A Summer Internship report

With reference to “PACS BANK" MOINABAD

Submitted in partial fulfillment for the requirement for the award of

MASTER OF BUSINESS ADMINISTRATION

BY

R.MAHENDHAR REDDY

ROLL.NO-16911E0034

UNDER THE GUIDANCE OF

Mr. P.SUMAN M.B.A

Assistant Professor

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION

VIDYA JYOTHI INSTITUTE OF TECHNOLOGY ( AUTONOMOUS)
Aziz Nagar, Moinabad, Hyderabad
INTRODUCTION
A Primary Agricultural Credit Society (PACS) is a basic unit and smallest co-
operative credit institutions in India. It works on the grassroots level (gram
panchayat and village level).

Founder Government of India

Location India

Affiliations Cooperative Societies India

The PACS are the bottom-tier of the Short Term Cooperative Credit Structure
functioning at the grassroots (Gram Panchayat) level. These are Primary Societies
owned by farmers, rural artisans etc. and intended to promote thrift and mutual
help among the members; cater to their credit requirements and provide credit-
linked services like input supply, storage and marketing of agricultural produce
etc. These Cooperative Credit Institutions with their wide out-reach in the rural
areas and accessibility to the small and marginal farmers and the other
marginalized populations have been playing a vital role in dispensation of
agricultural credit.

PACS has a significant role to extend credit to farmers. This unit abstracts the
vitality and service potential of the co-operative movement in the country. Such
societies are "the kernel of the co-operative movement of co-operative
institutions. These societies are started not only with the objective of providing
cheap credit but also to teach principles of co-operation to the members or
farmers.
HISTORY
Emergence of PACS
Based on the recommendations of a committee appointed by the Government
under the chairmanship of Edward Law, the Cooperative Credit Societies Act took
its birth on 25th March 1904 in response to eliminate the exploitation of
moneylenders. "The laudable measure was hailed as a turning point in economic
and social history. It holds the promise of helping to solve a host of problems in
rural masses, raising moral as well as economic status and laying down the
foundation to a new social order." The cooperatives solely I catered to the needs
of the rural poor up to the adoption of Multi-Agency Approach during the year
1969

INDUSTRY PROFILE
The co-operative banks in India have a history of almost 100 years. The co-
operative banks are an important constituent of the Indian Financial System,
judging by their role assigned to them, the expectations they are supposed to
fulfil, their number, and the number of offices they operate. The co-operative
movement was originated in the west, but the important that such bank have
assumed in India is rarely paralleled anywhere else in the world. Their role in rural
financing continues to be important event today, and their business in urban
areas also has increased phenomenally in recent years mainly due to the sharp
increase in the number of primary cooperative banks. Co-operative banks in India
are registered under the Cooperative Societies Act. The co-operative banks are
also regulated by the Reserve Bank of India (RBI) and governed by Banking
Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.

ESTABLISHMENT OF CO-OPERATIVE BANKS IN INDIA

The co-operative banks in India are well established financial service organization.
The first legislation on cooperation was passed in 1904. In 1914, the Maclagen
Committee envisaged a three tier structure of cooperative banking, viz., Primary
Agricultural Credit Services (PACs) at the grass root level, Central Co-operative
Banks at the district level and State Co-operative Banks at State level or Apex
level. The first urban cooperative bank in India was formed nearly 100 years back
in Baroda.

The co-operative banks arrived in India in the beginning of 20th Century as an

official effort to create a new type of institution based on the principles of co-
operative organization and management, suitable for problems peculiar to Indian
conditions. These banks were conceived as substitutes for money lenders, to
provide timely and adequate short-term and long-term institutional credit at
reasonable rates of interest.

In the formative stage, Co-operative banks were urban co-operative societies run
on community basis and their lending activities were restricted to meeting credit
requirements of their members. The concept of Urban Cooperative Bank was first
spelt out by Mehta Bhansali Committee in 1939 which defined on Urban Co-
operative Bank. Provisions of Section 5 (CCV) of Banking Regulations Act, 1949 (as
applicable to Co-operative Societies) defined an Urban Co-operative Bank as a
Primary Co-operative Bank other than a Primary Co-operative Society was made
applicable in 1966. 69

COMPANY PROFILE
ROLE OF PACS
A co-operative credit society, commonly known as Primary Agricultural Co-
operative Society (PACS) may be stated with 10 or more persons, normally
belonging to a village. The value of each share is generally nominal so as to enable
even poorest farmer to become a member. PACS occupy a predominant position
in the co-operative structure and form its base. A Primary Agricultural Credit
Society is organized at grass-root level of a village or a group of small villages. It is
the basic unit which deals with rural (agricultural) borrowers, gives those loans
and collects repayments of loans given. It serves as the final link between the
ultimate borrowers on the one hand and higher financial agencies, namely the
RBI/ NABARD on the other hand.
 At the end of June 1989 there were 87000 PACS. These societies covered about
90% of 5.8 lakh villages. Their membership of 9 crores covered about 65% of the
total estimated population of about 14 crore of rural households. More than half
of members of PACS are persons of small means- small farmers, agricultural
laborers, rural artisans, and 25% of them belong to SC/ST.

The working capital of the PACS derived mainly from borrowings from Central Co-
operative Banks (CCBs) and the small proportion from owned funds and deposits.
That the PACS have failed to attract deposits is not so much a reflection of low
savings habits of the rural population as a reflection of the availability of better
assets to rural savers of both rate of return and riskiness.

High net borrowings from CCBs shows that PACS act mainly as distribution
channel for funds mobilized elsewhere. Only the members of a PACS are entitled
to borrow from it. Most loans are for agricultural purpose and are such purpose
of machinery (mostly pump sets for irrigation) and cattle are also given. But
consumption loans given mostly to landless laborers, artisans, and marginal
farmers. The share of loans given going to weaker sections is usually about 40% of
loans. A varying number of PACS also undertake non-credit activities.

The management of the society is under an elected body consisting of President,

Secretary and a Treasurer. The management is honorary, the only paid
membership being normally, the accountant. Loans are given for short period
normally for one year, for carrying out agricultural operations, and the rate of
interest is low. Profits are not distributed as dividends to shareholders but are
used for the construction of the well or maintenance of the village school and so
on.

The PACS have stepped up their advances to the weaker sections particularly the
small and marginal farmers. This progress has been quite spectacular but not
accurate considering the demand for finance from farmers. However, the primary
credit society has continues to remain the weakest link in the entire co-operative
structure.
OBJECTIVES
 To cater to the credit need, mostly, farm credit and income generation
activities of farmers, artisans and other members.
 To extend selected banking services to members.
 To implement Kissan Credit Card Scheme for providing timely and adequate
farm credit to members.
 To take up marketing of agricultural produce of member farmers.
 To cater to the consumer needs, mostly, essential commodities of members.
 To create awareness among farmers to adopt improved farming practices.
 To reach up to the unprivileged section of the community through SHGs, JLGs
and TFGs.

FUNCTIONS
 To associate itself with the programme of production;
 To lend adequate amount to its members for their agricultural production and
consumption purposes;
 To borrow adequate funds from the central financial agencies for helping the
members adequately for the above purposes;
 To attract local savings for share capital and fixed deposits;
 To supervise the use of loans (especially medium term loans) and to see that
they are paid regularly;
 To distribute fertilizers, seeds, insecticides, agricultural implements etc. either
on its own or as agent;
 To supply certain consumer goods in common demand such as kerosene, sugar
etc.
 To store the produce of the members till it is sold;
 To collect or purchase produce, where necessary, on behalf of a consumers
society, marketing society, or government; and
 To associate itself with programme of economic and social welfare for the
village.
ORGANISATION STRUCTURE
Co-operative credit structure is a type of pyramid, the broad base of which is
represented by the primary societies at the village level. At the top, are the apex
societies at the state level and between these two are found the central societies.

State Co-operative BankCentral Co-operative Banks Agricultural Primary

Credit Societies

The purpose of this federal type of structure is to strengthen the primary society
which is at village or base level. If the borrower in a village needs credit, he
applies to the society. If the Primary Society has no funds at its disposal, it applies
to the Central Bank and Central Bank in need of fund applies to the State Bank.
The fact that the structure is federal in character and that the institutions at
different levels are independent legal entities, it also implies that the strength of
the chain depends upon the strength of each of the links
State-wise number of PACS
State No. of units
Northern region
Chandigarh 16
Haryana 640
Himachal Pradesh 2117
Jammu & Kashmir 765
Rajasthan 1609
Punjab 5671
North-Eastern region
Arunachal Pradesh 34
Assam 766
Manipur 232
Meghalaya 179
Mizoram 133
Nagaland 1719
Sikkim 169
Tripura 268
Eastern region
Andaman& Nicobar Islands 46
Bihar 8463
Jharkhand 498
Odisha 2452
West Bengal 7962
Western region
Goa 77
Gujarat 8154
Maharashtra 21402
Southern region
Andhra Pradesh 2807
Karnataka 4740
Kerala 1566
Puducherry 53
Tamil Nadu 4538
TOTAL 92,432
MANAGEMENT OF PACS
The management of the society is democratic and honorary. It is based on the
principle, 'one member one vote'. The management is entrusted to two bodies a
General Committee consisting of all members and a Managing Committee of 5 to
9 members chosen from among the members of General Committee constituting
its general body. The general body is the ultimate authority on all matters
concerning the society. Exclusive administration of the society is vested in the
hands of a panchayat or the committee elected by the general body.

The General Committee elects the members of the managing committee,

appoints an honorary secretary, adopts the annual balance sheet submitted by
the managing committee considering the orders and reports of registrars and
auditors, expels members, if necessary, fixes the maximum credit of the society as
a whole and of the (individual members separately and amends the by-laws of the
societies.

The Managing Committee is responsible for the routine and executive business of
the society. It admits new members, recovers arrears due from members and
exercises supervision over them, disposes the loan applications, raises funds for
the society and inspects the amount maintained by the secretary. The
management is honorary and only the secretary is paid small remuneration for
clerical work.

MEMBERSHIP AND SHARE CAPITAL

All agriculturists, agricultural laborers, artisans and small traders in the village can
become member of the society. PACS issue ordinary shares of small value
depending upon the particular society .i.e. Rs.10 and Rs.50 each to their
members. The ownership of shares decides the right and obligations of the holder
to the society. Share capital forms an important form or part of the working
capital. Members borrowing capacities were determined by the number of shares
held by them. Initially, societies were form with unlimited liability. The All India
Rural Credit Review Committee pointed out that unlimited liability operates as a
restraint on the willingness of the society to liberalize its loan policies, to admit
new members and to extend its area of operation. Besides, it hinders the society
to receive contribution from the State government, whose liability inevitably has
to be limited. In view of these reasons, the societies were formed with limited
liability and existing societies were converted into limited liability societies.

To make all Primary Agricultural Society viable and ensure adequate and timely
flow of co-operative credit to the rural areas the RBI , in collaboration with State
Government’s had been taking a series of steps to strengthen the PACS and to
correct regional imbalances in cooperative development. These efforts are being
intensified by providing larger funds to weak societies to write off their losses,
bad debts and overdue.

SOURCE OF FUNDS
In order to perform the functions of providing credit, the primary credit, the
society requires funds. Such funds are raised both from the internal and external
sources. The internal sources refer to funds raised from the society's members
and consist of the share capital, the entrance fees and the reserve funds and
deposits from non-members, loans from the Cooperative Central Financing
Organisation and the Government donations, grant, subsidies, etc.

FINANCING BY COMMERCIAL BANKS

The scheme of financing the operations of primary credit societies by commercial
banks was introduced in 1970. There were two major objectives of this scheme:

1. To fill up the production and investment credit gaps with respect to the
requirements of small farmer and

2. To improve the working of societies by increasing their membership and

business.
The scheme was purely temporary in nature in the sense that the societies ceded
to the commercial banks would revert to respective central co-operative banks as
soon as they are strengthened through the rehabilitation program.

BORROWING LOANS
The Primary Credit Societies depend largely on borrowings. This is the most
important element of their capital. This is obtained from the central financing
agencies viz., the Central Co-operative Banks and the State Cooperative Banks.

The maximum borrowing power of unlimited liability for the societies is fixed. It is
generally fixed at 1/6th or 1/8th of the value of the total net assets of the solvent
members which is certified by the Panchayat of the society. Credit limit is fixed by
the Registrar or the central co-operative banks on the basis of a number of factors
such as total assets of the members, their income, their repaying capacity, owned
funds of the society, its audit clarification, repayment performance etc.

NABARD FINANCIAL ASSISTANCE

Financial Support to Develop PACS as Multi Service Centers With a view to
developing PACS as Multi Service Centers (MSCs), a financial assistance of `121.41
crore was sanctioned to 258 PACS during 2015– 16, of which `117.61 crore was
loan component while the remaining was grant assistance. An amount of `95.10
crore (`93.86 crore as loan and `1.24 crore as grant) was disbursed during this
financial year In comparison, 769 PACS were sanctioned a total financial
assistance of `181.18 crore of which `105.06 crore was disbursed during 2014–15.
LOANS AND LOANING POLICY
The underlying idea of the co-operative credit is that a group combining to furnish
a collective guarantee can obtain funds at lower interest rates than they
individually could command. The main objective behind co-operative credit is
that it educates the borrower in the productive purposes and insists on punctual
payments.

As mentioned earlier, PACSs supply two types of loans to their members; short-
term loans are given for one year for the purchase of seeds, fertilizers, pesticides,
manures, implements, payments of wages to workers in the farm and the
payment of land revenue. The medium term loans are given for 3 to 5 years for
the purchase of cattle, implements, equipment, construction of small irrigation
facilities, including installing pumping sets, repair of wells, construction of bunds
and improvement of land.

The loans sanctioned to a member is related, in each case, to his production

credit needs which are ascertained and recorded in detail. In some areas these
particulars also known as "the normal credit requirements" are prepared by the
society every year. Under this practice, the credit limit of each member is fixed in
advance of the season which not only safeguards against lending of excessive
amounts but also facilitates getting loans in time.

However, it may be noted that not more than 38 % of the members of the
agricultural credit societies borrow from these societies. In no state the
percentage of borrowing members exceeds sixty. This low proportion of
borrowings is due to the delay in issue of loans, inadequacy of loans,
unwillingness of the members to sell produce through co-operatives, high rate of
interest, inconvenient repayment schedule, etc.

UTILIZATION OF LOAN
A large portion of the loans is not utilized for the purpose for which it is obtained.
The programme evaluation organization of the Planning Commission conducted a
survey which revealed that about 28 % of credit was diverted to a purpose which
was not intended. It was also seen that as much as 23 % was used for non-
agricultural and non-productive purposes. The percentage was as high as 35 in
the case of medium-term loans.

SUCH a diversion of loans can be attributed due to the lack of strict supervision
over the utilization of loans by the members. Neither the members of managing
committee nor the inspection staff of the societies were watchful.

RECOVERY OF LOANS
The responsibility of recovering the loans lies with the members of the managing
committee and office bearers with the help of bank supervisors and government
staff. However, the punctuality in the repayment of loans is hardly observed by
the members, with the result that there has been a steep run in the amount of
overdue all over the country. Timely repayment of loan's advanced by the credit
societies to their members is extremely crucial for the success of the society. In
addition, the overdue can also be attributed to the following causes.

1. Ineffective supervision.

2. Apathetic attitude of central co-operative banks.

3. Finances being made available from different sources e.g. seeds and fertilizers
distributed from agricultural department, marketing' societies provide production
and pledge loans.

4. The advancement of loans in contravention to rules.

5. The undue pressure exercised by political leaders and unsatisfactory

management by the committees.

6. The liberal attitude of the State Government.

7. Failure of crops.

8. Low rate of interest.

9. Non-linking of credit with marketing.

10. Defective loan policies.

PHASE OF CRISIS
In India, PACS are passing through an era of crisis. Increasing incidence of non-
viability is one of the major setbacks. PACS have made little progress in attracting
deposits. In majority of the cases, the deposits were collected through book
adjustments by carving certain portion of loan 76 amount. The repaying capacity
of the PACS has been dwindled considerably, resulting mounted over dues in the
loan outstanding against members. Along with the increasing volume of business
the number of PACS running into loss and the amount of loss has increased
considerably over the years.

The important reasons for this situation are: existence of non-viable and dormant
societies, uneven growth of agricultural credit movement, inadequacy of the
quantum of loan supplied by them, defective loan policies, delay in loan
disbursement, inadequate supervision and defective audit, no linking of credit
with marketing, high over dues, ineffective management, neglect of small farmers
and domination of vested interests.

WEAKNESS AND PROBLEMS OF PACS

In spite of many advantages and achievements, the PACSs do suffer from certain
weakness.

1. The misuse and diversion of the loans is a common practice in PACS. This will
lead the borrower to unproductive activities.
2. The growth of the credit movement has not been uniform throughout the
country. Northern and eastern states are very weak in co-operatives, while
western and southern states are strong.

3. Inadequate deposit in co-operative societies have failed to attract the

depositors.

4. Due to improper attention, the timely recovery is affected and a large

proportion of the outstanding loans is represented by overdue.

5. The disbursement of loan has been inadequate in most of the cases. Moreover,
delay in granting the loan led the members to borrow money from money
lenders.

6. These societies have not been able to inculcate the habit of thrift and saving
among the members.

7. About 15 % of the total societies are dormant and these societies are either
inactive or performing only the taken business.

8. The operational efficiency of these societies has been adversely affected by the
domination of vested interests. Political parties have used them to perpetuate
their hold on the rural masses.

9. The loaning policies of the credit societies are defective as they are still based
on personal security, insist on cash and not kind, also the improper timing of their
disbursement.

10. A major defect in the working of these societies is that they have not cared to
help the small farmers.

The shortcomings of the co-operative credit system vary from state to state, but
some major problems faced by almost all co-operatives are the problem of
overdue, indifferent management, dominance of co-operatives by vested
interests, shortage of resources, lack of efforts to mobilize deposits, untrained
staff and faulty arrangement for linking credit with marketing.
REASONS FOR POOR RECOVERY OF LOANS IN PACS
COMPETITION
The entry of the commercial and regional rural banks has militated against the
cooperative movement by making competition tougher for the PACS.

The economic development emerging out of liberalization, globalization and WTO

has resulted in creation of very competitive environment. Due to this prevailing
environment of competition, the role of public sector is on decline and private
sector is emerging as very strong. More and more MNCs are replacing the
domestic enterprises. In rural financing sector also multinational banks like ICICI
etc. are making greater in-roads. In addition to that, Govt. of India is stressing
nationalised banks to make greater penetration into rural areas. As such, rural
credit and banking has remained no more monopolistic domain of cooperatives.
Therefore, cooperatives have no option but to compete with these highly
professionalized institutions in providing rural credit to the farmers.

BUSINESS DIVERSIFICATION STRATAGIES ADOPTED BY

PACS
 It was found that the major fund based diversification strategy adopted by
sample PACS was the adoption of cluster approach in lending. That was
lending through SHGs and JLGs.
 It was found that the contribution of interest income earned through SHG
linkage has been at increasing trend in sample PACS.
 It was found that the non-fund based business diversifications served as a
channel for augmenting non-interest income for the sample PACS and also
generated additional employment opportunities to the village youth.
 It was found that though there was scope for further business diversification
these PACS have not harvested the opportunities due to lack of adequate
human resources for undertaking new business.
 It was found that the sample PACS adopted certain fund based and non- fund
based strategies, they are viz., linking SHG and JLG, running Fair Price Shops,
Agro Service Centre, Common Service Centre and Agri-Clinics.
 These diversification strategies were chosen by the sample PACS from the list
of business diversification strategies suggested by the Registrar of Cooperative
Societies, Government of Tamil Nadu for maintaining financial viability of
PACS.

FINDINGS
1. Rural credit is mainly focused on the agro sector and PACS plays a major role in
rural finance.

2. The society provides only short-term and medium term loan.

3. It supplies short-term credit on the personal security of the borrowers, while

medium –term credit is given by charge on their immovable assets.

4. The society provides loans only relate to agricultural credit to farmers

5. Deposit mobilization in society is less. Because of lack of awareness among the

people about the different schemes of the society.

6. The members deposit money for the purpose of compulsion made by banker to
open account.

7. The amount of loan distributed to members were in inadequate time.

8. Use of computer is less in these societies.

SUGGESTIONS
1. The society should provide long-term loan also to farmers to meet their
financial requirements.
2. As society provide loans only related to agricultural credit to farmers it is
suggested that it should also provide other types of loans so that it can help the
farmers and maintain good standard of living.

3. To improve the deposit mobilization, the society should conduct awareness

programs from time to time. This will popularize the different schemes of the
society and there by attract new customers and educating the farmers relating to
different services provided by society.

4. To help farmers the society should adopt easy procedures for distributing and
recovering the loan from farmers.

5. To develop self employment in the rural areas the society should provide
training to the rural unemployed people.

6. The adequate amount of loan should be distributed to farmers at adequate

time.

7. Political interference in lending operation should be eliminated as per as

possible.

8. For early retrieval of information use of computer should also be introduced for
maintaining 9echanized accounting system safely.

9. Society should educate the farmers relating to different services provided by

society.

10. The society should provide quality necessary agricultural items at reasonable
price to the farmers

11. The staff member of society should maintain good co-operative relationship
with members by providing all information to farmers.
CONCLUSION
Primary Agricultural Credit Society is actually organized at the grass-roots level a
village or a group of small villages. It is the basic unit which deals with rural credit
to farmers for meeting their financial requirements. It provides short-term and
medium-term loan to farmers which helps to meet their short-term financial
requirements. It supplies agricultural inputs and provides marketing facility for
the agricultural products. For the development of agricultural sector and allied
activities adequate and timely finance are essential. But many financial problems
are cropping up in the process of development of co-operative system they are
lack of adequate and trained staff, lack of necessary funds, poor industrial
relations climate, lack of professional management, political interference, change
in economic conditions, over dues and limited source of income of the farmers
and so on these societies are unable to provide adequate finance to the members
and they are making delay in the sanctioning of loan. Therefore to increase the
efficiency of the society and to serve the rural agricultural people in a better
perspective the cooperative banking should be strong and efficient to face the
challenges in competitive environment and it needs to take necessary measures.