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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