abhishreshthaa
Abhijeet S
The objective of co-operative banking is to create enduring and sustainable financial institutions, which remain responsive to the credit needs of the weaker sections.
Concerns have been expressed that the financial health of a large number of co-operative credit institutions is extremely fragile. Keeping in view the primacy of the role of the credit co-operatives and the need to review and improve the functioning of the credit co-operatives, various groups and committees have been constituted from time to time. In the recent past three such groups/committees were formed.
In 1999, a High Power Committee (Chairman: Shri. K. Madhava Rao) was appointed by the Reserve Bank to suggest ways to strengthen the urban co-operative banks in the country. The HPC submitted its report in November 1999.
A Task Force (Chairman: Shri. Jagdish Capoor) was appointed by the Government of India to suggest measures to strengthen the co-operative credit system in the country. The Task Force submitted its report in August 2000.
A Committee of Experts (Chairman: Professor V. S. Vyas) was formed by National Bank for Agriculture and Rural Development (NABARD) on rural credit system, which submitted its report in July 2001.
All these Committees/Groups emphasised the need to revitalise the co-operative credit system in the country.
Some of the common financial problems faced by the co-operative credit institutions, which have been identified by the HPC, the Task Force and the Expert Group, include the following:
• Low capital base,
• Inadequate loan appraisal systems and credit planning,
• Poor recovery performance,
• Mounting overdues and non-performing assets (NPAs), and
• Low levels of diversification in business operations.
Since credit co-operatives constitute a major avenue for flow of credit to the priority sector in general and rural sector in particular, deterioration in the financial health of these institutions hampers the effective channelisation of credit. The initiation of financial sector reforms has posed new challenges for the cooperative credit institutions.
First, the reform measures have substantially increased competition in the banking sector. Second, the structural changes in the Indian banking sector since the 1990s have increased the interdependence between financial institutions especially through inter-institutional exposures and payments and settlement channels.
Therefore, the deterioration in the financial position of the cooperative banks can get easily transmitted to other segments of the financial sector, which might generate a systemic problem.
In light of their assessment of the co-operative credit system in the country, the HPC, the Task Force and the Expert Group have come out with various suggestions. Some of the important common points in their recommendations include the following:
Functioning of co-operative credit institutions should be member-driven and democratic,
In order to make the co-operative credit system sustainable and the underlying institutions viable, it is essential to introduce professionalism in the operations of these institutions, and they need to be run on the basis of sound business principles. Co-operative banks need to devise ways to adapt to the new situation arising from the introduction of the financial reform process by making themselves more competitive,
Regulation and supervision mechanisms of the co-operative credit institutions need revamping and streamlining. There is need to explore possibilities to establish a suitable unified agency to supervise the co-operative credit institutions,
Prudential norms are required for both transparency and healthy functioning of financial system. Compared to the commercial banks, the reach of such principles for the co-operative banks remains rather limited especially in the context of rural co-operative credit institutions. Over time, co-operative credit system has to be brought under the purview of these measures.