Can Cooperative Banks be Revived?

The banking environment in India has become more diversified than before with the small finance banks, payment banks and postal bank emerging on the scene. Mergers and amalgamations in the private and public sector banks and ever increasing non-performing assets (NPAs) in the public sector banks (PSBs) are threatening the stability of the system. Seemingly, strong macro-economic fundamentals notwithstanding, disruptive technologies are also adding fuel to fire. The Financial Resolution and Deposit Insurance (FRDI) Bill poses a threat to the security of depositors and leaders’ promises cannot be insure against what the bill itself holds for the banking clientele. Senior citizens, differently abled citizens, women and customers of small means feel distanced from the services they were expecting at the hands of the banks.

Cooperative banks – both rural and urban – can provide a better alternative to the customers who are seeing a big void between the promise and the performance of the rest of the banking system, if one were to go by the Report of Trends and Progress of Banking in India, released by the Reserve Bank of India (RBI) this month.

The largest constituency of these cooperative banks is the marginalised sections of population: the illiterate and semi-literate people and those heavily influenced by politics. While one segment – the 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 the 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 financial discipline. UCBs are undergoing the necessary technological changes have joined the National Payment and Settlement system.

Financial inclusion demands customer centricity and smart technology applications, apart from financial learning, at the institutional and client level. Several developing economies in South Africa, Europe and Asia have adopted such technologies in a big way for the micro finance institutions, as also the developed cooperative institutions in Canada and Europe too 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 Computerisation of Cooperatives:

RBI has allocated Rs4 lakh per cooperative urban bank (UCB) for computerisation and maintenance cost of Rs15,000 per month for a period of three years for the post-implementation period. Union budget for the year FY17-18 made a provision of Rs1,900 crore towards computerisation of Primary Agricultural Credit Societies (PACSs), the bottom most tier of the short-term cooperative credit structure. The initiative offers a correction towards providing a level playing ground to the PACSs in the era of technology driven players like commercial banks, RRBs and the postal banks, a recent entrant.

All customers demand availability of banking services any time during the day. They want to open an account, deposit money, pay money to meet any of their needs anywhere, withdraw money, take a loan, and open a letter of credit. They do not distinguish between a cooperative and a commercial bank when it comes to meeting their own needs. Hence, cooperative institutions need to embrace technologies of a superior order such as artificial intelligence, and predictive analytics and put in place the necessary discretions at different tiers. This requires capital of a huge order.

Though the organisation may introduce appropriate strategies, it is the culture of the organisation and governance that would require to be looked at in the cooperative banks. They can improve the bottom lines through reduced costs, enhance 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 took almost nine months to present data as of March 2017 is enough proof that computerisation of cooperative banks – both rural and urban – has a long way to go.

District central cooperative banks (DCCBs) used to keep their books open beyond 31st March – some even up to June for making adjustments and reconciliation between PACS and themselves and between them and the state cooperative banks (StCBs) at the other end. This may be the reason for the lag in presenting the 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 keep 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 digitisation? 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.

At the macro level, RBI Report on Trends & Progress of Banking in India, 2016-17 reveals that as of 31 March 2017, 54 of the 1562 scheduled UCBs have been consolidated after the consolidation process of UCBs commenced in 2004. . In the cooperative banking space, 34.3% constitute UCBs and the balance are rural cooperatives. The states of Maharashtra, Gujarat, Andhra Pradesh and Telangana occupy more than two-thirds of the geographical space. About 156 UCBs having a deposit portfolio of above Rs500 crore, 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 a deposit portfolio of less than Rs100 crore though constitute 7.9%.

As many as 289 of the UCBs lent advances below Rs100 crore, accounting for 41.5% of the total advances. Also, 82% of non-scheduled UCBs held a Capital to Risk (Weighted) Assets Ratio (CRAR) above 9% by March 2016, with four of the scheduled UCBs having a negative capital adequacy ratio. Their non-performing assets (NPA) ratio is below that of the 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 Adjusted Net Bank Credit (ANBC) as against the prescribed 10%. However, NPAs in this segment is a cause of concern.

Although the RBI Report seemingly holds a confident view of the sector, it has excluded them from the acceptance and exchange of demonetised currency in the wake of the note ban from November 2016 and mandates 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 a support system? The answers rest on the ability of various cooperative banks to see themselves as a formidable economic constituency of the nation.

The sector has the potential to grow beyond narrow horizons if show the 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.