Cooperative Bank

Cooperative Bank:

• Financial institutions which are democratic set-ups where the Board Members are democratically elected with each member entitled to one vote each. 
• Co-operative societies are based on the principles of cooperation, mutual help, democratic decision making, and open membership. 
• Cooperative Banks cater to a services like loans, banking, deposits etc. like commercial banks but widely differ in their values and governance structures.  
• The co-operative banking system, with two broad segments of urban and rural co-operatives, forms an integral part of the Indian financial system. 
•  With a wide network and extensive coverage, these institutions have played an important developmental role in enlarging the ambit of institutional credit by way of inculcating banking habits among the poor and those in remote areas.
• They provide credit to small scale industrialists, salaried employees, and other urban and semi-urban residents.

Regulations for Cooperative Banks:

1. In India, co-operative banks are registered under the States Cooperative Societies Act. 
2. They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.

 Broadly, co-operative banks in India are divided into two categories -

1. Urban Co-operative Banks and
2. Rural Co-operative Banks

Rural cooperative credit institutions could either be:

1. Short-Term or 
2. Long-Term in nature. 

Long Term Rural Co-operative Banks credit system:

• It take care of needs for long term funding.
• In terms of RBI regulation, Long term cooperatives and PACS are out of purview of RBI, otherwise all other Cooperatives are under RBI regulation.

The Long-term Rural Co-operative credit system comprises of :

1. State Cooperative Agriculture and Rural Development Banks (SCARDBs) or
2. Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).

Long term Rural cooperative societies:

1. These are engaged in providing long term credit needs for production purposes.
2. These   have negligible resource base of their own, and mostly raise resources through borrowings. Their poor recovery performance has affected their ability particularly at the primary level to cater to the credit needs of new and non-defaulting members. 
3. This has also resulted in low paid-up share capital, which constrains their borrowing capacity, and the consequent limited resources have inevitably led to low business levels

Short-Term Rural Co-operative Banks credit system: 

These societies are designed essentially to provide for short-term credit needs for production purposes. 

The short-term rural co-operative credit system comprises of:

1. State co-operative banks (StCBs) 
2. Central co-operative banks (CCBs) 
3. Primary agricultural co-operative Societies (PACS) 

Primary Co-operative Credit Society (PACS):

• PACS are the grassroot level arm of short term co-operative credit, mediate directly with individual borrowers and  grant short-term to medium term loans and also undertake distribution and marketing functions.
• PACS are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India (RBI website). 
• The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks. 
• The borrowing powers of the members as well as of the society are fixed. 
• The loans are given to members for the purchase of cattle, fodder, fertilizers, pesticides, etc. 
• A large number of PACS, however, face severe financial problems primarily due to significant erosion of own funds, deposits, and low recovery rates. PACS hold more than 95 % of assets of rural cooperatives.
• These banks need not to maintain CRR and SLR.

Central co-operative banks:

• 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. 
• The funds of the bank consist of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks. 
• These banks provide finance to member societies within the limits of the borrowing capacity of societies. 
• These banks have to maintain CRR and SLR.

State Co-operative Banks:

• 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. 
• 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. 
• These banks have to maintain CRR and SLR.
• All short term Cooperatives except PACS are regulated by RBI.

Urban Co-operative Banks (UBBs) are classified as:

1. Scheduled Urban Co-operative Banks or
2. Non-scheduled Urban Co-operative Banks

MICRO FINANCE, Issues in Micro Financing, Microfinance vs Microcredit

 

MICRO FINANCE:

• Provisioning of financial services to the marginalised who are  un-bankable. 
• National Bank for Agriculture and Rural Development (NABARD) took this idea and started the concept of microfinance in India. 
• There are two models in India that link the formal financial sector to low-income households in India, namely SHG and MFI bank linkage programme. 

SHG model:

It works on the principle of directly financing of SHG by the banks and

MFI model:

It covers financing of Micro Finance Institution (MFIs) by banking agencies for the purpose of lending the same amount to SHG’s and other small borrowers.

Concept of Microfinance Institutes in India :

• Microfinance in India finds its roots in the early 1970s’ in Gujarat when the Self Employed Women Association (SEWA) was formed to provide banking services to the poor women of unorganized sector. 
• Program linking the Self Help Group to the banking sector was initiated in India in 1989, under NABARD. 
• Various schemes introduced by the present government like Micro Units Development and Refinance Agency (MUDRA) bank and Jan Dhan Yojna has aided in the growth of the micro finance institutions. Both of them target the same poor segment of the society.

The major factors that have fuelled the growth of micro finance in India are:

·         Rapid growth in the Business Correspondent (BC) model, opportunity.

·         Introduction of differentiated bank license and opportunity.

·         Rising participation of the current central government in financial inclusion

·         Micro finance institutions in India are expanding with time due to the financial benefits provided to the unprivileged people of the country.

Issues in Micro Financing in India: 

• High interest rates, 
• No variety in the products offered to the customers and 
• Lower risk mitigation measures 
• Urban poors are not covered
• Poor credit appraisal system, 
• Lack of awareness,
• poor debt management 
• weak loan collection system
• High Non-Performing Assets (NPAs), 

Despite the disadvantages they form a very important part of the functioning of many industries due to easy loans given to those who otherwise cannot afford better facilities. 

Microfinance vs Microcredit:

In micro credit; small loans are given to the borrower but under microfinance financial services  savings accounts and insurance are also provided alongwith loans. 

Digital Banking Unit, Self-service Zone vs Digital Assistance Zone

 

What are Digital Banking Unit (DBUs): 

DBUs will be brick-and-mortar outlets that will provide a variety of digital banking facilities to people such as the opening of savings accounts, balance-check, printing passbooks, transfer of funds, investment in fixed deposits, loan applications, stop-payment instructions for cheques issued, applications for credit and debit cards, tax and bill payment and nominations.  

DBU's will have 2 distinct features – 

• Self-service Zone 
• Digital Assistance Zone

Self-service Zone:

• The customers can access ATM, a Cash Deposit Machine (CDM) and a Multi-Functional Kiosk (MFK) that offers services like printing of passbook, depositing cheque and accessing internet banking. 
• It will also provide a digital interactive screen where customers can interact with a chatbot to know about products, offers and mandatory notices.

Digital Assistance Zone:

It will have branch officials to assist customers to undertake the services including opening of savings account, current account, fixed deposit and recurring deposit etc

Shadow Banking , Non-bank financial companies (NBFCs),NBFCs vs Scheduled Commercial Banks

 

SHADOW BANKING---

• Financial Institutions that function like Banks but are not governed by  the Banking Regulations eg Hedge Funds, Non-bank financial companies, Special Investment Vehicles. 
• Some of these NBFCs do form one type of “Shadow banking” in India, because they’re outside the traditional regulatory rules for Banks.

Non-bank financial companies (NBFCs): 

1. Those Financial Institutions that provide banking services without meeting the legal definition of a bank as they do not hold a banking license.
2. The specific banking products offered by NBFCs depends on the jurisdiction,and may include services such as loans and credit facilities, savings products, investments and money transfer services. 
3. Some of the well known NFC’s are Housing Development Finance Corporation Limited, Power Finance Corporation Limited, Rural Electrification Corporation Limited, National Bank of Agricultural and Rural Development and  Infrastructure Development Finance Company Limited.

NBFCs vs Scheduled Commercial Banks:

• NBFC cannot accept demand deposits.
• NBFCs do not form part of the payment and settlement system and hence cannot issue cheques drawn on itself;
• Deposit Insurance Facility is not available to depositors of NBFCs, unlike in case of banks.
• NBFC's are under Indian Companies act 1956 while banks are regulated under The banking regulations act 1949.

Non-bank financial companies & Prompt Corrective Action (PCA) framework:

• Non-bank financial companies (NBFCs) have been brought under the ambit of the Prompt Corrective Action (PCA) framework.
• Under the framework, NBFCs will face restrictions when certain parameters like non-performing assets, Capital Adequacy Ratio and Tier 1 capital fall below the stipulated levels. 
• The PCA framework for NBFCs came into effect on October 1, 2022.
• The RBI decision has come after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds and collapsed despite the tight monitoring in the financial sector.

Priority Sector Lending (PSL)

 

Priority Sector Lending (PSL): 

Those sectors which the GOI and RBI consider as important for the development of the basic needs of the country and are to be given priority over other sectors. The categories of priority sector are:

1.       Agriculture

2.       Micro, Small and Medium Enterprises

3.       Export Credit

4.       Education

5.       Housing

6.       Social Infrastructure

7.       Renewable Energy 

8.    Others

Provisioning of PSL:

• Domestic Scheduled Commercial Banks and foreign banks are to provide 40% of their Adjusted Net Bank Credit (ANBC) to priority sectors. 
• Regional Rural Banks and Small Finance Banks have to provide 75 % of ANBC. 
• RBI has revised Priority Sector Lending (PSL) Targets for Urban (Primary) Cooperative Banks(UCB).
• Earlier the PSL target for UCBs was 40% of  the bank credit and now it has been increased to 75% in a phased manner: 60% by 31st March 2024 65% by 31st March 2025 75% by 31st March 2026

If in case, banks fail to provide stipulated credit, then the shortfall is transferred to RIDF.

National Bank for Agriculture and Rural development (NABARD), Rural Infrastructure Development Fund (RIDF)

 

National Bank for Agriculture and Rural development (NABARD):

• NABARD is the apex financing agency refinancing the institutions which looks after the development of the cottage industry, small industry and village industry, and other rural industries. 
• At present, NABARD is completely owned by GOI. 

Functions of NABARD are :

• It serves as an apex financing agency refinancing the institutions providing investment and production credit for promoting the various developmental activities in rural areas.
• NABARD partakes in development of institutions which help the rural economy.
• It regulates the institutions which provide financial help to the rural economy.
• It provides training facilities to the institutions working in the field of rural upliftment.
• It takes measures towards institution building of financing agencies in rural area.
• It monitors and evaluates projects refinanced by it.
• NABARD's refinance is available to state co-operative agriculture and rural development banks (SCARDBs), state co-operative banks (SCBs), regional rural banks (RRBs), commercial banks (CBs) and RBI approved financial institutions.

Rural Infrastructure Development Fund (RIDF):

• The main objective of the Fund is to provide loans to State Governments and State-owned corporations to enable them to complete ongoing rural infrastructure projects.
• The RIDF was set up by the Government in 1995-96 for financing ongoing rural Infrastructure projects. 
• The Fund is maintained by the National Bank for Agriculture and Rural Development (NABARD). 
• Domestic commercial banks contribute to the Fund to the extent of their shortfall in stipulated priority sector lending to agriculture. 

 At present, there are 39 eligible activities under RIDF as approved by GoI classified under three broad categories i.e.

·         Agriculture and related sector

·         Social sector 

·         Rural connectivity.

The eligible institutions under RIDF are: 

1- State Governments / Union Territories,

2- State Owned Corporations 

3-State Govt. Sponsored / Supported Organizations 

4- Panchayat Raj Institutions/Self Help Groups (SHGs)/ NGOs.

BANK Rate, BASE RATE, MCLR, EXTERNAL BENCHMARK RATES

 

BANK Rate:

Rate at which RBI lends money to the banks for long tenures.

After the introduction of Liquidity Adjustment Facility (LAF), Bank rate has lost its relevance.

BASE RATE:

• Introduced in July 2010, these were the minimum interest rates decided by the Reserve Bank of India (RBI) below which banks were not allowed to lend funds to their customers. 
• No bank offers loans at an interest rate lower than the Base Rate without mandate from the government for the same.

Calculation of base rate was based upon the following factors:

• Average cost of deposit rates offered by the banks to their customers,
• Cost of maintaining CRR and SLR,
• Operation cost of banks and ROI on Networth. 

In 2016, Marginal cost of lending rates (MCLR) replaced Base Rate.

What is MCLR:

On 1 april-2016, MCLR replaced the Base rate as the Benchmark lending rate .

MCLR is built on the following 4 main components:

Negative carry on account of CRR: 

Cost incurred by the banks while keeping reserves (CRR) with the RBI. 

Operating cost: 

These are the operating expenses incurred by the banks

Tenor premium:

 It denotes that higher interest can be charged from long term loans

Marginal Cost: 

The marginal cost of funds comprises of Marginal cost of borrowings and return on NetWorth .Marginal Cost comprises of following factors:

• Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
• Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
• Return on NetWorth – in accordance with capital adequacy norms.

EXTERNAL BENCHMARK RATES (EBLR):

Introduced in 2019 to replace MCLR, EBLR is the Interest Rate defined by the External Benchmark.

EBLR is the lending rate which the Banks can choose from one of the four external benchmarks —

• Repo Rate, 
• Three-month Treasury Bill Yield, 
• Six-month Treasury Bill Yield or 
• any other Benchmark interest rate published by Financial Benchmarks India Private Ltd.
• The external benchmark was first proposed by the former governor Urjit Patel in 2018.
• EBLR shall be reset at least once every three months. 
• EBLR is intended to plug the deficiencies in MCLR.
• EBLR is now widely used in home loans and recently banks have started adopting EBLR for other retail products such as personal loans and education loans that were based on MCLR.
• EBLR has replaced MCLR as the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory. 

Fixed vs Floating Interest Rate:

• The fixed interest rate on loan means repayment of loans in fixed equal instalments over the entire period of the loan. 
• Floating interest rate by name implies that the rate of interest varies with market conditions. 
• The drawback with floating interest rates is the uneven nature of monthly instalments.

LEAD BANK SCHEME

 

LEAD BANK SCHEME:

• Prof. D. R. Gadgil (Gadgil Study Group) recommended for Lead Bank Scheme in order to promote Financial Inclusion.
• Lead Bank Scheme was introduced in 1969.
• In Lead Bank Scheme, district is the basic unit in terms of geographical area. 
• Lead Bank Scheme envisages assignment of lead roles to individual banks (both in public sector and private sector) for the districts allotted to them. 

Identification of Lead Bank Scheme:

Bank having relatively large network of branches in the rural areas of a given district and endowed with adequate financial and manpower resources has generally been entrusted with the lead responsibility for that district. 

Roles of Lead Bank:

The lead bank acts as a leader for coordinating the efforts of all credit institutions in the districts so as to increase the flow of credit to agriculture, small-scale industries and priority sector in the rural and semi-urban areas.

Usha Thorat committee constituted in 2009  has recommended for the revival of the scheme.

D-Systemically Important Banks (D-SIBs)

 

D-Systemically Important Banks (D-SIBs):

Systemic risk: 

Systemic risk can be defined as the risk associated with the collapse or failure of a company, financial institution or an entire economy. 

D-Systemically Important Banks (D-SIBs):

• Some Commercial Banks, due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, become Systemically important for the Economy.
• D-SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. 
• In case of failure of D-SIB, overall economic activities are disrupted significantly  
• Because of their  TBTF nature, Government support is sought for these banks at the time of distress. 
• D-SIBs are subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them. 

Depending upon  their systemic importance scores , banks are categorised into :

• Five different Buckets and 
• Required to have additional Common Equity Tier 1 Capital (CET1) requirements ranging from 0.20% to 0.80% of Risk Weighted Assets (RWA). 

The D-SIBs banks are classified into 5 buckets. 

• Bucket 1, Bucket 2, Bucket 3, Bucket 4 and Bucket 5. 

• With Bucket 5 being the most important followed by rest in decreasing order. 
• State Bank of India is in Bucket 4, while HDFC Bank is in Bucket 2 ICICI Bank  is in Bucket  1.

CET1 is the highest quality of regulatory capital, as it absorbs losses immediately when they occur. 

It is a capital measure introduced in 2014 globally as a precautionary means to protect the economy from a financial crisis.