CHAPTER 6

REGULATORY FRAMEWORK--RBI INITIATIVES

Srno. Particulars Page no.

6.1 Introduction 6.2

6.2 RBI Control 6.2
6.2.1 Government Control 6.3
6.2.2 Problems of Duality of Control 6.4
6.3 Failure of Urban Co-operative Banks & Scams in co-operative 6.5
banks
6.4 Role of State Government & Registrar of Co-operative Societies 6.6
6.4.1 Organizational set up of Registrar of Co-operative Societies 6.7
6.4.2 Regulatory powers of Registrar of Co-operative Societies 6.8
6.4.3 Functioning of MSC Bank and Federation 6.10
6.4.4. Objectives of Federation/Association 6.12
6.5 Government initiative to avoid Dual Control—concept of MOU 6.13
6.6 RBI Initiative 6.15
6.6.1 Major Policy Measures during the Year 2000 6.16
6.6.2 Major Policy Measures during the Year 2001 6.19
6.6.3 Major Policy Measures during the Year 2003 6.21
6.6.4 Major Policy Measures during the Year 2004 6.22
6.6.5 Major Policy Measures during the Year 2005 6.23
6.7 Conclusion 6.25
References 6.26
 CHAPTER 6

REGULATORY FRAMEWORK—RBI INITIATIVES

"Authority does not work without prestige, or prestige without distance."

Genera! Charles de Gaulle, French President.

6.1 INTRODUCTION

After Independence urban co-operative banks have grown both in numbers

and size. The deposits and loan business of urban co-operative banlcs recorded
spectacular grovvth, compared to commercial banks even then they remained outside
the control of RBI. These banks became severe competitors for the commercial banks
particularly with regard to deposit mobilization. Therefore in order to have an
effective regulation of monetary and credit policy of RBI need was felt to bring the
field of co-operative banking under the control and authority of RBI. This was
because of their presence and sizable collection of deposits from the public. Therefore
in the interest of the public, RBI has decided to supervise and regulate the operations
of urban co-operative banks.

6.2 RBI CONTROL'

A number of banks other than co-operative banks miserably failed during the
early 60s which adversely affected the interests of depositors. Slowly they started
demanding insurance cover to their deposits. The Deposits Insurance and Credit
Guarantee Corporation agreed to extend the insurance cover to urban co-operative
banks provided the RBI was statutorily empowered to regulate the activities of urban
co-operative banks and their banking operations. The reasons for the control of co-
operative banks by the RBI are the following:—
^ Necessity of Safe-guarding the interests of depositors,
^ Need for extension of Banking Regulation Act to the banks in co-operative
sector in the wider context of monetary and fiscal control of the economy.
^ Control and supervision of RBI was considered necessary for extending the
deposits insurance cover.

6.2
-ef Substantial funds were granted to co-operative credit structure by RBI which
had monetary policy connotation.
^ Public interest required that institutions having substantial public deposits and
flinctioning as banks should operate under the supervision of RBI.

The RBI has appointed a committee under the chairmanship of Mr. Madhav
Rao, the former Chief Secretary of Andhra Pradesh to suggest specific reforms in the
relevant union and state legislations so that the twin objectives of effective regulation
of banking activities of these banks and maintenance of their co-operative character
are achieved. The committee examined the issue of dual control.

From 1-3-1966, certain provisions of Banking Regulation Act 1949 came to

be applied to Co-operative banks which ushered in an era of dual control over the co-
operative banks. These banks came under the control of Banking Regulation Act for
the banking activities where as for other purposes, such as incorporation, registration,
amalgamation, liquidation etc the urban co-operative banks continued to be subject to
the provisions of State Co-operative Societies Act.

6.2.1 GOVERNMENT CONTROL

Urban co-operative banks are regulated and supervised by both state

government, through the Registrars of Co-operative Societies, and the Reserve Bank
of India. The Registrars exercises powers in regard to incorporation, registration,
management amalgamation, reconstruction or liquidation. In case of banks having
presence in more than one state, the central Registrar of Co-operative Societies, on
behalf of Central government exercises such powers. The banking related functions
such as issue of license to start new banks or branches, matters relating to interest
rates policies on loans and investments, prudential norms etc, are regulated and
supervised by the Reserve Bank of India. Duality of command is not unique in India,
and requires delicate co-ordination for obtaining synergies in regulatory and
supervisory functions.
Regulating the activities of India's co-operative banks first came into focus
as an adjunct of extension of deposit insurance cover to this sector of banking. Unless
RBI as a central bank of the country exercise control over co-operative banks, it was
not feasible to introduce deposit insurance cover for these institutions. Initially many

6.3
State Governments expressed their reservations against this. A conference convened
by RBI in November 1963 to deliberate on the issues witnessed intense debate over
the virtues of vesting the power to liquidate a co-operative bank or supercede its
management, in RBI. The then RBI governor P.C.Bhattacharya assured State
Governments that the bank would entrust its powers to regulate co-operative banks
only to the agricultural Credit Department, which was familiar with these institutions
and was sensitive to their special needs. The Madhav Rao Committee also expressed
that it will not be feasible to extend deposit insurance cover to urban co-operative
banks if the Reserve Bank of India was not vested with the sufficient powers through
suitable legislative measures.

6.2.2 PROBLEMS OF DUALITY OF CONTROL ^

In practice, however the dual control created many problems for the
urban co-operative banks mainly because of overlapping areas of both the State
Registrars and the Reserve Bank of India. Earlier committees opined that there is a
need to address the issue of duality of control, by carrying out necessary statutory
amendments to the Banking Regulation Act and the State Co-operative Societies Act.
Therefore it will be ideal to highlight the banking related functions and co-operative
functions as mentioned by the high power committee.

A. Banking related functions under the domain of RBI^

1. Issues related to rate of interest, loan policies, investments, prudential exposure
norms, forms of financial statements, reserve requirements, appropriation of
profits etc.
2. Branch licensing, area of operation;
3. Acquisition of assets incidental to carry on banking functions;
4. Policy regarding remission of debts;
5. Audit
6. Change of management and appointment of Chief Executive Officer;
7. Appointment of Administrator;
8. Any other banking related subject to be notified by the Reserve Bank of India

6.4
B. Co-operative functions under the domain of the State Registrars of Co-
operative Societies

1. Registration of Co-operative Societies.

2. Approval and amendment to the bylaws.
3. Election of Managing Committees.
4. Protection of members'rights.
5. Super cession of Managing Committee for violation of item no. 1 -4 above.

As the State government did not carry out amendments as suggested by the Madhav
Rao Committee, the problems of dual control of Urban Co-operative Banks continue
creating friction. Due to overlapping area and provision contained in the State Co-
operative Societies Acts, on the matters like area of operation, investment of funds in
immovable property, audit of urban co-operative bank, appointment of administrator,
etc, the registrar is empowered to exercise these powers. Incidentally statutory audit
of accounts of large urban co-operative banks having deposits over Rs 50 crores is
now given to the Chartered Accountant as per circular instructions of the RBI.

6.3 FAILURES OF URBAN CO-OPERATIVE BANKS AND SCAMS IN CO-

OPERATIVE BANKS

In the year 2000 many co-operative banks like Madhavpura Mercantile Co-
operative bank in Gujarat, Krishi and Charminar Co-operative banks from Andhra
Pradesh failed and three District Central Co-operative banks and few urban co-
operative banks from Maharashtra were involved in security scams. All these
incidents have shaken the public confidence in the functioning of co-operative banks
and there was a hue and cry for tightening the control over urban co-operative banks
by Reserve Bank of India. The contention of RBI was that unless dual control over
urban co-operative banks is removed and brought under the single control of the RBI,
it will not be possible to subject them to the discipline of commercial banks and
tighten the RBI control over them. But no co-operation was forthcoming from State
Government towards this effort.
Therefore the RBI and Central Government introduced a bill viz, "Banking
Regulation and (Amendment) and miscellaneous provisions Bill -2003" in the
parliament on the recommendations of the Joint Parliamentary Committee appointed
in the wake of scams detected in Madhavpura Mercantile Co-operative bank and other

6.5
banks. The rationale behind the bill was that the co-operative societies doing banking
business though registered by the State Registrars of Co-operative Societies, would
fall within the jurisdiction of Central government and therefore parliament will have
powers to legislate on the subject of banking related items of co-operative banks. The
Bill proposes to bestow vast powers on the RBI in matters like full time paid
chairman, 5 1 % of the directors to be from the field of agriculture, co-operation
economics, etc directors to be nominated by the RBI, prohibition to the Directors and
their relatives to borrow from the bank where they are directors, removal of directors
individually and collectively and powers to the RBI in regards to appointment of
directors, removal of Chief Executive officer etc."*
The bill met with a lot of opposition from the co-operative banking sector all
over India in general and particularly in Maharashtra. It is argued by leaders and
cooperators that the proposed bill will ruin the spirit of co-operation. The Finance
ministry. Government of India has constituted a study group on IV'*^ October 2003.
The group consists of members from RBI, Income tax department, and prominent co-
operative leaders from the field of co-operative banking. This group has made
recommendations to the Centra! Government. Later on the bill was accepted without
taking the confidence of the State Government and co-operators.

6.4 ROLE OF STATE GOVERNMENTS AND REGISTRARS OF CO-

OPERATIVE SOCIETIES

The Maharashtra state came into existence in the year 1960 and from then it was
leading in co-operative movement .Different type of co-operative movements such as
co-operative sugar factories, co-operative spinning mills etc gave boost to the
economy of Maharashtra.The policy of the government was rural development
through co-operation, and different co-operative societies Acts were in existence. The
need for a single Act for uniformity was felt and Rural Credit Survey Committee
appointed by the RBI suggested certain changes in co-operative law. Considering all
these the present Co-operative Societies Act was passed in 1960 by the Maharashtra
Government, which was amended more than 50 times as of now.

During 1960 there were 149 urban co-operative banks in the state, which
increased to 381 in 1991-92. Maharashtra state was leading in urban co-operative
banking, due to the growth of commerce and small scale industries in the state along

6.6
with enlightened leadership at different levels. This has resulted a spectacular growth
of urban co-operative banks, nearly 1/3 rd of the urban co-operative banks in India/

During the 1970s it was observed that the urban co-operative banks were
concentrated in Mumbai and parts of western Maharashtra only and all other regions
such as Vidharbha, Konkan were lagging behind. Government of Maharashtra
appointed a committee called Joglekar Committee in the year 1974 to recommend
measures to remove the regional imbalances prevailing within Maharashtra region.
The committee submitted its report in 1976 and recommended that, in under
developed and backward areas the State government should contribute to the share
capital of urban co-operative banks on matching basis so that they can fulfill the
economic viability norms prescribed by the RBI. The committee also suggested that
state government should provide managerial subsidy to the un-economic branches of
urban co-operative banks for three years. Accordingly State Government followed a
policy of helping the co-operative banks to some extent.

6.4.1 ORGANISATIONAL SET UP OF REGISTRAR OF CO-OPERATIVE

SOCIETIES

Registrars of Co-operative Societies play an important role in the development

of co-operative movement in the state. Co-operative Department has a long history of
outstanding Registrars who were responsible for the development of Co-operative
movement at the initial stages. The Registrar and his subordinates collected people
and convinced them the importance of forming co-operative societies and advantages
related to that by acting friend, philosopher and guide to the co-operative societies.

6.7
Chart 6.1

Co-operative Department (Registrar of Co-operative

Societies)

''

^' " "

\
Divisional Level District Level Taluka Level

'' ^' u
Joint Registrar Deputy Registrar Assistant Registrar

^"^--v^ 'A^^"^

Sub Staff

(Source: Researcher's contribution)

6.4.2 REGULATORY POWERS OF REGISTRAR OF CO-OPERATIVE

SOCIETIES

The Registrars of Co-operative Societies appointed by the State Government

plays a very important role under the provisions of Maharashtra co-operative
Societies Act. The Registrar is the head of the Co-operative Department in the State,
who will be assisted by the Additional Registrar, Joint Registrars, Deputy Registrars
and Assistant Registrars of Co-operative Societies along with subordinate staff They
are empowered to exercise various powers to facilitate effective implementations of
various provisions of Co-operative Societies Act. The co-operative department has a
vast network from State level to Taluka level, level manned by various officers
depicted in the above chart 6.1.
A special post of Joint Registrar was created at the Head Office in Pune,
following the recommendations of RBI in this behalf, exclusively for looking after the
functioning of urban co-operative banks. Presently, this work is placed under the
control of Additional Registrar of Co-operative societies who is assisted by two

6.8
Deputy Registrars and supporting subordinate staff to help the Registrar in the Head
Office, and to liaison with the RBI. Thus a post has been created at the State level in
the office of the Registrar of the Co-operative Societies.

Under the Maharashtra Co-operative Societies Act, the annual audit of urban
co-operative banks is the statutory responsibility of the Registrar. The co-operative
department has a separate set up of Audit Wing in the State. Additional Registrar of
co-operative societies in the head office is the head of the audit wing, who is assisted
by the Divisional Joint registrar. Special auditors and Auditors at district or below
district level.

The proposals for registration of new urban co-operative banks are normally
received at district level and scrutinized by the Deputy Registrars, and only after
getting clearance from RBI the banks are registered. Thus urban co-operative banks
need to get license from RBI, to commence banking business. The registrar performs
statutory functions such as registration, amendment of bye laws, super cession of their
boards, liquidation and cancellation of registration of urban co-operative banks etc
under the provisions Maharashtra Co-operative Societies Act. The RBI has no powers
under Maharashtra Co-operative Societies Act and therefore it has to act through the
Registrar.

The RBI has laid down a policy according to which an urban co-operative
bank having deposits exceeding Rs.50 crores has to be audited by the Chartered
Accountant only that is on the panel maintained by the Registrar. The Registrar is also
empowered to inspect urban co-operative banks and to conduct enquiries in the
working, constitution, and financial position of co-operative banks, if necessary.

If the urban co-operative banks are found guilty in observing norms stipulated
by the RBI, or mismanagement, misappropriation of funds etc the Registrar is
empowered to remove the erring management and appoint an Administrator in its
place. The Registrar also collects monthly/quarterly returns from the urban co-
operative banks. For improving the efficiency of the banks Registrar has issued
guidelines for awarding marks under certain heads such as deposit mobilization.

6.9
recovery of loans, lending to priority sector, and weaker sections, capital adequacy,
C.D.Ratio, profits etc.

Further more; under provisions of the Maharashtra Co-operative Societies Act

the Registrar can issue recovery certificates to the urban co-operative banks for
recovery of overdues from the members without referring the matter to the co-
operative courts. This facilitates speedy recovery of overdues from the members.

The Registrar and the staff of the Co-operative Department require skill and
profound knowledge about the working of co-operative banks. In order to improve
their skills and efficiency rigorous training facilities are provided by the RBI. Though
Registrar plays an important role in development of co-operative movement, his role
in the development of urban co-operative banks are decreasing now a days due to the
principle of 'dual control'as well as application of Banking Regulation Act by the
RBI from 1966 onwards, i.e the role of Registrar has been restricted by the acts of
Reserve Bank Of India.

6.4.3. Functioning of Maharashtra State Co-operative Bank and Federation

It will be very useful to have a mention of the role played by the Maharashtra
State Co-operative Bank Ltd (MSEB) as well as the Federations for improving the
functioning of urban co-operative banks. The Bombay Provincial Co-operative Credit
Society was registered in 1910.Subsequently it was converted into Bombay Provincial
Co-operative Bank Ltd, in 1911.This was headed by very eminent personalities like
Shri. Vaikunth Metha, Dr. D.R.Gadgil,etc for a very long period, who developed the
bank as a leading State Co-operative Bank. After reorganization of the state the
present Maharashtra State Co-operative Bank came into existence in the year 1960.*

For a period of 4 years from 31-3- 2003 on wards, the position of Maharashtra
State Co-operative Bank, Mumbai was as under: -

6.10
Table 6.1 Position of Maharashtra State Co-operative Bank-2003 06.

Share Deposits Investments Advances Working Reserves

Years capital Capital
2003 Rs 207. Rs.11238 Rs.4808 Cr. Rs.8908 Rs. 15207 Rs.l347Cr
Cr. Cr. Cr. Cr.
2004 Rs.210Cr Rs. Rs.6079 Cr Rs.8432 Rs.l7694.Cr Rs.1793
13300 Cr Cr.
2005 Rs.215.Cr Rs. 13404 Rs.7773 Cr Rs.7643 Rs.l7983Cr Rs.1830
Cr Cr Cr.
2006 Rs.225 Cr Rs.13635 Rs.8121 Cr Rs.7634 Rs.l8742Cr Rs.2092
Cr. Cr Cr.
(Source: Annual Reports of the Bank)

The above figures show the financial strength and soundness of the apex bank.
The functions of Maharashtra State Co-operative Bank can be enumerated below:-

1) The M.S.C. Bank arranges for conferences, workshops, meetings, of urban co-
operative banks to discuss important issues and solve the difficulties faced by
the urban co-operative banks.
2) Urban banks are instructed by the Reserve Bank of India to invest (a) 10% (b)
15% and (c) 25%) of SLR in respect of banks having total time and demand
liabilities of (a) less than Rs 25 cr,b) above Rs.25 cr,and (c) Scheduled urban
co-operative banks respectively, in Government Securities instead of keeping
the same amount in time deposits with District Central Co-operative Banks or
M.S.C bank for which M.S.C. bank only gives guidelines.
3) Further the bank also provides expert advice in respect of investments of funds
of co-operative banks in call deposits as per the instructions of RBI.
4) M.S.C. Bank is the convener of the meetings of the State Level Rehabilitation
and Revitalisation Committee for urban co-operative banks. Every year
regionwise meetings of weak/sick banks are convened to watch the progress of
these banks as per the action plan given to them.
5) M.S.C Bank also gives counter guarantee to urban co-operative banks if
required for loans sanctioned by the urban banks.
6) It conducts inspection of those banks to which it gives financial
accommodation.
7) It also conducts training programmes through its staff college at Nagpur to the
staff and officers of all urban co-operative banks.

6.11
8) The bank used to conduct survey for organization of new urban co-operative
banks in the state and help the Registrar of Co-operative Societies to register
new banks, as per the recommendations of Joglekar Committee report 1976.
9) M.S.C. Bank has a Board of Directors consisting of 57 directors, who
represented various types of co-operative societies affiliated to the Bank. Out of
57 directors 6 Directors are elected from urban co-operative bank constituency.
Thus representation is given to urban co-operative banks.
10) M.S.C. Bank also helps urban co-operative banks for issue of drafts, collection
of bills etc through a system called Mutual arrangement scheme. From 1974
onwards urban co-operative banks are able to transfer their funds throughout
India, through All India State co-operative Banks Federation.

It will be appropriate at this juncture to mention about role of Federations.

Urban co-operative banks are having existence of about 100 hundred years and the
number of urban co-operative banks in Maharashtra has recorded a spectacular
growth. At present the number has gone up to 656 and in order to collect statistical
information as well as to ventilate grievances of urban co-operative banks, a separate
body was set up as Organization of Federations/ Associations of urban co-operative
banks. During 1970 District/State and National Federations were set up. Maharashtra
State Urban Co-operative Banks Federation Ltd, Mumbai, National Federation of
Urban Banks and Credit Societies Ltd, Delhi, etc were set up to coordinate the
activities of urban co-operative movement.'
6.4.4 Objectives of Federations / Associations: -

1) To provide a common platform for discussing technical and practical problems

and devise means to solve the problems;
2) To promote and protect member banks;
3) To establish liaison between Govt, of India, State Governments, RBI and other
concerned institutions and member banks in respect of problems and
difficulties faced by the urban banks;
4) Organising conferences.seminars.and set up working groups in regard to the
matters relating to bank management;
5) To exchange information of common interest of the member banks and to
arrange for publication of periodicals and statistical data:
6) To keep the members informed with latest developments relating to banking;

6.12
7) Collection of statistical information of member banks regarding functioning of
urban co-operative banks and its publications;
8) To arrange for training to officers and staff of the member banks;
9) Discharge statutory functions, if powers are delegated under the state Co-
operative Societies Acts such as issue of recovery certificates etc.
10) To act as Liquidator/ administrator of urban co-operative banks, if appointed
by the Registrar;^

The Maharashtra State Urban Banks Federation as well as National Federation

of Urban Banks and Credit Societies are coordinating the various activities of urban
banks. They solve the problems and issues faced by urban banks with central
government/state government and RBI. For e.g. one time settlement the cut off date
under which was 31-10-1998, was exempted up to 31-5-2002 for urban co-operative
banks in Maharashtra by the Registrar of Co-operative societies. Thus whenever need
arises, these federations are offering a helping hand to urban co-operative banks
through inter acting with the concerned authorities. The useful work done by the
federation and association in the development of urban banking will be highly
appreciated.

6.5 GOVERNMENT INITIATIVES TO AVOID DUAL CONTROL-

CONCEPT OF MOU
The concept of dual control created many problems in the functioning of the
co-operative banks because of the overlapping areas such as area of operation,
investment of funds in immovable property, appointment of auditors, auditing and
inspection, appointment of administrator etc which always created delay in decision
making. In fact co-operative banks were facing serious difficulties due to which they
were forced to think about some reformation and relief in this matter.
The Issue of dual control over urban co-operative banking sector is set to be
resolved by the RBI by appointing a committee which has prepared a vision
document. The advisory committee wants to ensure effective regulation of the sector
by its two regulatory bodies, the RBI and RCS (The Economic Times, 13"^ January,
2006.)
The RBI has formulated a draft vision document in order to improve existing
supervisory and regulatory approach of co-operative sector as well as to enhance

6.13
professionalism, along with consultative arrangement for identifying weak and
potentially viable units among co-operative banks (www.rbi.org.in).

In pursuance of the proposals in the draft vision document, state governments

having a large number of urban co-operative banks were approached for signing
memorandum of understanding (MoU). The memorandum provides the basis for the
constitution of Task Force for Urban Co-operative Banks (TAFUCBs) in each state,
which is the forum for the consultative decision making process. The TAFUCB is
constituted with the representatives of RBI, State Government as well as urban co-
operative bank sector also. The memorandum also provides for professionalism in
audit procedure as well as RBI's role in improving IT and Personnel in urban co-
operative banks. For those states that have signed MoU, certain facilities like setting
up currency chests, selling mutual funds, providing forex services, opening new
ATMs are considered by RBI.

The MoU ensures greater co-ordination between RBI and State Governments for
supervision and regulation of urban co-operative banks. Since June 2005,MoUs have
been signed with 8 state governments viz Andhra Pradesh,Gujarat,Kamataka,
Madhyapradesh,Uttranchal,Rajastan,Chattisgarh,and Goa which together constitute
844 urban co-operative banks and account for almost 23% of deposits of the sector.
Later on Maharashtra Government also signed MoU which has got maximum number
of urban co-operative banks. It is the ninth state to sign the MoU.'

Upon signing the MoU, RBI constituted TAFUCB, which is a six member
body with two representatives each from State Government, urban banking sector and
RBI. The TAFUCBs are chaired by the respective regional directors of RBI, and RCS
is the co-chairperson, along with the representatives of urban banks for providing
local inputs.

For improving the inter-regulatory coordination, apart from the MoU signed
between the Registrar and the State Government another MoU between the Registrar
of Co-operative Societies of the State and the respective Regional directors of the RBI
is also prepared. This MoU stipulates the broad measures to be taken by the
signatories for implementing the recommendations of the TAFUCB for each

6.14
potentially viable, non viable urban co-operative bank are placed for consideration of
TAFUCB. Based on the recommendations of the TAFUCB, the RBI can fix up
supervisory actions like mergers, cancellation of licenses etc.

The impact of'MoU-TAFUCB' Mechanism is reflected in the decline of the

number of weak and sick urban co-operative banks in the states which had signed the
MoU. These initiatives taken by the RBI would lead to the evolution of the urban co-
operative banking system into a strong and vibrant sector with strong banks
conforming to the prudential norms.'"

6.6 RBI INITIATIVES

The Reserve Bank of India has now started issuing master circulars so as to
make it easy for the banks. Various aspects of working of urban co-operative banks
are covered during the year 2004. Many co-operative banks became weak during the
period 2003-04 and RBI has given special emphasis on 'transparency,'
'Professionalism', and 'corporate governance' and circulars were issued towards this
end. Now the terminology of weak and sick banks has been replaced with 'grades'.
Banks placed under grade I are considered as ideal. This section throws light on
various policy measures taken by RBI from 2000- 2005. These measures are the gifts
given by RBI for earmarking the completion of 100 years of co-operative banking.

6.15
6.6.1 MAJOR POLICY MEASURES DURING THE YEAR 2000 "

1. ELIGIBILITY CRITERIA FOR PROMOTERS OF NEW UCBs

PRESCRIBED:-

The following eligibility criteria have been prescribed for promoters of new
urban co-operative banks:-
(a) There should be at all times at least two directors with suitable banking
experience or persons with relevant professional qualifications, i.e. Chartered
Accountants with banking experience.
(b) The promoters should not be defaulters in any financial institution/bank/co-
operative bank/ co-operative society.
(c) No criminal proceedings should have been instituted against the promoters.
(d) Promoters should not be associated as director with any chit fund/NBFC/ co-
operative bank.
In addition to the above, whenever promoters submit to the office of the Registrar
of Co-operative Societies of the State concerned proposals for setting up of a new
urban co-operafive banks, Registrar's office being the first level of screening such
proposals have been advised to scrutinize each proposal carefully on the following
lines:-
^ Promoters' educational background, professional competence, means and
standing etc, ability to mobilize requisite capital and membership.
^ The promoters' means and standing may be ascertained from their social
status, leadership qualities, entrepreneurial abilities, financial integrity etc.
ei The Co-operation Department should strictly ensure that the promoters are not
defaulters to any financial institution/ Commercial bank/ co-operative
bank/co-operative society etc.

2. VIABILITY NORMS DISPENSED WITH (FOR LICENSE PURPOSE):-

The relevance of viability standards in the context of prudential norms and relative
regulatory prescriptions have been examined by the Central Office of USD, RBI and
it has been decided to dispense with these norms. Hence the viability norms
prescribed in RBI, UBD Circular dated May 25, 1993 stand withdrawn for the
existing as well as for new urban co-operative banks.

6.16
3. INCOME RECOGNITION, ASSETS CLASSIFICATION, PROVISIONING -
CONCEPT OF 'PAST DUE' DISCONTINUED:-

As per the guidelines on income recognition, assets classification and

provisioning, an asset is classified as NPA based on the period for which the amounts
due in the account remained 'past due'. An amount is considered as 'past due' when it
has remained outstanding for 30 days beyond the due date. Due to the improvements
in the financial sector, it has been decided to dispense with 'past due' concept with
effect from March 31, 2001. Accordingly as from that date, a non performing asset
shall be an advance where:-
(1) Interest and /or installments of principal remain overdue for a period of more
than 180 days in respect of a term loan.
(2) The account remains out of order for a period of more than 180 days, in
respect of an overdraft /cash credit,
(3) The bill remains overdue for a period of more than 180 days in the case of
bills purchased and discounted.
(4) Interest and /or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two and half years in the case of an
advance granted for agricultural purposes and
(5) Any amount to be received remains overdue for a period of more than 180
days in respect of other accounts.

6.17
4. ENTRY POINT NORMS FOR ORGANISING NEW URBAN CO-
OPERATIVE BANKS REVISED:
The revised norms for organizing new urban co-operative banks are as under:
Table 6.2
General Category A B C D
Share Capital 400 200 100 25
Membership 3000 2000 1500 500
Unit Banks:
Share Capital 200 100 50 12.50
Membership 3000 2000 1500 500
Banks Organized by Mahilas/ SCs/ STs/ less developed states
Share Capital 200 100 50 12.50
(50%ofEPN)
Membership 3000 2000 1500 500
Banks organized in least developed states/North Eastern States/ Tribal Regions:
Share Capital 133.33 66.67 33.33 8.33
(33.33% of EPN)
Membership 2000 1334 1000 334
(66.67% of Normal membership)
(Source: www.rbi.org.in)

Norms for Urban co-operative banks- category of centre

Table 6.3

Category of Centre Population

A Over 10 Lakhs
B 5 lakhs and above but less than 10 lakhs
C 1 lakh and above but less than 5 lakhs
D Less then 1 lakh

(Source: www.rbi.org.in)

6.18
6.6.2 MAJOR POLICY MEASURES DURING THE YEAR 2001
1. Recommendations of High Power Committee—Area of operation of primary
urban co-operative banks—Revised policy Approach
The policy regarding area of operation of urban co-operative banks has been
reviewed by a High Power Committee on urban co-operative banks constituted by
RBI in 1999 based on which revised policy approach to an area of operation of urban
banks is set out in the following paragraphs :-
2. Extension of area of operation to the adjoining districts:—
Licensed urban co-operative banks, which are not classified as weak/sick, are
only eligible for extension of area of operation beyond their present limits. With a
view to giving more operational freedom to urban co-operative banks it has been
decided to allow new as well as existing urban co-operative banks to extent their area
of operation to the whole of the district of registration and to its adjoining districts
within their state of registration without the prior permission of RBI.
3. Extension of area of operation beyond the adjoining districts:—
An urban co-operative bank desirous of extending its area of operation beyond
adjoining districts to its district of registration but within the state may do so with
prior permission of Reserve Bank subject to complying with the following norms:-
(i) Its owned funds (share capital + free reserves ) should not be less than the
Entry Point Capital prescribed for the highest category centre in that district
for organizing a new multi branch bank as per the RBI circular dated 30'*' Aug
2000.
(ii) It should have achieved the prescribed targets for priority lending,
(iii) Its net NPAs should be less than 10% of its net loans and advances and it
should have made full provisions as prescribed by RBI.
(iv) It should have posted net profits during the preceding 2 years,
(v) It should have complied with the RBI regulatory framework, such as
compliance with CRR/SLR requirements, timely submission of prescribed
returns/ statements and satisfactory compliance with RBI inspection findings
etc.

6.19
4. Extension of area of operation beyond the state of registration:-
An urban co-operative bank with the prior approval of RBI may extend its
area of operation beyond its state of registration provided its owned funds are not less
than Rs.50 cr and it complies with the five norms stipulated above.

5. Review of Branch Licensing Policy:-

Licensed urban co-operative banks, which are not classified as weak/sick may
apply for allotment of centers after satisfying the following criteria:-

i) Capital to Risk Assets ratio (CRAR) of banks should not be less than that
prescribed by RBI from time to time,
ii) Banks should have posted net profits during each of the preceding 2 years;
iii) Their net NPAs should be less than 10% of their net loans and advances as on
the last balance sheet date and they should have made the requisite provisions
as per RBI guidelines;
iv) Banks should have achieved the target prescribed by RBI for priority sector
advances;
v) Banks should have demonstrated track record of compliance with the
provisions of B.R.Act 1949, R.B.I Actl934 and should maintain requisite
level of CRR and SLR and also ensure timely submission of statutory and
other returns.

6. Banks which have been organized as unit banks and have been extended
relaxation in the entry point capital would be eligible to open branches only after
augmenting their owned funds to the level required for opening a new bank
where the bank was organized or where the branch is desired to be opened, which
ever is higher.
7. Investment of funds by urban co-operative banks as deposits with other
institutions and other urban co-operative Banks:-
Urban co-operative banks are advised to desist from parking their funds with
other institutions / public sector companies etc vide circular No BR.1866/A
12(19). But in the event of any financial problem afflicting the deposit accepting
bank, it has been decided to prohibit parking of urban co-operative bank deposits
with other urban co-operative banks also except for maintaining balances in

6.20
 current accounts for meeting their clearing and remittance requirements. Those
urban co-operative banks which are maintaining funds in the form of fixed
deposits with other urban co-operative banks are required to unwind the
outstanding deposits with other urban co-operative banks before the end of June
2002.

6.6.3 MAJOR POLICY MEASURES FOR THE YEAR 2003

1. Fortnightly report on loans and advances granted by urban co-operative banks to

their directors etc up to September 30,2003:-
Urban co-operative Banks are advised that the directions issued by RBI on prohibition
on granting loans and advances to the directors, their relatives and the firms
/concerns/ companies in which they are interested, would become effective from
October 1,2003.

2. It is reiterated that the loans and advances if any, granted to directors etc should
strictly and scrupulously comply with all the guidelines issued by RBI for extension
of loans and advances by urban co-operative banks, including >

i) Careful assessment of requirement of finance based on proper credit appraisal

in detail, documentation and supervision over end use of funds ,
ii) Specific safeguards to be observed while providing cheque discounting
facilities,
iii) Exposure ceilings on single borrower and group borrower at 0% and 50% of
the bank's capital funds;
iv) Proper safeguards to be observed in regard to account opening procedures,
custody of documents, loans against deposits, issue of guarantees/ letter of
credit, prevention of diversion of funds, sanctioning of loans/ other credit
facilities etc

3. The urban co-operative banks should forward a fortnightly report to the chief
General Manager in charge giving details of loans granted to directors and any
deviation from the guidelines would be viewed seriously and would invite penalty as
per the provision of the Banking Regulation Act 1949.

6.21
6.6.4 MAJOR POLICY MEASURES FOR THE YEAR 2004

1. Income Recognition, Asset Classification, Provisioning- 90 days Norm for

recognition of loan impairment—exemptions
The circular dated 26'*^ December 2002 on income recognition, asset
classification; provisioning and related matters advised urban co-operative banks to
classify an asset as non performing if the interest and /or installment of principal
remain overdue for a period of more than 90 days, with effect from the year ending
31" march.
But it has been decided to exempt both gold loans and small loans upto Rs one lakh
from 90 days norms for recognition of loan impairment. These loans would continue
to be governed by the 180 days norm for classification as NPA even after 31" march
2004.
2. Maintenance of Cash Reserve Ratio :-0n a review of liquidity conditions it has
been decided to increase CRR of scheduled primary urban co-operative banks in
two stages, effective from fortnights as indicated below:-
Norms for CRR
Table 6.4

Effective date CRR on net demand &time liabilities

From Sept 18,2004 4.75%
From October 2,2004 5%

(Source: www.rbi.ors.in)

However the effective CRR maintained by scheduled primary urban co-operative

banks on total demand and time liabilities shall not be less than 3%, as stipulated
under the RBI Act 1934.
3. New circulars are issued in relation with Investment Fluctuation Reserves, Know
your customer norms. Cash transaction, uniform accounting of Repo/Reserve Repo
transactions etc.
4. Circulars in relation with transparency, corporate governance and professional
management among banks were also issued during this period.
5.Various aspects of the working of urban co-operative banks viz rating of urban co-
operative banks on 'CAMEL' factors, disclosure of information as 'note on Accounts'
to the Balance Sheet, norms for opening extension counters, closure of un

6.22
remunerative branches, rate of depreciation on computers, compulsory settlement of
transactions in Government Securities through Clearing Corporation of India,
investment in Government Securities/ PSU bonds in demat form, payment of dividend
to shareholders etc.
6. The earlier ban on lending against shares / debentures keeping deposits with other
urban banks was removed.
7. The terminology of weak and sick banks has changed into grades. Banks placed in
Grade I are considered ideal. The banks classified under Grade II have to take prior
permission for payment of dividend to shareholders.
8. Concurrent audit has now been made compulsory for all banks.
9. The ceiling of unsecured loan limit has been raised to 2 lakhs.
10. To help banks to earn additional income, scheduled urban co-operative banks are
now allowed to take corporate agency for insurance business.

6.6.5 MAJOR POLICY MEASURES FOR THE YEAR 2005.

1. Loans and advances to directors etc- directors as surety/guarantors:-
The circular UBD PCB 10/13.05 dated 7th Aug 2004 advises urban co- operative
banks that the directors and relatives cannot stand as surety /guarantor to the
loans and advances sanctioned by the urban co-operative banks.
2. In this connection the banks which have granted loans and advances against the
guarantee /surety to the loans and advances taken by directors and their relatives
prior to October 2003 may not unwind the position and may continue with the
guarantee till the maturity of the facility. However no fresh borrowal
arrangements should be allowed by the urban co-operative banks with the
guarantees/ surety of their directors and or their relatives.
3. The norm for scheduling urban co-operative banks has been revised. Here after
only such banks whose demand and time liability has crossed Rs. 250 Cr will be
eligible for inclusion in the list of scheduled banks.
4. The licensing of new urban co-operative banks has also been temporarily
suspended awaiting the new legal and regulatory frame work for this sector is
put in place.
5. The regulatory authority is of the opinion that the reconstruction of ailing banks
should be done with the stakeholders or State Government infusing capital

6.23
 instead of the Deposit Insurance Credit Guarantee Corporation infusing
liquidity.
6. The offsite surveillance system which was earlier introduced among scheduled
banks has now been extended to cover all banks having deposit size of Rs.lOO cr
and above.
7. The State Government on Sept 24 has promulgated an ordinance to amend the
Banking Regulation Act 1949 to enable Reserve Bank to issue license to multi
state co-operative Societies to carry on banking business. The ordinance should
also extend the deposit insurance cover to urban co-operative banks registered
under Multi State Co-operative Societies Act.
8. According to Mid Term Annual Policy statement it was decided that the general
provisioning requirement of standard advances shall be 0.40% with immediate
effect from the present level of 0.25%.

RBI has come out with a vision document which has been received by co-
operators and State Government. As a follow -up of Vision document, some of the
State Governments have already signed MoU with RBI. Maharashtra is the 9"^ state
for signing the MoU. Government and the regulatory authorities are encouraging
mergers among the urban co-operative banks. Very strict instructions are given about
KYC norms in order to check money laundering activities.

Non- performing assets are another worry for the regulatory bodies. But due to
strict legislations, net NPAs are on the decline, and the need of the hour is to arrest
gross NPAs. The year 2005 is earmarked fori 00 years of Co-operative legislation in
the country. If the state government along with RBI and RCS prepare separate scheme
of activities, the co-operative sector can be strengthened very easily.

6.24
6.7 CONCLUSION
The RBI also brings out important publications and periodicals for the
information and guidance of all bankers. Some of the Publications are, The Report on
Trends of Banking in India, Review of Co-operative Movement in India, Statistical
Tables relating to Co-operative Movement in India. These publications consist of
wealth of information about co-operative banking in India.
The RBI provides assistance to the urban co-operative banks particularly to
the smaller ones, in improving their skill levels. The College of Agricultural Banking
is providing training facilities to these banks. The cost of training programmes could
be largely subsidized by RBI for the unit banks falling under Tier I (Draft Vision
Document for Urban Co-operative banks).
The RBI also facilitates holding of Periodical Conferences of urban co-
operative banks at national and regional level. All these conferences give feed back to
RBI about the views of co-operators, and high officials which can help for
modification of existing policies.
The role of RBI could, be to frame a regulatory and supervisory regime to
capture the heterogeneity of the sector and implement policies that would provide
adequate room for the sector to grow in a non-disruptive manner. It would be in the
interest of the sector if they support, facilitate and empower the RBI to put in place
mechanisms and systems that would enable the urban co-operative banks to perform
their banking functions successfully.

6.25
REFERENCES
1. Draft Vision Document for Urban Co-operative Banks, RBI publication,
p.1-9
2. Ibid p.1-9
3. Sri D.S.Lokhande & Sri B.M.Deshpande Evolution of Urban Co-
operative Banks in Maharashtra Feb 2005,p.l54-155
4. Ibid 155-156
5. Ibid 118-119
6. Shri.D.S.Lokhande & Shri.B.M.Deshpande, Evolution of Urban Co-
operative Banks In Maharashtra,Yashwantrao Chavan Pratishthan
Publication, Mumbai 21.p.l26
7. Ibid p.135-136
8. Ibid p.136-137
9. Ms Usha Thorat, Moving Towards an Empowered Customer, Published
by A.D.Shroff Memorial Trust
10. Ms. Naina Lai Kidwai, Changing face of Indian Banking, Published by
A.D.Shroff Memorial Trust.
ll.www.rbi.org

6.26