa, Europe and Asia have reflected high level of adoption of such technologies among the micro finance institutions while the cooperative institutions in Canada and Europe alone have embraced them. Indian Cooperatives both rural and urban, have still to catch up with digital technologies on par with their counterparts in commercial banks.

Investment for Computerization of Cooperatives:
RBI has allocated Rs. 4 lakhs per Cooperative Urban Bank (UCB) for Computerisation and maintenance cost of Rs. 15,000/- per month for a period of 3 years for post-implementation period. Government of India in their Budget for the year 2017-18 have made a provision of Rs. 1900 Crore towards Computerization of PACS, the bottom most tier of the Short-term Cooperative Credit Structure. The initiative offers a correction towards providing a level playing ground to the PACS in the era of technology driven players like Commercial Banks, RRBs and the postal banks, a recent entrant.

Customers of all hues would like availability of banking services any time during the day. They want to open the account, deposit the money, pay the money to meet any of their needs anywhere, draw the money, take a loan, open a letter of credit, etc. They do not distinguish between the cooperative and commercial bank when it comes to meeting their own needs. Hence, cooperative institutions need to embrace technologies of superior order like the Artificial Intelligence, Predictive Analytics, etc., and put in place the needed discretions at different tiers. This requires capital of a huge order. 

Though the organization may introduce appropriate strategies, it is the culture of the organization and governance that would require to be looked at in cooperatives. They can improve the bottom lines through reduced costs; enhance the customer experience; and strengthen security and compliance through state-of-the art encryption practices, audit trails and security certifications. Customers always need their data to be safe and secure. The fact that RBI could present data with one year lag as of March 2017 is enough proof that computerization of Cooperative Banks – both Rural and Urban has a long way to go.

It is not out of place to mention that DCCBs used to keep their books open beyond March 31 – some even up to June for making adjustments and reconciliation between PACS and themselves and between them and the StCBs at the other end. This may be the reason for the lags in data.

Can Cooperative institutions provide enough confidence to their customers in the existing environment – legal, regulatory and governance while complying with the Basel III directed capital regulations?

Do all types of cooperatives hold their accounts with the Cooperative Banks? Do all the directors of cooperative institutions hold their deposits and the deposits of their kith and kin with the Cooperative Banks? Is there willing cooperation among the cooperatives for strategic initiatives towards digitization? Can the Cooperative banks get out of the stigma of money laundering through proper KYC audits? The response to all these questions lies in instituting mechanisms for appropriate governance, risk and compliance mechanisms.

At the macro level, RBI Report on Trend & Progress of Banking in India, 2016-17 reveals that as of March 31, 2017, scheduled UCBs after consolidation of UCBs that commenced in 2004, number 54 of 1562. In the Cooperative Banking space, 34.3% constitute UCBs and the balance Rural Cooperatives. Maharashtra, Gujarat, Andhra Pradesh and Telangana occupy more than two-thirds of the geographical space. 156 UCBs having deposit portfolio of above Rs.5bn account for 9.9% of the total number of UCBs, only 90 UCBs have lent advances in that band accounting for just  5.9%. It is interesting to note that 124 UCBs holding deposit portfolio of less than Rs.1bn though constitute 7.9% 289 of the UCBs lent advances below Rs.1bn accounting for 41.5% of the total advances. 82% of non-scheduled UCBs held CRAR above 9% by March 2016 with four of the scheduled UCBs have negative capital adequacy ratio. Their NPA ratio is below that of scheduled commercial banks. The Report cautions that the rise in gross NPAs demands higher provisioning and therefore requires higher capital plus reserves from their Members. On a broad parameter of Financial Inclusion, lending to weaker sections by the UCBs constitutes 26% of the ANBC as against the prescribed 10%. However, NPAs in this segment is a cause of concern.[ii]

Although RBI Report seemingly held a confident note on the sector, it has excluded them from the acceptance and exchange of demonetized currency in the wake of NOTE BAN from November 2016 and required a Court Directive for their inclusion. But do the UCBs and DCCBs see eye to eye? Do these institutions know what regulatory supports are required? If so, will they be able to abide by the requirements of such support system? The answers rest on the ability of various cooperatives to see themselves as a formidable economic constituency of the nation.

The Sector has potential to grow beyond the narrow horizons if they take courage to insist on the state governments to embrace the Constitution 97th Amendment Act 2011 and modify all their state laws. Development of cooperatives is no longer an option, but a compelling necessity.
http://www.moneylife.in/article/can-cooperative-banks-be-revived/52579.html?utm_source=PoweRelayEDM&utm_medium=Email&utm_content=Subscriber%2327753&utm_campaign=Daily%20Newsletter%2026%20Dec%202017






[i] Yerram Raju B (2012): ‘Cooperatiives as Instruments of Financial Inclusion’, Commemorative Souvenir of AP State Cooperative Banks’ Federation on the eve of celebrating the International Year of Cooperation.
[ii] Report of the Trend and Progress of Banking in India (2016-17), Reserve Bank of India, Mumbai pp.99-137 (www.rbi.org.in)

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