Contents

Sr. No. 1 2 Particulars Role of RBI-Efforts to Ensure Sustainable Growth and Functioning of UCBs Introduction to industry 1 Banking Sector 2 History of Bank and Banking 3 Financial Structure of Bank in India Research Methodology 1 Significance of Study 2 Objectives of Study 3 Research Methodology 4 Limitations of Study Introduction to UCB sector 1 What is Co-operative? 2 Introduction of Co-operative Bank 3 History of Urban Co-operative Bank 4 Features of Urban Co-operative Bank 5 Importance of Urban Co-operative Bank 6 Difficulties faced by Co-operative Bank 7 Banking Sector Reforms and UCB 8 Profile of UCB 9 Mushrooming Growth 10 Market share of UCBs in the Banking System 11 Heterogeneity in UCB Sector 12 Size of Deposits, Advances, Assets 13 Unit Banks 14 Financial Health of Banks 15 CRAR Distribution 16 Diversity in Spread Umbrella Organization 1 Concept Development 2 Objectives of UO 3 Organizational Structure of UO 4 Features of UO 5 Need for UO 6 Management 7 UO at National Level 8 Working Methodology 9 Form of Organization 1 Page NO. 3 7 7 9 13 15 15 16 17 21 22 22 22 23 24 25 26 28 33 34 35 36 36 38 39 40 41 43 44 45 46 46 47 49 50 51 52

6 7
8

9 10 11

10 Function of UO 11 Authorized Capital, Subscription? Paid up Capital 12 Sources of Working Capital 13 CRR & SLR 14 Regulation and Supervision 15 Emergency Liquidity & Solvancy Support 16 Emergency Liquidity Support 17 Revival of Fund 18 Emergency Fund Facility Trust 19 Effects Analysis of Umbrella Organization What steps should UO has to take? Feasibility Case Study 1 Charminar Co-operative Bank 2 Surat Peoples Co-operative Bank Recommendation Conclusion Bibliography Annexure

55 56 58 59 60 60 61 62 62 64 65 74
78 78 82 84 85 86

Role of RBI-Efforts to Ensure Sustainable Growth and Functioning of UCBs

The Urban Banks Department of the Reserve Bank of India is vested with the responsibility of regulating and supervising primary (urban) cooperative banks, which are popularly known as Urban Cooperative Banks (UCBs). While overseeing the activities of 1926 primary (urban) cooperative banks, the Urban Banks Department performs three main functions : regulatory, supervisory and developmental. The Department performs these functions through its 17 regional offices. I. Regulatory Function: For commencing banking business, a primary (urban) cooperative bank, as in the case of commercial bank, is required to obtain a license from the Reserve Bank of India, under the provisions of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies). (ii) Licensing of Existing Primary (Urban) Co-operative Banks: 2 (i) Licensing of New Primary (Urban) Cooperative Banks:

In terms of sub-section (2) of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), the primary (urban) cooperative banks existing in the country as on March 1, 1966, (when some banking laws were applied to UCBs), were required to apply to the Reserve Bank of India. They were given three months to obtain a license to carry on banking business. Similarly, a primary credit society which becomes a primary (urban) cooperative bank by virtue of its share capital and reserves reaching Rs. one lakh (Rs.1,00,000) and above was to apply to the Reserve Bank of India for a license within three months from the date on which its share capital and reserves reach Rs. one lakh. The existing unlicensed primary (urban) cooperative banks can carry on banking business till they are refused a license by the Reserve Bank of India. (iii) Branch Licensing: Under the provisions of Section 23 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), primary (urban) cooperative banks are required to obtain permission from the Reserve Bank of India for opening branches. (iv) Statutory Provisions: The regulatory functions of Urban Banks Department relate to monitoring compliance with the provisions of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) by urban cooperative banks. These provisions include : a. Minimum Share Capital: Under the provisions of Section 11 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), no primary (urban) cooperative bank can commence or carry on banking business if the real or exchangeable value of its paid-up capital and reserves is less than Rs one lakh. b. Maintenance of CRR and SLR: As in the case of commercial banks, primary (urban) cooperative banks are also required to maintain certain amount of cash reserve and liquid assets. The scheduled primary (urban) cooperative banks are required to maintain with the Reserve Bank of India an average daily balance, the amount of which should not be less than 5 per cent of their net demand and time liabilities in India in terms of Section 42 of the Reserve Bank of India Act, 1934. In addition to the cash reserve, every primary (urban) cooperative bank (scheduled/non-scheduled) is required

to maintain liquid assets in the form of cash, gold or unencumbered approved securities which should not be less than 25 per cent of the total of its demand and time liabilities in accordance with the provisions of Section 24 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies). Out of the prescribed SLR, the UCBs have been advised to maintain a certain amount in the form of SLR Securities as under: Minimum SLR holding in Government and other approved securities as percentage of Net Demand and Time Liabilities (NDTL) 25%

Sr. No. 1.

Category of bank Scheduled banks Non-Scheduled banks a) with NDTL of Rs.25 Crore & above b) with NDTL of less than Rs.25 Crore

2.

15% 10%

Supervisory Functions: To ensure that the UCBs conduct their affairs in the interests of the depositors and also comply with the regulatory framework prescribed by the Reserve Bank of India, the department undertakes on site inspection of these banks with frequency ranging from one to two years depending upon the financial condition / status of banks. The thrust of supervision is to ensure that banks' affairs are not conducted in a manner detrimental to the depositors' interest and also to assess the solvency of the bank vis--vis its liabilities, besides examining the banks' compliance with the existing regulatory framework. The department also undertakes off-site surveillance of scheduled banks and non-scheduled banks with a deposit base of Rs 100 Crore and above based on a set of quarterly and annual returns. III Developmental Functions: With a view to extending institutional credit support to tiny and cottage units, the Reserve Bank of India grants refinance facilities to urban cooperative banks under the provisions of Section 17 of the Reserve Bank of India Act, 1934. The refinance is given at the Bank Rate. Training is imparted to the middle and top management of urban cooperative banks through College of Agricultural Banking, Pune. 4

IV Sections / Divisions of Urban Banks Department: 1. Administration: This Section handles staff matters of the department. 2. New Bank Licensing and Branch Licensing: This section frames policies for issue of bank license /allots centers for opening of branches and authorizes regional offices to take action accordingly. It also deals with conversion of cooperative credit societies into urban banks. 3. Returns: Returns section at each of the regional offices is responsible for monitoring receipt of various statutory returns under the provisions of Banking Regulation Act, 1949, (AACS) and Sec 42 of Reserve Bank of India Act 1934 in case of scheduled UCBs. They also verify compliance with the provisions of the Acts, ibid, and take suitable action against noncompliant UCBs.

4. Banks Supervision: This division arranges inspection of urban cooperative banks through regional offices and closely monitors the action taken by the UCBs to rectify the irregularities / deficiencies pointed out in inspection reports. The division also associates itself with the RCS of respective states in rehabilitation of financially weak UCBs. 5. Banking Policy: This section frames policies on prudential norms, investment policies, monitoring priority sector targets, refinancing, issue of directives on interest rates, CRR/SLR, etc. Policies relating to para banking activities such as merchant banking, hire purchase, leasing, insurance business, etc. are also formulated by this division. Besides, the section also attends to compliance with the directions of Local Board / Central Board / BFS, furnishes requisite material for Bank's publications such as Annual Report, Report on Trend and Progress of Banking in India, Currency and Finance, etc. Further, the section interprets the provisions of Banking Regulation Act 1949 (AACS), initiates amendments, coordinates with the Government, corresponds with various State Governments on matters pertaining to amendments of State Cooperative Societies Acts,

coordinates with DICGC on matters pertaining to banks under liquidation, maintains and updates the list of urban cooperative banks, monitors cooperative credit societies having paid up capital above Rs one lakh, watches compliance to Sec 9, 29 & 31 of Banking Regulation Act, attends to cooperative banks going out of the purview of Banking Regulation Act etc.

Reserve Banks Role in Empowering UCBs:

In order to empower the cooperative banks in their commercial / managerial functioning, the Reserve Bank in its MOUs with the State Governments has committed to facilitate the development of human resources and skills and to provide assistance in IT initiatives undertaken by the UCBs. The UCBs here have to take a lead and play a more pro-active role in order to utilize the services and assistance provided by the Reserve Bank to make themselves more competitive by bringing efficiency in their functioning. This has to be achieved through cultivating Capital Adequacy and NPA Provisioning Standards; better Corporate Governance; introducing Professional Management and following best practices in Banking operations.

Introduction to Industry
Introduction to Banking Sector : Banking Sector:
In simple word, A Bank can be defined as a financial institution that accepts deposits and channels the money into lending activities. The banking system in India is significantly different from that of other Asian nations because of the countrys unique geographic, social, and economic characteristics. India has a large population and land size, a diverse culture, and extreme disparities in income, which are marked among its regions. There are high levels of illiteracy among a large percentage of its population but, at the same time, the country has a large reservoir of managerial and technologically advanced talents. Between about 30 and 35 percent of the population resides in metro and urban cities and the rest is spread in several semi-urban and rural centers. The 6

countrys economic policy framework combines socialistic and capitalistic features with a heavy bias towards public sector investment. India has followed the path of growth-led exports rather than the exported growth of other Asian economies, with emphasis on selfreliance through import substitution. These features are reflected in the structure, size, and diversity of the countrys banking and financial sector. The banking system has had to serve the goals of economic policies enunciated in successive five year development plans, particularly concerning equitable income distribution, balanced regional economic growth, and the reduction and elimination of private sector monopolies in trade and industry. In order for the banking industry to serve as an instrument of state policy, it was subjected to various nationalization schemes in different phases (1955, 1969, and 1980). As a result, banking remained internationally isolated (few Indian banks had presence abroad in international financial centers) because of preoccupations with domestic priorities, especially massive branch expansion and attracting more people to the system. Moreover, the sector has been assigned the role of providing support to other economic sectors such as agriculture, smallscale industries, exports, and banking activities in the developed commercial centers (i.e., metro, urban, and a limited number of semi-urban centers). The banking systems international isolation was also due to strict branch licensing controls on foreign banks already operating in the country as well as entry restrictions facing new foreign banks. A criterion of reciprocity is required for any Indian bank to open an office abroad. These features have left the Indian banking sector with weaknesses and strengths. A big challenge facing Indian banks is how, under the current ownership structure, to attain operational efficiency suitable for modern financial intermediation. On the other hand, it has been relatively easy for the public sector banks to recapitalize, given the in creases in nonperforming assets (NPAs), as their Government dominated ownership structure has reduced the conflicts of interest that private banks would face.

History of Bank and Banking: History of Banking:

The first banks were probably the religious temples of the ancient world, and were probably established sometime during the 3rd millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-tocarry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests to merchants. Modern western economic and financial history is usually traced back to the coffee houses of London. The London Royal Exchange was established in 1565. At that time moneychangers were already called bankers, though the term "bank" usually referred to their offices, and did not carry the meaning it does today. There was also a hierarchical order among professionals; at the top were the bankers who did business with heads of state, next were the city exchanges, and at the bottom were the pawn shops or Lombard's. 8

Global banking and capital market services proliferated during the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions, but also because financial market conditions were buoyant and, on the whole, bullish. Growing internationalization and opportunity in financial services entirely changed the competitive landscape, and now many banks prefer the universal banking model. Today universal banks are free to engage in all forms of financial services, make investments in client companies, and function as much as possible as a one-stop supplier of both retail and wholesale financial services.

The Indian Story:

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank in 1895 in Lahore and Bank of India in 1906 in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers.

Indian Banking- Present and Future:

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Currently, banking in India is considered to be fairly mature in terms of supply and product range. Indian economy is one of the fastest growing economies in the world. The countrys GDP has been growing at an average rate of almost 7 percent during the last decade with the GDP growth rate touching 9.4 percent in the last year. The Indian banking industry also has obtained its share in the growth of the Indian economy. In the post nationalization period, the country witnessed unprecedented expansion in the branch network of commercial banks with these banks reaching the people in far-flung unbanked areas. There was a gradual shift in the approach of nationalized banks from class banking to mass banking. The present focus on retail credit such as housing loans and vehicle loans, regulatory norms for flow of credit to agricultural sector and changes in the attitude of the people now opting for availing loans to build their assets, have created a vast market potential for banks in India. On the other hand, the Indian household sector, which is one of the largest savers in the world, still continues to lock up a major portion of its savings in the form of investments in gold and real estate. The need for huge investment in various infrastructure projects being undertaken for providing support to the economic development of the country opens up a hitherto untapped market in the financial sector in India. The overall banking scenario is proving to be a fast growing profitable avenue for commercial banks, which is now attracting the foreign banks for reaping benefits of the developing economy. Further, the Indian banking industry has realized the Critical importance of IT based operational solutions for surviving the fierce competition to enhance the customer base. Many banks have implemented IT based Core Banking Solutions in the recent time. A considerable amount has been spent in the form of IT investments by major banks in the country. Wherever required, the banks have undertaken business process re-engineering to suit the technology. Indian Banks also seek to expand overseas considering both developing and developed nations. Expanding into developed economies will provide Indian Banks an expertise, much needed to face competition from global players in local market i.e., Indian market. High margins and opportunity to reap profits lure the Indian players to developing economies. The Reserve Bank of India in its road map for the banking industry has indicated that the Indian market will be opened for international banks by 2009. It is expected that apart from the existing foreign players, many such other banks would gain entry in the Indian markets to tap the vast potential. These banks with the help of advanced technology, adequate capital for

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investment, and their customer centric approach attract the profitable customers from the existing banks. A fierce competition between the existing banks and the new entrants provides impetus for business growth. The new foreign banks entering the Indian market strive for creating a strong customer base. These banks, with their large resource availability in the form of capital, infuse the latest IT based technological solutions for quality financial services. The Indian commercial banks have experienced the shift of preferences of the new generation customers from personalized banking to technological banking. This techno-savvy customer group prefers to complete banking transactions from their home or offices rather than visiting the bank branch. They have very little loyalty to their bankers and given a slightest improved technology based service, they are ready to shift their banking needs from the existing to another bank. In the face of the threat of losing profitable customers to the new entrants in the banking sector, the existing commercial banks evolve suitable market strategies aimed at attracting new customers and retaining the existing ones. To effectively meet the competitive challenge from such banks, the Indian banking industry will have to gear up and adopt the global best practices, which would make them stronger and comparable with the international banks. In the changed circumstances, the need for need for customer delight overrides the need for customer service.

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 Financial Structure:
The Indian financial system comprises the following institutions: 1. Commercial banks a. Public sector b. Private sector c. Foreign banks d. Cooperative institutions (i) Urban cooperative banks (ii) State cooperative banks (iii) Central cooperative banks 2. Financial institutions a. All-India financial institutions (AIFIs) b. State financial corporations (SFCs) c. State industrial development corporations (SIDCs) 3. Non-banking financial companies (NBFCs) 4. Capital market intermediaries

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(Chart No. 1)

STRUCTURE OF INDIAN BANKING SYSTEM

Organized

Unorganized

Licensed Creditors Unlicensed Indigenous moneylenders.

Reserve Bank of India

Commercial Bank
13

Co-operative Bank

Public Sector:
1. State Bank of India 2. Subsidiaries of State Bank of India 3. Nationalized Indian Scheduled Commercial Bank

Private Sector:
1. Branch es of Banks In corporate outside India 2. Other Indian Scheduled Commercial Bank 3. Non Scheduled Commercial Bank

1. State Co-operative Bank at State level 2. Central Co-operative Bank at District level 3. Rural Primary Cooperative bank of Village

Research Methodology
Significance of the study
The main aim of any person is the utilization money in the best manner since the India is country were more than half of the population has problem of running the family in the most efficient manner. However Indian people faced large number of problem till the development of the full-fledged banking sector. The Indian banking sector came into the developing nature mostly after the 1991 government policy. The banking sector has really helped the Indian people to utilize the single money in the best manner as they want. People now have started investing their money in the banks and banks also provide good returns on the deposited amount. The people now have at the most understood that banks provide them good security to their deposits and so excess amounts are invested in the banks. Thus, banks have helped the people to achieve their socio economic objectives. The banks not only accept the deposits of the people but also provide them credit facility for their development. Indian banking sector has the nation in developing the business and service sectors. Many small UCBs are looking forward to a centralized organization for buying, selling and managing government securities on their behalf in view of their lack of skill and expertise in the areas.

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To make the umbrella organization sustainable, the RBI could reckon deposits kept by the UCBs with the organization for the purpose of cash reserve ratio and statutory liquidity ratio, permit the organization membership of Payment and Settlement systems; and setting up ATM networks, etc. Being a non-deposit taking NBFC, it would be in a position to access working capital via borrowings from banks/ financial institutions; term deposits from UCBs; bonds/ debentures; and refinance against loans and advances/ securities.

Objective of the Study:

The primary objective of the making report is:

Primary objective: To know why should be an umbrella organization for UCBs The secondary objectives of preparing this report are: To understand what is Umbrella organization and what are the underlying reasons for the Umbrella organization. To understand the impacts of Umbrella Organization on the operations of the Commercial Sector Banks. To know what steps are being taken by the Indian banking sector to enhance the UCBs

Secondary objectives:

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Research methodology:
The research methodology means the way in which we would complete our prospected

task. Before undertaking any task it becomes very essential for any one to determine the problem of study. I have adopted the following procedure in completing my report study. 1. Formulating the problem 2. Research design 3. Determining the data sources 4. Designing Data Collection Form. 5. Determining Design and Sampling Size 6. Organizing and Conducting Field Survey 7. Processing and analyzing the collected data 8. Report Writing (1) Formulating the problem I am interested in the banking sector and I want to make my future in the banking sector so decided to make my research study on the banking sector. I analyzed first the factors that are important for the banking sector and I came to know that providing facility to the customer/ member by Umbrella organization. On the basis of the analyzed factor, I felt that the important

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issue right now. I started knowing about the basics of the Umbrella organization and decided to study on the Umbrella organization. So, I chose the topic Umbrella organization for UCBs (2) Research Design: The research design tells about the mode with which the entire project is prepared. My research design for this study is basically analytical. It is based upon primary data. I got help to make this project from the data published by RBI on 17th Nov 2009 for Umbrella Organization. A research design specifics the method and procedures for conducting a particular study. The research design that was selected by me for our project was descriptive research design. The objective of a descriptive studying is to learn who, when, where and How of a topic Who- who is to be surveyed. The answer of this question is the customers who prefers to Umbrella organization. What- what is the objective of the survey. The answer of this question is to find out degree of satisfaction level of the customers who prefers to Umbrella organisazation. When- during 2 months of research project undergone for the partial fulfillment of TY B.B.A. So was the case with our study. We wanted to know the various degrees of influences of satisfaction level of the clients of UO. 3) Determining the sources of data: The data source can be primary or secondary. The primary data are those data which are used for the first time in the study. However such data take place much time and are also expensive. Whereas the secondary data are those data which are already available in the market. These data are easy to search and are not expensive to for my study I have utilized totally the secondary data issued by RBI on 17 Nov.2009 and from banknetindias data issued on 22nd July 2009. The purpose of our using the secondary data was to help us in collecting the primary information i.e. to design the questionnaire, Who prefers UO & etc. The following are the various sources of data used by me. Primary Sources Questionnaire Design

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Secondary Sources Catalogs Magazine Internet Web Sites 4) Designing data collection forms: Once the decision in favor of collecting primary data was taken the more of collecting the data was decided. The two methods available are observation and survey method. We had decided to go for survey method. Survey method is commonly used to collect primary data from the respondent. We had done personal survey with the help of the questionnaire by going satisfaction level of the member who prefers UO. 5) Determining sampling design and sampling size:

Sample Design When the research has to carry out a filed survey, He has to decide whether it is to be a census or sample survey. I had decided to go for a sample survey as the population survey was out of reach and not feasible. When a decision in favor of a sample survey has been taken, it is necessary to have clear definition of the population from which the sample is to be drawn; in sampling I surveyed people who prefer UO. In this project report, I used probability sampling, where all the member who prefer UO have equal chance to be selected in sample. Sample Size The sample size taken by me to study the objective was 7 clients to the UO. The cooperative bank in Surat is limited so we can not get more sample survey. 6) Organizing & Conducting field Survey : Having prepared the questionnaire and selected the sample design and size of the sample, the next step was to organize and conduct the filed survey. 18

Interviewing The task of interviewing though seems very simple but it is very difficult to conduct. This is because respondents are generally hesitant in giving information unless approach with tact, initiative & intelligence. I interviewed 7 clients personally and by going at their Bank. Supervision Supervision of fieldwork is equally important to ensure timely & proper completion of the filed survey. Supervision was also very carefully done. I supervised each & every questionnaire after the clients filled it. I will duly check to see whether the clients did not miss any questionnaire in between.

(7) Processing and analyzing the collected data:

The primary data would not be useful until and unless they are well edited and tabulated. When the person receives the primary data many unuseful data would also be there. So, I analyzed the data and edited them and turned them in the useful tabulations. So, that can become useful in my report study. Analysis of the data was very carefully done. Moreover, it took many days to analysis the data collected. A number of tables are prepared to bring out the main characteristic of the data. In order to present the analyzed data in a proper manner following tools were used. Tables Graphs Charts Interpretation of the data With use of analysed data I managed to prepare my project report. But the analyzing of data would not help the study to reach towards its objectives. The interpretation of the data is required so that the others can understand the crux of the study in more simple way without any problem so I have added the chepter of analysis that would explain others to understand my study in simpler way.

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(8) Report writing: This is the last stage of the preparation of project report. Once the data have been tabulated interpreted & analyzed, it was require to prepare report embodying the findings of the research study & his recommendation. The sole objective of the report writing will to present the findings to the concerned authorities.

Limitations of the study:

This report is published by RBI recently so it is difficult to get more information about this topic. It was critical for me to gather the financial data of the every bank of the Commercial Sector Banks so the better evaluations of the performance of the banks are not possible. Since my study is based on the secondary data, the practical operations as related to the Umbrella Organization are adopted by the banks are not learned. Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector

The limitations that I felt in my study are:

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Introduction to UCB Sector

What is Co-Operative?
Co-operatives represent the basic qualities of our people: honesty, democratic consensus, mutual concern and self-reliance. Throughout our land, there are co-operatives-large and small which have succeeded. Our day starts with the consumption of milk, the sugar we use in the preparation of sweets, the ration that we purchase from a fair price shop, the papad and pickles which add taste to our lunch, the education our children are imparted, the fish and poultry products that we consume for dinner; the betel nut that we chew after dinner and chocolates given to kids put them to sleep, all have some contribution of the co-operative movement. Indeed, co-operatives have touched our lives in more ways than one. India is the land of cooperatives. The largest numbers of co-operatives are in our nation. According to ICA, "a cooperative is an autonomous association of persons united voluntarily to meet their common, economic, social and cultural/needs and aspirations through a jointly owned and democratically -controlled enterprise"

Introduction of Co-operative Banks:

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In the early 20th century, the availability of credit in India, more particularly in rural areas was non existent. There was no organized institutional credit for agricultural and related activities. People in the rural areas largely depended on money lenders who lent money at very high rates of interest. Thus, there was need to create an institution which would cater to the needs of ordinary people and was based on the principles of co-operative organization and management. In 1904, the first legislation on cooperatives was passed. In 1914, the Maclagen committee suggested a three tire structure for cooperative banking i.e. Primary agricultural credit societies at the grass root level, Central cooperative banks at the district level and State cooperative banks at the state level. Cooperative banks were expected to serve as substitutes for money lenders, and provide both short term and long term institutional credit at reasonable rates of interest.

History of Urban Co-operative Bank:

Inspired by the success of urban cooperative movement in Germany and Italy, in the

early part of the last century, urban cooperative credit societies were organized on community basis and their lending operations were confined to meeting the consumption oriented credit needs of their members. Many urban cooperative banks, which were organized initially, were essentially credit societies but later converted themselves into urban cooperative banks. Interestingly, many urban cooperative credit societies, which were not engaged in any banking functions, also used the word .bank.. There was no well-defined concept of urban cooperative bank till 1996, when banking laws (provisions of section 5(CCV) of Banking Regulation Act 1949) were made applicable to cooperative banks. Accordingly, an urban cooperative bank was defined as a Primary Cooperative Bank other than a primary agricultural credit society; (i) the primary object of which is the transaction of banking business, (ii) the paid up share capital and reserves of which are not less than Rs.1 lakh (0.1 Mn) and (iii) the by-laws of which do not permit admission of any other cooperative society as a member. The word .primary. is used to denote that the urban cooperative banks perform the role of a primary unit in a 3-tier cooperative credit structure.

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Features of Urban Co-operative Bank:

Following are the features of urban cooperative credit banks in India.

1. Urban cooperative banks are registered under Cooperative Societies Act of the respective state Governments. The Reserve Bank of India (Central Bank of the country) is the regulatory and supervisory authority for UCBs for their banking related operations. Managerial/Administrative aspects of UCBs continue to remain with the state Governments. The Union Government regulates the UCBs having multi-state presence and such banks are registered under Multi-state Cooperative Societies Act. Controlling of UCBs by state Government and the Central Bank of the country is generally known as .duality of control.. 2. The discernible characteristic feature of UCB structure is its heterogeneity. Nearly 50 percent of the banks are unitary in nature (with single branch banking). Heterogeneity in their size is another facet of the UCB structure. The larger UCBs (scheduled UCBs) numbering just 51 accounts for more than 40 percent of the business from UCB sector as against 800 UCBs accounting for just 6 percent. 3. UCB structure is exemplified by its pronounced focus on the needs of small men and micro credit sector. The average size of the loan also works out to be relatively low and an 23

overwhelming segment of UCBs have been able to comply with the priority sector lending targets (directive from central bank to lend to certain sectors like small enterprises, trade & business, housing etc) set by the central bank of the country. 4. Urban cooperative credit movement in general, and the number of UCBs in particular is concentrated in few states. Five states account for 80 percent of the total UCBs in the country and one of them accounts for as high as 32 percent of the total UCBs. 5. A noticeable feature of urban banking sector is its financial independence. Unlike the agricultural cooperative credit structure, the urban cooperative banks are not surviving on external assistance such as refinance support. In fact, UCBs have been supporting federal units (District Central Cooperative Banks and State Cooperative Banks) by keeping their surplus resources in the form of deposits.

Importance of UCBs:
In India, like many other countries in the world, cooperative movement started as a means of ensuring that the poorly equipped citizens have similar advantages that better placed persons were able to command. This was ensured by the pooling in of their individual resources. The principle of mutual aid, which is the basis of cooperative organization, and the practice of thrift and self-help which sustain it, generate a feeling of self-reliance and empowerment which is of utmost importance in a democratic set up like us. We recognize and are aware of their importance in the entire banking system in expanding the outreach of the system and increasing access to credit. The types of reach cooperative banks have in our country and the type of customized services they can offer at the local level, the potential is tremendous. But, the question is have we achieved the true potential? The answer to the question in my opinion to a certain extent is negative. Co-operative banks in India have come a long way since the enactment of the Agricultural Credit Co-operative Societies Act in 1904. The century old co-operative banking structure is viewed as an important instrument of banking access to the rural masses and thus a vehicle for democratization of the Indian financial system. Co-operative banks mobilize deposits

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and purvey agricultural and rural credit with a wider outreach. They have also been an important instrument for various development schemes, particularly subsidy based programmes for the poor. Primary (urban) co-operative banks play an important role in meeting the growing credit needs of urban and semi-urban areas. UCBs mobilize savings from the middle and lower income groups and purvey credit to small borrowers, including weaker sections of the society. In view of its importance, it is imperative that the sector emerges as a sound and healthy network of jointly owned, democratically controlled and professionally managed institutions.

Difficulties faced by Co-operative Banks:

The progress of co-operative banks is not up to the expectation and is slow when

1) Slow progress: comparing other type of banks because of many restrictions on their operations. 2) Limited scope of investment: The main objective of co-operative banks is to provide credit facilities to the poor people i.e., to small and marginal farmers and other weaker sections. They were originally having limited scope to invest their surplus funds freely. 3) Delay in decision making: The co-operative banks directly or indirectly by various agencies i.e., NABARD, RBI. Thus it takes long time to take decision on some important issues. This, in turn affects the progress of co-operative banks. 4) Lack of training facilities: Generally the staff of co-operative banks is urban oriented and they may not know the problems and conditions of rural areas. Lack of training facility concerning these areas also affects the growth of co-operative banks.

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5) Poor recovery rate: The recovery performance of the co-operative banks is not up to the mark. the reason for poor recovery of loans and mounting overdue are; inadequate supervision and follow up action to assess the end use of credit by co-operative banks due to inadequate staff in banks, poor identification of beneficiaries, inadequate generation of output and income by the beneficiaries, poor marketing facilities. 6) Lack of local participation: Rural co-operative banks have not received sufficient local participation. The cooperative banks have been thrust upon the rural people from above without involving local people in its operation and management. In this connection, it is suggested that knowledgeable persons in the rural areas need be associated with the management of co-operative banks.

7) Lack of co-ordination: There is lack of proper co-ordination between co-operative banks and other institutional financing agencies like commercial banks and RRBs. Also, there is inadequate co-ordination between co-operative banks and other developmental agencies operating in rural areas. This has hampered the progress of co-operative banks. 8) Poor development of rural areas: In spite of several efforts made during the course o development plans to promote the development of rural areas, it has not taken place in a significant way. The areas, at present lack economic infra- structures like; facilities of marketing storage and distribution of inputs. Besides, social infrastructure like; schools, medical facilities. As a result, co-operative banks find it extremely difficult to operate in such areas.

26

 (I)

Banking Sector Reforms and Urban Co-operative Bank:

While recognizing the differences between commercial and urban cooperative banks, a majority of the prudential norms introduced for commercial banks are being extended to UCBs, albeit in a phased manner.

The reform measures as applicable to UCB sector may be classified into three broad categories.

(II)

Policy initiatives have been introduced (through Monetary & Credit Policies) to contain the systemic risk emanating from cooperative sector, in particular from UCB sector.

(III)

Lastly, duality/multiplicity of control has been recognized as an irritant to their effective regulation and supervision. Although, the focal point of the reforms has been prudential norms, steps are also being initiated to professionalize the management and manpower of UCBs. The influence of the reforms on the functioning as well as the cooperative character of UCBs is discussed below.

Prudential Standards: (I) To begin with, in 1993, RBI introduced Income Recognition and Asset Classification Norms to UCBs. In 1995, the prudential exposure norms to single/group borrowers were 27

also made applicable to them. Subsequently, in a phased time frame, the capital adequacy norms (capital to risk weighted asset ratio) were also made applicable to UCBs. To put it differently, while there is no dispute that UCBs should be subjected to prudential standards (capital adequacy, asset classification, income recognition and provisioning norms), it is not yet clear, whether the prudential standards prescribed for commercial banks would work without distorting the cooperative character of UCBs. (II)Secondly, in order to ensure the adherence to the prudential standards by cooperative credit societies/banks, the regulator.s frequency (as also scope) of intervention increases thereby affecting the cooperative character. In this regard, in India regulator.s intervention has indirectly infringed upon the functional autonomy covering areas like share-linkage, credit, investment, deposit and so on. (III) Thirdly, in the name of protecting the interests of the depositors (majority of whom are not the members of cooperative banks), not only prudential standards are extended but even the professional content in the management committee of the urban cooperative credit societies/banks is also stipulated in India by the regulator/Government. While one can not remain ignorant of the role of the Government in the promotion of and development of cooperation in India, prescribing the number and qualification of the nominee directors would no doubt impair the cooperative character. (IV) Fourthly, the strict entry norms in terms of minimum capital, membership prescription as it prevails in India, prevents the birth of new credit cooperatives and constrain the existing societies in so far as the expansion is concerned. (V) Fifthly, with the introduction of same prudential standards the difference between urban credit cooperatives/banks and commercial banks get blurred and possibly, the former may have to progressively imbibe the character of the latter. In view of the above discussion, four major issues (or broad areas for investigation by researchers/scholars interested in cooperative banking) are listed below which needs the consideration of the cooperative thinkers. a) How relevant are the prudential standards (norms are accepted and implemented by most countries) to cooperative credit societies/banks?

28

b) In countries where prudential standards have been extended to urban credit societies/banks, whether desired result has been obtained? Could urban credit societies/banks adhere fully to prudential practices? c) What are the implications of extending prudential standards to urban credit societies/banks on their cooperative character? d) Is it possible to derive a set of prudential norms especially for urban credit cooperative societies/banks from the Standards? Professional Management and Governance: Good corporate governance is critical to efficient functioning of an entity and more so for a banking entity. Thus the need for professional management and healthy governance practices in urban credit cooperative societies/banks in the present competitive environment needs no emphasis. Thus, for managing a financial intermediary, whether a cooperative or a commercial bank (irrespective of its size), the human resource comprising of paid staff and elected management has to be highly competent. However, in India it is not uncommon that the cooperative banks are superseded and Government officials are posted to head or nominated on the board and unfortunately this trend is increasing in the post reform period. Quite often the reason quoted is that there is lack of qualified and competent directors and the protection of depositors. Interests (majority of them are not the members) in the case of urban cooperative banks. While this is to some extent true, the solution to this problem certainly is not Government intervention as it would seriously impair the cooperative character. It is disheartening to note that the elected management of 41 % of State Cooperative Banks, 37 % of State Cooperative Agricultural and Rural Development Banks, 21 % of the District Central Cooperative Banks and 8% of Primary Cooperative Agricultural and Rural Development Banks stood superseded as on March 2000. It is this management committee which is entrusted with the responsibilities like risk management - policy/strategy, credit and NPA management, investment management, marketing plan/strategy, Asset-Liability Management and so on. It should also be noted that the very concept of banking (financial inter-mediation) is undergoing change in the present competitive environment and the conventional framework for management with which cooperative banks are comfortable may not be sufficient. Given this, it is doubtful whether the elected management (as per the existing provisions of cooperative act and principles the individuals without sufficient knowledge/experience in financial markets or

29

management can be at the helm of affairs of a cooperative bank) would be able to take on the emerging challenges. Perhaps, the need of the hour is to ensure that in cooperative organizations, the system of governance including the size and composition of the board of directors is driven by the purpose and objectives of the business. In this regard, the following issues/areas may be of some interest to the cooperative researchers. a) Is it possible to develop a framework of good governance for urban credit cooperatives/banks within the guiding principles of cooperation? b) How to ensure that the system of governance including the size and composition of the board of directors are in consonance with the purpose and objectives of a cooperative bank? What level of awareness and competencies are required for board of directors for effective management of a cooperative bank and how to ensure the same within the framework of cooperative principles?

Future set-up of weak Banks: The sheer number of weak banks which is well over 200 is a cause of concern. In a large number of cases licenses have already been cancelled and the banks have closed down. This process is taken up very cautiously so as not to create panic in the society. Closure is decided only after all other options are exhausted. Level of capital, history of losses and size of NPAs are some of the factors which weigh with us in taking a decision on closure. Possibilities of rehabilitation are invariably explored before such a decision is arrived at. Rehabilitation may involve the following strategies: (a) Registrars should direct the co-operative courts for speedy recovery process and execution of decrees (b) Unviable branches should either be relocated or closed down (c) Avenues should be explored for the bank getting additional capital (d) Merger with a well-managed bank. However, a forcible merger should be strictly avoided.

30

Improving Governance: It is extremely important that there is a mechanism to ensure that an effective system of internal governance is in place. Chief Executive should be a person of clean image and display a professional attitude. Board should consist of knowledgeable persons who are aware of their responsibilities as board members. There should be a board level committee which should focus attention on the findings of audit and inspection teams and ensure compliance thereof. The Committee should also ensure compliance with various regulatory instructions issued by RBI as also state governments. It is ultimately the boards responsibility that all prudential norms of governance are observed by the bank. Supervision and Regulation: At present in India, urban credit cooperatives/banks are subjected to duality of control, meaning that the administration related aspects are being supervised and regulated by State Government and the banking operations are supervised and regulated by the central bank of the country. This has, understandably resulted in overlapping jurisdiction of the state Government and the central bank of the country. Given the number of urban credit cooperatives/banks, the central bank of the country is not in a position to effectively supervising them. Thus, the duality of control not only affects the quality of supervision and regulations, but also the functioning of the urban cooperative banking sector. Needless to mention, under this regime of duality of control the urban cooperative banks may turn out to be neither cooperative nor commercial banks. There are some areas of concern; some of them may be good for research as well. a) What type and level of supervision and regulation is required for urban credit cooperatives? Is it possible to draw an outline of the supervisory framework? b) Is existing supervisor/regulator (central bank of the country) appropriate for regulating and supervising the activities of urban credit cooperatives/banks? c) Can we think of a separate agency (or even regulator) for urban credit cooperatives?

31

Profile of UCB Sector:

Primary (Urban) Cooperative Banks (UCBs) are the offshoots of the cooperative movement in India which gained momentum with the passage of the Cooperative Societies Act, 1904. The first urban cooperative society was registered in Canjeevaram town in the then Madras province in October 1904. However, the urban cooperative credit movement did not pick up till the Maclagan Committee (1912) recognized the importance of these institutions. The movement got a fillip when the banking laws were made applicable to cooperative societies in 1966 in order to protect the interests of the depositors and to provide insurance cover under the provisions of the Deposit Insurance and credit Guarantee Corporation Act, 1961. Profile of UCBs as on March 31, 2009:
(Amounts in Rs. Cr..) (Table No. 1)

Sr. No.

Particulars

Scheduled 32

NonScheduled

All

2 3 4 5 6 7

No. of UCBs of which i) Tier I of which Unit Bank ii) Tier II of which Multi State Assets Deposits Loans and Advances Investment Total no. of Deposits Accounts Total no. of Borrowal Accounts

53 NIL NIL 53 25 85,895 67,929 42,234 29,210 1,44,87,941 1,44,87,941

1668 1429 830 239 15 1,10,500 90,804 55,684 34,961 3,91,43,063 67,61,846

1721 1429 830 292 40 1,96,395 158,733 97,918 64,171 5,36,31,004 79,00,780

Mushrooming Growth:
In the year 1966, when the Banking Regulation Act,1949 was made applicable to UCBs, there were about 1,100 UCBs with deposits and advances of Rs.167 Cr. and Rs.153 Cr., respectively. The UCBs continued to grow at a fast pace till 2003, when their number inCr..eased to 1,941 and their deposits and advances in creased to Rs. 1, 01,546 Cr. and Rs. 64,880 Cr respectively. The liberal licensing policy followed by the Reserve Bank pursuant to the recommendations of the Marathe Committee (1992) led to the proliferation in the sector. However, the ban on licensing of new UCBs since 2004 and encouragement to voluntary amalgamation and consolidation in the sector has resulted in decline in the number of UCBs to 1,721 in 2009 with total deposits of Rs. 1,58,733 Cr. and advances of Rs. 97,918 Cr. The growth profile since the 1990s is given in Table 2 below. Growth of UCBs:
(Amounts in Cr. of rupees)

(Table No.2)

33

Year ended March 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

No. of UCBs 1,307 1,311 1,306 1,305 1,300 1,327 1,355 1,502 1,590 1,645 1,618 1,854 1,941 1,926 1,872 1,853 1,813 1,770 1,721

Deposits 10,157 11,108 13,531 16,769 20,101 24,165 30,714 40,692 52,681 71,189 80,840 93,069 1,01,546 1,10,256 1,05,021 1,14,060 1,21,391 1,38,496 1,58,733

Percent Growth 9.4 21.8 23.9 19.9 20.2 27.1 32.5 29.5 35.1 13.6 15.1 9.1 8.6 -4.7 8.6 6.4 14.1 14.6

Advances 8,003 8,713 10,132 12,172 14,795 17,908 21,550 27,807 34,214 45,995 54,389 62,060 64,880 67,930 66,874 71,641 79,733 88,981 97,918

Percent Growth 8.9 16.3 20.1 21.5 21.1 20.3 29 23 34.4 18.2 14.1 4.5 4.7 -1.6 7.1 11.3 11.6 10

Market share of UCBs in the banking sector:

As discussed above, UCBs are important purveyors of credit to socially underprivileged and deprived sections of the urban and semi urban populace. The sector has over 79 lakh borrowers and 5.36 Cr. depositors. The market share of UCBs is given in the Table 3 and 4 below. It may however, be observed from the tables that the market share of UCBs have come down from peak of 6.6 % in end- March, 2000 to 3.7 % in end-March, 2008. Market share of deposits of All Bank Groups to Total Deposits:
(Market Share in Percentage) (Table No.3)

Year ended March 31 1996 1997 1998 1999 2000 2001

UCBs 4.5 4.9 5.3 5.6 6.6 6.3

Rural Co-op Bank (DCCBs & SCBs) 7.2 7.6 7.7 7.8 7.7 7.2

Regional Rural Banks 2.5 2.6 2.8 2.8 2.8 2.9

Commercial Banks 85.8 84.9 84.2 83.8 82.9 83.6

34

2002 2003 2004 2005 2006 2007 2008

6.4 6.3 5.8 5.3 4.6 4 3.7

7.2 7 6.6 6.3 5.4 4.7 4.1

3 3 3.1 3.1 2.9 2.7 2.7

83.4 83.7 84.5 85.3 87.1 88.6 89.5

Deposits of the UCBs vis--vis other banking entities: Particulars Deposits ( amount in Cr...) 2006 2007 2008 1,14,060 1,21,391 1,38,496 21,64,681 26,96,936 33,20,054 71,329 83,144 99,095 1,32,937 1,43,089 1,52,247 24,83,007 30,44,560 37,09,892 Share % 2007 4 88.6 2.7 4.7 100

(Table No.4)

UCBs SCBs RRBs DCCBs + SCBs Total

2006 4.6 87.2 2.9 5.4 100

2008 3.7 89.5 2.7 4.1 100

Heterogeneity in UCB Sector:

UCBs are unique among banks in the sense that there is high degree of heterogeneity among the banks in this sector in terms of size (deposits, assets and branches), geographical distribution and financial health. Further, some UCBs have also been organized for specific needs of certain communities, underprivileged class of society, Mahila banks, etc. As on March 31, 2009, while there were 1,721 UCBs in total, there were 1,668 non scheduled banks, 79 Salary Earners' Banks, 108 Mahila banks and 6 SC/ST Banks.

Size of deposit, advance and asset:

Apart from a few large scheduled UCBs, most of the banks are of small and medium in size as shown in the deposit, advances and asset-wise frequency distribution are as follows: Deposit-wise Distribution of UCBs (End-March 2009): Deposit Size No of Banks 35 No.of Banks (% to total) Deposits Rs in Cr. Deposits (% to
(Table No.5)

total) < Rs 10 Cr. Rs. 10 Cr. & above but < Rs. 25 Cr. Rs 25 Cr. & above but < Rs. 50 Cr. Rs 50 Cr. & above but < Rs.100 Cr. Rs100 Cr. & above but < Rs. 250 Cr. Rs 250 Cr. & above but < Rs. 500 Cr. Rs 500 Cr.& above but < Rs1000 Cr. Rs 1,000 Cr. & above Total 464 452 317 196 189 56 27 20 1,721 27 26.3 18.3 11.4 11 3.3 1.6 1.2 100 2,975 7,621 11,757 15,069 28,526 20,754 18,749 53,281 1,58,733 1.9 4.8 7.4 9.5 18 13.1 11.8 33.5 100

Advance wise Distribution of UCBs (End-March 2009): No of Banks 710 441 236 154 116 37 16 11 1721 No.of Banks (% to total) 41.3 25.6 13.7 8.9 6.7 2.1 0.9 0.6 100 Advances Rs in Cr. 3,831 7,279 8,658 11,634 17,721 12,668 11,093 25,033 97,918 Advances (% to total) 3.9 7.4 8.8 11.9 18.1 12.9 11.3 25.6 100

(Table No. 6)

Advance Size. < Rs 10 Cr. Rs. 10 Cr. & above but < Rs. 25 Cr. Rs 25 Cr. & above but < Rs. 50 Cr. Rs 50 Cr. & above but < Rs.100 Cr. Rs100 Cr. & above but < Rs. 250 Cr. Rs 250 Cr. & above but < Rs. 500 Cr. Rs 500 Cr. & above but < Rs1000 Cr. Rs 1,000 Cr. & above Total

Asset wise Distribution of UCBs (End-March 2009):

(Table No.7)

36

Asset Size < Rs 15 Cr. Rs. 15 Cr. & above but < Rs. 25 Cr Rs 25 Cr. & above but < Rs. 50 Cr. Rs 50 Cr. & above but < Rs.100 Cr. Rs100 Cr. & above but < Rs. 250 Cr. Rs 250 Cr. & above but < Rs. 500 Cr. Rs 500 Cr. & above but < Rs1000 Cr. Rs 1000 Cr.& above but < Rs. 2000 Cr Rs 2,000 Cr. & above Total

Number (Percent to Total) 28.6 16.6 19.5 14.2 13.1 4.3 2.3 0.6 0.9 100

Assets (Percent to Total) 2.3 2.6 5.9 8.3 17.1 12.4 13.5 6.3 31.7 100

As may be seen from the table 5 above, 27.0 percent of UCBs had deposits less than Rs.10 Cr. as at end March 2009. However, these banks accounted for only 1.9 percent of total deposits at the end of March 2009. At the other end of the spectrum, there were 20 UCBs with deposits of Rs.1000 Cr. and above accounting for 33.6 percent of deposits of the sector. Further, 83 UCBs (i.e. 4.9 percent of the total number) with deposits of Rs. 250 Cr. and above but less than Rs 1000 Cr accounted for 24.9 percent of the total deposits. 64 UCBs (i.e., 3.6 percent of the total number) having advance of Rs. 250 Cr. and above accounted for 50.8 percent of the total advances (table 7). This reflects the skewed distribution of deposits and advances in the sector. Similarly, the skewed distribution pattern is reflected in the asset wise distribution and 38.0 percent of the assets is concentrated in only 1.5 percent of the UCBs having asset of Rs 1000 Cr. and above (Table 7).

Unit Banks:
Another unique but significant characteristics of the sector is the presence of large number of unit banks, i.e., banks which function as head office-cum-branch. Of the 1721 UCBs at endMarch 2009, 830 were unit banks (55.5 percent Maharashtra (including Goa), Gujarat and Karnataka had the highest number. (Table 8) State wise Distribution of UCBs as on end-March 2009: States Total No.of Reporting UCBs Total No.of Units UCBs Total No. of Branches (Including Total No.of extension Counters
(Table No.8)

37

Andhra Pradesh Assam/ Manipur/ Tripura /Meghalaya/ Mizoram Bihar/Jharkhand Chattisgarh Gujarat Jammu & Kashmir Karnataka Kerala Maharashtra Madhya Pradesh New Delhi Orissa Punjab/Haryana/Himachal Pradesh Rajasthan Tamil Nadu/Puducherry Uttarakhand Uttar Pradesh West Bengal/Sikkim Total

114 17 5 13 260 4 273 60 583 55 15 13 16 39 130 5 70 49 1721

82 13 4 10 134 1 146 16 219 41 6 1 8 19 58 1 42 29 830

Head office cum Branches) 234 28 6 21 886 16 828 332 4148 84 62 50 40 149 310 49 189 100 7532

7 1 1 2 10 4 9 2 165 0 1 4 3 3 0 2 28 2 244

Financial health of banks:

As part of on-site inspection, Reserve Bank has adopted a system of categorizing banks into four grades (since April 2003) based on objective parameters relating to capital adequacy, asset quality, earnings, compliance with CRR / SLR requirements and adherence to RBI guidelines and / directives. While Grade I represents banks with no major supervisory concerns, the other three grades would indicate supervisory concerns in varying degree. TheGrade-wise and center -wise position is given below (table 9 and 10): Grade wise Distribution of UCBs as on end-March 2009: No .of Banks 845 484 219 173 1721 No. of Banks (Percent to Total) 49.1 28.1 12.7 10.1 100 Deposits (Percent to Total) 65.2 19.5 5.1 10.3 100 Advances (Percent to Total) 64.2 19.7 5.6 10.5 100
(Table No.9)

Grade I II III IV Total

38

Centre & Number wise Distribution of UCBs in every Grade as on end March 2009: Centre Ahmedabad Bangalore Bhopal Bhubaneshwar Chandigarh Chennai Dehradun Guwahati Hyderabad Jaipur Jammu Kolkata Lucknow Mumbai Nagpur New Delhi Patna Raipur Thiruvananthapuram Total Gr. I 116 128 13 3 10 88 4 7 75 25 3 27 46 202 55 11 5 7 20 845 Gr. II 100 82 25 4 2 34 0 8 25 11 0 11 10 100 40 2 0 3 27 484 Gr. III 16 47 12 3 1 3 1 1 6 1 1 1 9 64 39 1 0 1 12 219 Gr. IV 28 16 5 3 3 5 0 1 8 2 0 10 5 54 29 1 0 2 1 173 Total UCBs. 206 273 55 13 16 130 5 17 114 39 4 49 70 420 163 15 5 13 60 1721

(Table No.10)

Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

It is observed from the above that at the end of March 2009, out of the 1721 UCBs, 845 banks (49.1percent) were classified under Grade-I and 484 banks (28.1 percent) were Grade-II, while financials of 392 UCBs (22.8 percent) were not considered satisfactory and were categorized under Grade III / IV.

CRAR Distribution:
Basel I norms have been made applicable to UCBs in so far as it relates to credit risk. As per the existing norms, UCBs are required to maintain capital charge for credit risk based on 1988 capital accord and surrogate capital charge on market risk through an additional risk weight of 2.5 percent. The CRAR (Capital to Risk Assets Ratio) position of banks is given in Table 11. CRAR Wise Distribution of UCBs as at end March 2009:

39

(Table No. 11)

Range of CRAR Scheduled Non-Scheduled Total ( percent share)

0% & above but < 3% 9 136 145 8.4

3% & above but < 6% 1 24 25 1.5

6% & above but < 9% 1 66 67 3.9

>=9% 42 1442 1484 86.2

Grand Total 53 1668 1721 100

It is observed that out of 1721 UCBs as of March 31, 2009, 237 (13.7 percent) UCBs have CRAR lower than the prescribed CRAR of 9 percent. Out of these banks 145 (8.4 percent) UCBs have CRAR less than 3 percent.

Diversity in spread:
Geographical spread of UCBs is also uneven. UCBs are concentrated in 5 states viz., Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu, which cumulatively account for 79 percent of the total UCBs and 89 percent of deposits resources. Maharashtra alone accounts for 33.9 of the total UCBs and 61.4 per cent of deposit of the sector (table 12). Regional Spread of Urban Co-operative Banks (as of end March 2009): No.of UCBs (Share in total %) 6.6 15.1 15.9 33.9 7.5 40 Amount of No. of Deposits (Share in Branches(Share Total %) in Total %) 2.3 3.1 16.1 11.5 6.5 10.8 61.4 55.5 2.3 4

(Table No.12)

Sr. No. 1 2 3 4 5

State Andhra Pradesh Gujarat Karnataka Maharashtra Tamil Nadu

6 Others Total (Chart No.2)

21 100

11.4 100

15.1 100

Spread of UCBs

AP Gujarat Karnataka M aharashtra Tamil Nadu Others

Interpretation: As shown above the UCB sector is more popular in Maharastra. We need to enhance and develop the UCB sector in Andhrapradesh. (Chart No. 3)

Share in Deposits

AP Gujarat Karnataka Maharashtra Tamil Nadu Others

Interpretation: Maharastrian believe in C-UCB sector and Deposits in it and get the benefits of facilities provided by the Bank. On the contrary Andhra Pradesh and Tamil Nadu are 41

lacking because of many factors like facilities provided by the Bank, interference regulatory bodies, uneducated people and etc.

Umbrella Organization Umbrella Organization:

Increase in deposit and decrease in demand of loans have been the main problem of the banking industry during the last few years. As a result, a reduction in the distribution of loans is observed despite the best efforts of banks. Urban Cooperative Banks (UCBs) have been, mainly, giving loans against gold jewellery, house construction, consumer goods and social rituals or occasions. Now, the commercial banks are also distributing these types of loans aggressively. Urban cooperative banks are less competent and unable to compete with the capability of commercial banks in terms of their nationwide character, vast deposit base, marketing competency and commercial vision. Urban cooperative banks are lagging behind in traditional business even. Various new mechanism and deregulation of polices, especially deregulation of interest rates, have posed new challenges to them. Urban cooperative banks are helpless in

42

offering the fee based financial services. UCBs are not able to offer services like, collection of outside Cheques, foreign currency exchange, etc. because of the national level mechanism, non availability of proper resources and technology. Information technology revolution has greatly facilitated providing services like, online trading, collection, remittances, payments and balance verification, etc. Most of the UCBs are perceived to be weak in the perceptions of customers. Many banks will become sick if due and timely attention is not paid. Thus, it is now the right time in preparing the UCBs to be more innovative, resourceful and competent. Day-to-day difficulties of UCBs are many and of varied nature. It will be much beneficial for all concerned if an Umbrella organization is formed to look after the routine problems and provide solutions. The proposed umbrella organization will be consisting of participatory UCBs and will provide the necessary base to all member banks.

Concept Development:
The idea of networking of UCBs was initiated during an All India Convention of SAHKAR BHARTI at Pune in the year 1998. Further in the general meeting of national Federation of Urban Cooperative Banks (NAFCUB) at Delhi, the idea of networking was presented in the forms of a model Coop Bank. The handouts of this model were circulated among the participants who were representatives of various UCBs. The idea and the model created a lot of enthusiasm and a thought provoking discussion took place. Also, during another general meeting of NAFCUB in July 2008, questionnaires regarding Umbrella Concept for UCBs were distributed by NAFCUB and the responses were received. The aforementioned model Co-op Bank was again presented to NAFCUB. The same model was presented during the Seminar on Policy Issues at CAB in January 2009. Recently a Working Group, for the establishment process of Umbrella Organization for Urban Cooperative Banks, has been constituted by the Reserve Bank of India (RBI) under the chairmanship of the Executive Director, RBI. More than 70 key persons of various UCBs

43

gathered during the one day seminar in March 2009 and embraced the idea of Umbrella Organization. The model, described in this document has been sent to the chairperson of Working Group of Umbrella Organization (constituted by RBI), NAFCUB, and TAFCUB of Madhya Pradesh.

Objectives of UO: To establish modern information technology like Core Banking Solution, its To link UCBs with electronic clearing system; To make banks competent to provide fee based services in order to increase their renewal/modernization and maintenance

incomes; to facilitate provision of facilities like, ATM, credit and debit cards, travelers Cheques, demand drafts, Demat account, etc. and offering services like life and general insurance, mutual funds, etc. To advise the banks for making decisions in investment of surplus funds To help banks in funding high cost projects and infrastructure To provide guidance and training to banks to make more effective utilization of human To identify the weak and sick banks timely and to help them making strong and to

resources manage them. 44

To propagate and project the UCBs at national level through various means; To promote the establishment of new UCBs

Organization Structure:
The structure

of the proposed Umbrella Organization of UCBs will be as under:

(Chart No.4)

45

UCB GWALIOR

UCB MUMBAI

UCB DELHI

UBRELLA ORGANIZATION

UCB BANGLORE

UCB AGRA

UCB CHENNAI

Features of UO:
Umbrella Organization will be the service provider. UCBs may be shareholder/business partners by maintaining their respective autonomy. Settlement of accounts (net Dr & Cr) of transaction between UCBs will be taken up by the UO. All UCBs shall keep sufficient funds with the UO for settlement. UO will be responsible for information technology and software development, their maintenance and necessary changes. The cost incurred may be shared with partner banks. Relation between UO and UCBs will be that of service provider and service consumer or business partnership or shareholder

Need for Umbrella Organization:

Urban Cooperative Banks in India cater to the financial needs of the middle and lower middle class people in metropolitan, urban and semi-urban centers. They operate on a standalone 46

basis, unlike rural cooperatives in India, which have a three tier structure. These banks are large in number, though of varied asset size, ranging from small to medium. Although they compete with commercial banks, their share in total deposits is barely 4 percent. There is a significant part of the UCB sector that lacks professionalism and is unable to keep pace with rapid advancements in IT, modern banking systems and financial products. The sector also has significant number of banks which are weak and need financial support. There have been occasions when, due to contagion effect, banks have encountered liquidity problems. Being in the nature of cooperative societies, the UCBs' ability to augment their capital is also restricted, thereby hindering their growth. The organizational structure of UCBs, their small size and limited area of operation add to their vulnerability. Further, in the wake of advances in information and communication technology, payment and settlement systems and services, they need to widen their range of services to run on professional lines and match the services provided by commercial banks. Internationally, cooperative banks, popularly called Credit Unions, operate in networks and have an entity which provides a wide range of services to them, such as, fund management services, lines of credit, asset management, payment and settlement system gateway, ATM networks, credit card, investment, securitization, capital raising and other financial services. These entities act as Umbrella Organizations and the networks provide cooperative solidarity. International experience has shown that the presence of such an Umbrella Organization has contributed towards the member Credit Unions being stable, sound and efficient entities. The Working Group had a close look at the Umbrella Organizations of credit unions in certain countries, such as, Australia, Belgium, Canada, Finland, France, Germany, Netherlands, Poland and USA. These have been discussed in the preceding chapter of this report. In particular, it was noteworthy that the presence of such organizations has induced a climate of self-regulation and good corporate governance in the sector. This has resulted in greater comfort for regulatory authorities in these countries. The Working Group is convinced that an Umbrella Organization that provides a variety of professional services to UCBs helps them in augmenting their capital and provides emergency liquidity support would be immensely helpful for the sector. This, indeed, was also the unanimous view of all the representative bodies of UCBs across various states as also cross-section of UCBs which were consulted by the Working Group.

47

As on March-end 2009, there were 1,721 UCBs with an asset size of Rs 1,96,395 Crore. If these banks initially contribute Rs 0.10 per every Rs 100 of assets, then Rs 196 Crore could be raised by way of capital. However, since shareholding in the organization would be voluntary for UCBs, their participation, according to the group, is expected to be 50-60 per cent in terms of assets, though it could be much more in terms of actual number. The paid-up capital could be called up/ subscribed in two or more installments. To begin with, a one-time fee of Rs 1 lakh a member could also be collected and kept in the reserve fund. The group felt that some kind of fiscal incentives by the Government to UCBs for their contribution would help the organization mobilize the share capital.

Management:

48

It goes without saying that an Umbrella Organization, such as the one under design should be run on thoroughly professional lines and observe the best practices insofar as corporate governance is concerned. The Working Group recommends that the Memorandum and Articles of Association of the company (Umbrella Organization) should specifically provide for appointment of independent directors. In order to achieve this objective, the fit and proper criteria for the Board of Directors and Executive Board/CEO may be prescribed either in the Memorandum and Articles of Association, or by the regulators. The Working Group is the opinion that the CEO should be a professional of repute, with deep knowledge and understanding of the UCB sector, combined with business acumen of a finance company to inspire confidence in the Umbrella Organization. The Working Group leaves it to the Reserve Bank for putting in place a suitable system, standards and stringent fit and proper criteria to ensure that the position of CEO is held by a competent person. The Working Group is also of the considered view that the Reserve Bank should nominate on the Board a suitable officer, at least during the initial formative years of the Umbrella Organization, Subsequently, the Reserve Bank may have an Observer on the Board. This would not only lend the Umbrella Organization greater credibility, but its nominees guidance would also be useful in adherence to best corporate governance practices, regulations and formulation of appropriate business strategies and products. The Working Group shall comprise: a) Shri V.S Das, Executive Director, RBI , Chairman b) Joint Secretary & CRCS, Ministry Agriculture, Govt. of India Member c) CGM-in-charge , RBI, DBOD, CO Member d) CGM-in-charge, RBI, UBD, CO Member e) Legal Adviser-in-Charge, RBI, Legal Dept, CO Member f) Representative , Govt. of Maharashtra Member g) Representative , Govt. of Gujarat Member h) Representative, NAFCUB, New Delhi Member i) Representative, Maharashtra Urban Co-op Banks Federation. Member

49

j) Representative, Gujarat Urban Co-op Banks Federation Member k) General Manager, UBD, BPD, RBI , CO Member Secretary

Umbrella Organization at the National Level:

The Working Group carefully went into the important issue of whether in India we should have an Umbrella Organization at the national level or whether each state should have its own Umbrella Organization. While countries such as Canada and USA have provincial Umbrella Organizations, Australia and European countries have preferred to consolidate and have national level organizations. UCBs in India are not evenly spread across the country. They have predominant presence in five states, viz. Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu accounting for about 89 percent of the total business of the sector. Further, UCBs in Maharashtra alone had about 64 percent of the total business. In contrast, their presence was minimal in many states. Considering the regional spread and market share of UCBs, the Working Group is of the opinion that having multiple umbrella organizations for UCBs in India or state-wise umbrellas may be neither feasible nor desirable. Therefore, the Working Group is of the view that there should be one Umbrella Organization at the national level for the entire UCB sector.

Working Methodology:
50

The working arrangement would be similar to that of Bombay Stock Exchange (BSE) of National Stock Exchange (NSE).All the business partner UCBs will have link with the UO through satellite and they will conduct mutual business. Customer of a bank will deal with the customer of another bank through their respective bank. Each member bank will be allocated a bank participant number and customers will be provided with the customers identification number. (Chart No.4)

UMBRELLA ORGANIZATION

UCB RAJKOT

UCB PUNE

UCB DELHI

UCB BHOPAL

CUSTOMERS

CUSTOMERS

CUSTOMERS

CUSTOMERS

Form of Organization of Umbrella Organization:

51

The form of organization of the proposed Umbrella Organization was a subject matter of intense discussion within the Working Group. While cooperative sentiments favored an apex cooperative structure, considering the limitations and legal barriers that prevent UCBs from enhancing capital there was consensus on a company form of organization. The company form is generic; and within the company form, there could be a wide variety of organizations, each one having its own characteristics and advantageous. From the detailed discussions that took place, emerged a clear preference for a single national level institution over state specific institutions. The Working Group reviewed the current legislative and regulatory framework for various forms of organizations keeping in view the proposed functions detailed above. The permissible and non-permissible activities for different form of organizations are summarized as under: (Table No. 13) Sr. NO. 1 Form of Organization Multi State Cooperative Bank Permitted Activities Most activities Activities not Permitted i) Acceptance of UCBs as members ii) Raising of capital from the market i)Acceptance of demand deposits ii) Limit on acceptance of Term Deposits iii)Current Account with RBI iii)SGL Account with RBI v) Clearing and settlement: Membership of Clearing House, RTGS, NDS, etc. vi)Limit on borrowings i)Acceptance of public deposits ii)Current Account with RBI iii)SGL Account with RBI iv) Clearing and settlement: Membership of Clearing House, RTGS, NDS, etc. v) Limit on borrowings i)As at Sl. No. 2 and 3

NBFC(Deposit Taking) Loan/Investment Companies

Most activities

NBFC(ND) Loan/Investment

Most activities

Section 25 company

Most activities 52

ii)Distribution of dividend and hence may not be acceptable to the shareholders/UCBs 5 Banking company All the activities listed at paragraph three above No perceivable restrictions

During the discussions, some members of the Working Group and officials from the UCBs and their Federations expressed a view that the proposed Umbrella Organization should be an apex cooperative bank registered under the Multi State Cooperative Societies Act, 2002 and all the UCBs should become members of the apex bank and contribute to its share capital. Further, the proposed Multi State Cooperative bank can take up all activities permissible under the provisions of the Banking Regulation Act, 1949(AACS) and also act as central credit institution for member banks (UCBs). The Working Group deliberated on the issues involved at length. The Working Group, while acknowledging some of the successful cooperative banking models in European counties, is of the opinion that a cooperative form of Umbrella Organization would face the same legal constraints as a UCB. As the apex bank would not be able to raise capital funds from the market, it would have to depend upon UCBs. Further, the existing laws in India do not permit setting up of an apex UCB at the national level. Hence, the Working Group did not find the cooperative format of organization feasible for the proposed Umbrella Organization. There was also a view that the proposed Umbrella Organization could be set up as a company under Section 25 of the Indian Companies Act, 1956. The share capital of the company may be closely held by UCBs. The argument for a non-profit organization was in consonance with the cooperative principle of reserving of profits and creation of a commonwealth of resources for the benefit of its shareholders, viz. UCBs. It is observed that the Central Government permits formation of such companies for promotion of commerce, art, science, religion, charity, etc. However, the activities proposed to be undertaken by UO for UCBs may not fit into the objects for formation of a Section 25 company. Further, a Section 25 company structure may not encourage UCBs for equity participation as such a company would not be able to distribute dividend.

53

The Working Group observed that in quite a few countries, e.g. Australia, Canada, USA, etc. the Umbrella Organization is a banking company owned by the cooperative credit unions, and functions as their banker. Its banking operations are, however, confined to the members only. A banking company can perform all the functions of an Umbrella Organization. As a banking company predominantly held by UCBs, it would fall in the regulatory and supervisory domain of the Reserve Bank and SEBI (if, a listed public company). It can have access to capital markets by diluting the shareholdings of UCBs. The organization would be professionally managed as the structure of governance is laid down by the Banking Regulation Act, 1949. Further, it would have to comply with corporate governance principles and policies. Though a banking company structure appears to be suitable for Umbrella Organization, the Working Group felt that there would be severe hindrances in its formation as banking company may compete with UCBs for its business. Very often, it has been argued that the cooperative funds should remain within the cooperative sector. An Umbrella Organization in the form of a banking company may siphon off the funds collected by UCBs for deployment outside the cooperative sector. Further, as per the existing licensing policy, the minimum entry point capital for a banking company is prescribed at Rs.300 Cr and it would be difficult to mobilize such a huge amount of start up capital from UCBs as participation would be voluntary. The members from the UCB federations were, however, optimistic about raising the requisite capital funds from the sector for formation of a banking company. They were also of the view that Umbrella Organization as a banking company may be the first choice, since it is the most suitable form of organization. The Working Group observed that non-banking financial companies (NBFC) could perform most of the functions of Umbrella Organization, as described above. The minimum startup capital for such companies has been stipulated at Rs.2 Cr, for the present, as per the Reserve Banks policy for issue of certification for registration. The Working Group is of the view that even though contribution to share capital of the Umbrella Organization would be voluntary, the initial startup capital could easily be garnered from UCBs. It would be better to build the edifice, brick by brick, with low startup capital and augment the capital funds over the years, rather than to commit huge capital funds from the cooperative sector, which itself is facing difficulties in raising capital. Further, at present, the Reserve Bank has been vested with adequate power to regulate and supervise NBFCs. The current RBI regulations, however, do not permit NBFC to undertake certain activities and place restrictions on certain others; more importantly,

54

the Payment and Settlement services. Considering that access to Payment and Settlement gateways and dealing platforms for securities through Umbrella Organization are the most sought after services, the Working Group was of the view that it would be within the powers of the Reserve Bank to grant regulatory permissions/ forbearances wherever necessary, depending upon the type of functions. The Umbrella Organization in the form of a non-deposit taking NBFC would, however, access money from UCBs and others, which are not treated as public deposits. The conversion of the Umbrella Organization to a banking company could be considered in due course in the light of experience gained

Function of Umbrella Organization:

The Umbrella Organization should act as a central credit institution for UCBs, like similar organizations abroad for Credit Unions. It should provide a wide range of services such as providing loans and advances, refinance, payment and settlement services, IT services, ATM network services, investment banking, fund management, management consultancy, capacity building services and even capital support. The UCB sector was found to be particularly keen that the organization provides payment and settlement services and liquidity assistance. This may possibly be emanating from the concern arising in the context of implementation of the new eligibility norms for MICR clearing, RTGS, SGL/CSGL accounts and making them out of reach for a large number of UCBs and lack of avenues for temporary liquidity assistance (even against SLR securities) in case of need and urgency; more so in case of run like situations. Similarly, many small UCBs are looking forward to a centralized agency for buying, selling and managing Government securities on their behalf in view of their lack of skill and expertise in the areas. The Working Group recommends that the Umbrella Organization should provide a whole range of services to member UCBs, as described above.

Authorized capital, subscribed/ paid up capital:

55

The extant RBI regulations stipulate that a company incorporated under the Companies Act, 1956 should have minimum net owned funds of Rs.2 Cr to be eligible for Certificate of Registration from the Reserve Bank for commencement of business of non banking financial institution. However, keeping in mind the proposed business profile and number of promoters (UCBs), the Working Group is of the opinion that Umbrella Organization should have its authorized and paid up capital much above the prescribed minimum. The Working Group is of the view that the authorized and paid up/subscribed capital of the Umbrella Organization may be pegged at Rs.200 Cr and Rs.100 Cr respectively. With net owned funds of Rs.100 Cr, it would be able to sustain about Rs.800 Cr of assets at 15% CRAR. Considering the proposed functions of Umbrella Organization, the Working Group considers net owned funds of Rs.100 Cr as adequate and recommends that the Umbrella Organization should have an authorized capital of Rs.200 Cr and subscribed capital of Rs.100 Cr. Incidentally, for access to payment and settlement system (RTGS), the members should have a minimum net worth of Rs.50 Cr. Further, to begin with, the entire share capital may be contributed by UCBs. The shareholdings may be divested subsequently; and a majority stake (up to 51%) may be held by UCBs. The Working Group deliberated at length on the modus operandi of raising share capital for the Umbrella Organization. It was felt that share capital of the Umbrella Organization should be closely held by the UCBs and subscription should be voluntary. However, some members strongly felt that contribution to the share capital of the Umbrella Organization should be made compulsory for UCBs and the Reserve Bank could consider issuing direction to UCBs in this regard. The Group discussed on the pros and cons of the proposal and was of the view that though equity participation by all UCBs should be encouraged; there could be constraints to make it compulsory for UCBs. The Group was of the view that both the options should be kept open. The National and State Federations should educate UCBs about the benefits of having an Umbrella Organization and also play a big role for its set up and raising of capital. There were 1,721 UCBs with an asset size of Rs.1,96,395 Cr as on March 31, 2009. If they initially contribute Re.0.10 (i.e. 10 paise) per every 100 rupee of assets, Rs.196 Cr could be raised as capital. However, since the share holding would be voluntary for UCBs, their participation is expected at 50-60% in terms of assets, though it could be much more in terms of actual number. For example, a bank having an asset size of Rs.10 Cr may have to contribute Rs. 1.00 lakh as shares; and the largest UCB having an asset size of Rs.17,521 Cr, may have to

56

contribute Rs.17.52 Cr. The proposed amount of Rs. 100 Cr may be called up / subscribed in two or more installments, if necessary, depending upon the need and response. Further, to begin with, a onetime and uniform entrance fee of Rs. One lakh per member could also be collected and kept in the Reserve Fund. That would provide about Rs.10 Cr. The Working Group felt that some kind of fiscal incentives by the Government to UCBs for their contribution would help the Umbrella Organization in mobilizing the share capital.

Sources of Working Capital:

57

To begin with, the capital funds would normally go to finance fixed assets of Umbrella Organization and the balance amount could be used for financing activities. Umbrella Organization would also need some source of working capital. Being anon-deposit taking NBFC, it would have access to the following sources for its working capital: i) ii) iii) iv) v) Borrowings from banks/financial institutions Deposits: term deposits from UCBs Debt instruments: bonds/debentures Refinance: against financial assets (loans and advances) including securities Other miscellaneous sources

The Umbrella Organization would need to have access to deposits from UCBs, which could be a major source of working capital for carrying out its business. A significant number of UCBs have low credit deposit ratios and they park their surplus funds with DCCB/SCB and commercial banks. Umbrella Organization, being the central credit institution for UCBs, may be able to tap these deposits for its financing and investment activities.

CRR and SLR:

58

During the discussions with the representatives from UCBs and their federations, an argument was put forth that the Umbrella Organization, being the central credit institution for UCBs, their deposits should be reckoned for the purpose of CRR and SLR. One can see some merit in this argument in the sense that such an option would provide Umbrella Organization an assured source of working funds. Scheduled UCBs are required to maintain CRR only in current accounts with the Reserve Bank. Non-scheduled UCBs are, however, permitted to maintain CRR as current account balances with higher financing agencies (DCCB/SCB) and with public sector banks, besides their own cash balances. According to the provisions of Banking Regulation Act, 1949 (As applicable to Cooperative Societies), deposits of UCBs with higher financing agencies (DCCB/SCB) are eligible for SLR. The Act ibid also provides that loans and advances availed by UCBs from DCCB/SCB are not to be included under liabilities for the purpose of CRR/SLR. However, as a matter of prudence and measure of monetary policy, non-scheduled UCBs have been advised to shift their entire SLR portfolio to Government and other approved securities by March 31, 2011 and scheduled UCBs are, at present, required to maintain SLR only in Government and other approved securities. The Working Group feels that it would be attractive for UCBs to place deposits with Umbrella Organization if these deposits are treated as CRR/SLR. The Umbrella Organization would definitely need such deposits to meet its working capital requirements. The Working Group, therefore, recommends that the Reserve Bank may consider exempting UCBs placing term deposits with the Umbrella Organization from maintenance of SLR in the form of Government and other approved securities up to 15% of their NDTL. The Working Group also feels that this would serve as an incentive for UCBs to take up membership of the Umbrella Organization. The Working Group feels that the Reserve Bank which has been instrumental in promoting several developmental and financial institutions should consider the recommendation positively and favorably as the Umbrella Organization is being conceptualized to provide the much needed stability to the UCB sector that would also contribute to financial stability.

Regulation and Supervision:

59

The Umbrella Organization, being an NBFC, would be governed by the provisions of Indian Companies Act, 1956 and the Reserve Bank of India Act, 1934. It would function under the supervision of the Reserve Bank.

Emergency Liquidity and Solvency Support:

Occasionally, UCBs confronted by financial distress, caused by temporary liquidity problems, need emergency liquidity support systems to come to their rescue. Similarly, UCBs classified in Grade III and IV with meager or entirely eroded net worth needs solvency support for their revival. Representatives from the UCB sector, during the meeting with the Working Group emphasized the need for addressing these pressing issues. The Working Group, while appreciating the need for evolving a mechanism to address the aforesaid twin issues, is of the view that it should not be the mandate of the Umbrella Organization to provide such emergency liquidity and solvency support to UCBs as it may be difficult for it to meet the quantum of financial assistance that may be required in this regard. Further, solvency support is subject to high risk and low or nil return and envisages a fairly long period of pay back. Neither the sector, nor the Umbrella Organization, being a non-deposit taking NBFC, would be in a position to fund the recapitalization needs of problem UCBs. However, arrangements need to be put in place to address and resolve these problems.

Emergency Liquidity Support:

60

The Working Group believes that due to lack of homogeneity, uneven geographical spread of UCBs, cultural differences, affinity to state federations and state laws on cooperation, the bonding of UCBs at the State level is strong. Empirical evidence also demonstrates that the contagion effects are localized and solidarity amongst the cooperatives at the State level is far greater than at the national level. The emergency liquidity supports need to be provided to UCBs in financial distress and, in most cases, such facility would be without collateral and for a short term. The uncollateralized emergency liquidity support would carry more than the normal counter party credit risk. Therefore, a thorough understanding of the local polity, the management and operations of the distressed UCB, its problems and prospects would be necessary. The Working Group is of the view that a State level institution would not only have better appreciation of the financial needs of the distressed UCB, but also pull resources for supporting the UCB concerned. Therefore, the Working Group recommends State-specific Emergency Fund Facility Schemes. The Working Group is of the opinion that emergency liquidity support to UCBs could be provided through Emergency Fund Facility Scheme under a tripartite Industry Support Agreement (ISA). Under the Agreement, all the UCBs registered under a particular State Cooperative Societies Act should contribute a certain sum (say 0.05 % of their assets) to the Emergency Fund as deposits at a specified rate of interest (say at the prevailing interest rate for deposits for six months), which would be available to the participating UCBs as a soft loan (liquidity support) carrying interest, say at 8% [cost of funds (6%) +2% markup] for a period of not more than six months/one year. The quantum liquidity support at a soft rate (First Tranche) may be capped at 50 % of net worth of the UCB concerned. Further, under the ISA, a participating UCB should also commit to provide a line of credit to the Emergency Fund when called upon to do so (say additional 0.05% of its assets) at a specified rate of interest (say, the prevailing interest rate for one year deposit). The amount that could be raised through the line of credit may be used for providing liquidity support under Second and Third Tranches to UCBs, at rates higher than the loan under First Tranche say at 10%[ cost (8%)+ 2%mark up} and 12% [cost(10%)+2% mark up) respectively. The Second and Third Tranches may also be to the extent of 75% and 100% of the net worth of the UCB concerned, respectively.

Revival of Funds:
61

The presence of a large number of weak and sick UCBs (about 399; 23% of the total), which need solvency support, call for an urgent need for creation of a Revival Fund. If UCBs with negative net worth were to be brought to positive net worth, an enormous sum of about Rs.2, 500 Crore may be required. While RBI may pursue a menu of options, including mergers, with or without DICGC support, and financial restructuring for turn around of these banks, possibly, an amount of Rs.2000 Crore may still be necessary. However, such a fund could only be raised out of contribution from the net profits of UCBs. The total net profit of the sector being about Rs.1,000 Crore, mobilization of this magnitude of resources from the sector may not be feasible. The Working Group has observed that though the Central/State Governments have been supporting the revival of the rural cooperatives, such support was not extended to UCBs. Therefore, in the absence of capital contribution from the Central/State Governments, the Revival Fund for solvency support to UCBs would not be feasible. The Working Group also believed that the providing solvency support to UCBs from contributions from the profits may be resisted by the sector and the contribution would be too little to rescue sick UCBs. Therefore, it would be more appropriate to provide both short and medium term finance from the Emergency Fund. UCBs not complying with the prescribed CRAR may be supported from the Emergency Fund by way of subscription to Tier II instruments issued by these banks.

Emergency Fund Facility Trust:

In view of the State specific approach to Emergency Fund Facility, the Working Group also recommends setting up of a separate Trust, viz., Emergency Fund Facility Trust at the State level. The representatives from State Government, participating UCBs and State Federation may be in the Board of Trustees to administer the trust funds. As an institutional set-up in the form of TAFCUB is already in place in MOU States and TAFCUB has good understanding about the UCBs in the State and access to information on UCBs, the Working Group believes that the collaboration of the TAFCUB with the Board of Trustees for administration of the trust funds may be necessary. Financial assistance to distressed UCBs from the trust funds may be made on the recommendations of TAFCUB. The modalities and terms and conditions for such support may be worked out by the Board of Trustees in consultation with TAFCUB.

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In states where the presence of UCBs is small and it is not viable to set up such a facility, UCBs could affiliate themselves with another state that offers such a facility. The Working Group, while recommending State specific trust funds, is aware of UCBs registered under the Multi State Cooperative Societies Act having presence in more than one States. Such banks may seek affiliation to the trust funds of the State, where their registered Head Office is located or they may elect to have their separate trust funds.

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Effects:
I. II. III. IV. V. VI. banks. VII. Nation wide advertisement by UO will be beneficial for all the partner banks. VIII. UO may provide competency, resources and readiness to banks for non fund and fee based business like, consultancy, exchange, portfolio management. IX. UO may adopt new functions e.g. hire-purchase, leasing, insurance, capital issue management, etc. which shall be beneficial to participatory banks. Every participating UCB will be allowed to provide collection, redemption and UO offers products, like, travelers Cheques, gift Cheques, demand drafts, etc. to be used Participating banks will issue ATM cards, debit and credit card at low cost. UO may invest the surplus finds of participatory banks or make an investment on the The mechanism of UO will be helpful in NET banking. Profitable investment in the capital market through UO will be possible. By hiring the

remittance facilities to all those places which have partner banks and their branches. by all the participatory banks.

basis of joint investment.

services of experts for this purpose, UO may provide necessary advice and services to partner

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Analysis of Umbrella Organization

1. Are you aware of Umbrella Organization? Name of The Bank Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank Varachha Co-operative Bank
(Chart No. 5) Umbrella oganisation awareness
60% 50% Percentage 40% 30% 20% 10% 0% YES NO

Yes

NO

Interpretation: The working group of Umbrella Organization started their work recently. So that there may be lack of awareness of Umbrella organization and its services. As I analyzed in surat, I went only in 7 Urban Co-operative Bank and from that 4 bank knows what is Umbrella Organization. 2. According to you It stands for Name of The Bank 65 To help Centralized Regulatory

UCB Sector Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank Varachha Co-operative Bank
(Chart No. 6)
Purpose of U O 90% 80% 70% Percentage 60% 50% 40% 30% 20% 10% 0% To help UCB sector Regulatory Body for UCB Puposes

Body for UCB

Body for UCB

Series1

Centralized Body for UCB

Interpretation: Umbrella organization is stand for to help UCB sector, as well as it is Centralized Body. As I analyzed co-operative Bank of Surat, I can say that they prefer UO as Helper to UCB Sector rather than to be a Centralized Body.

3. Do you Prefer Umbrella Organization? Name of The Bank Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank 66 Yes NO

Madhulika Co-operative Bank Varachha Co-operative Bank

(Chart No. 7)
Prefernce to UO
120% 100% Percentage 80% 60% 40% 20% 0% YES

NO

Interpretation: All co-operative Bank prefers UO, but they all do not likes the interference of the Umbrella Organization. Some of them do not want to pay any kind of premium so can by that money UO can help the weak co-operatives.

4. Umbrella Organization should in Form of ___?

Name of The Bank Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank

Trust

Credit Union

A Company

NBFC

67

Varachha Co-operative Bank

(Chart No. 8)
Form of UO 80% 70% 60% Percentage 50% 40% 30% 20% 10% 0% Trust Credit Union A Company NBFC Categories

Interpretation: If Umbrella Organization will be in form of a Company than it can raise funds easily by issuing the shares. And if it will be a trust than it has to depend upon the donatios or charity fund.

5.

What kind of services should be provided by Umbrella Organization? Name of The Bank Supporting Credit Unions Providing Liquidity Managing Access to payment and settlement system

Temporary Investment

Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank Varachha Co-operative Bank
(Chart No. 9)

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Services Provide by Uo
120% 100% Percentage 80% 60% 40% 20% 0% Supporting credit union by w ay of capital For Providing temporary Liquidity For managing Investment For Providing access to payment and settlement system Training

Categories

Interpretation: As per my analysis the all C-operative Banks of Surat demands the services mostly the access to payment and settlement system, and temporary liquidity. They mostly require money or fund, because their deposits are more against their loans and advances.

6. Benefits by Umbrella Organization? Name of The Bank Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank Varachha Co-operative Bank
(Chart No. 10)

Shareholder

General Public

Member Bank

RBI

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Benefits by UO
80% 70% 60% Percentage 50% 40% 30% 20% 10% 0% Benefits to Shareholders Benefits to General Public Benefits to Member Bank Benefits to RBI

Interpretation: Benefits to the shareholders is indirect if the bank grows than the shareholders will get benefit. Member bank will get more benefit because the Umbrella Organization is made for them only.

7. It is necessity for UCB Sector? Name of The Bank Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank Varachha Co-operative Bank
(Chart No. 11)

Yes

NO

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Necessity of UO
80% 70% 60% Percentage 50% 40% 30% 20% 10% 0% YES NO

Interpretation: The co-operative bank of surat have different views. The well established Banks say that they do not require any kind of Organization. They have to keep CRR, SLR and gives loans and Advances still they get the surplus of 12%. So do not require Umbrella Organization.

8. What Steps should take further steps for weak UCB? Name of The Bank Mergers and Acquisition Surat Peoples Co-operative Bank Surat Nagrik Sahkari Bank Suntex Co-operative Bank The Prime Co-operative bank Akhand Anand Co-operative Bank Madhulika Co-operative Bank Varachha Co-operative Bank Establishment of Organization Training Liberalization in Government Policies

71

(Chart No. 12)

Steps taken fo UCB Sector
60% 50% Percentage 40% 30% 20% 10% 0% Mergers and Establishment of Acquisition w ith any Organization nationalized Bank w hich help them Should give Training Liberalization in Government Policies

Interpretation: The well established Co-operative Bank thinks that the weak bank should be merge with the Nationalized Bank, but the weak Co-operative Bank needs the support to survive in market.

9. Suggestions by Banks: Some Bank requested that they do not want to be a member of the Umbrella Organization and it should not be mandatory. It should spread the objectives of Umbrella Organization. The Government should be liberalized in its policies for UCB sector. It should give the training to the weak Co-operative Banks

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Feasibility Case Study

1) Charminar Urban Co-operative Bank:
In September 2003, Aruna and Vinita two sisters ended their lives by consuming poison. Next day their brother Achyuta and mother Jana also committed suicide. The cause of suicide: dejected over not getting back Rs.4 lakhs they had deposited in the scam hit Charminar Urban Cooperative Bank. In Andhra Pradesh, Charminar Urban Cooperative Bank collapsed in quick succession. The Charminar Co-operative Bank was established in1903. It played significant role in UCB sector. It collapsed due to liquidity. Reasons for Collapsed: FRAUDS UNRAVELED:

73

In-depth and thorough investigations revealed a series of illegalities committed by the management and staff of the banks in collusion with borrowers, which led to the collapse of these banks. Following are some of the glaring acts of criminalities: Directors themselves siphoned off crores of rupees never to repay. Many of the Directors used the money taken from the bank for construction of their palatial houses and buying cars. Some Directors purchased farmhouses and deposited the amount in their personal accounts. The information regarding Directors availing loan was either not intimated or partly furnished to the RBI. Many of the Directors got crores of rupees sanctioned to their Class-IV employees, though the latter had no credit worthiness and source of income generation. Not surprisingly these amounts reached the pockets of their masters and the amounts were never repaid. Term loans were converted into overdrafts and loan amounts were enhanced without any formal request from the borrowers. Huge amounts of loans were sanctioned on the basis of the properties mortgaged with the bank, which had fake and fabricated sale deeds and therefore had no legal value. Most of the properties mortgaged were grossly over valued by the valuators of the banks. Single individuals borrowed 25-30 crores from the banks and used the funds for the purpose other than indicated in the proposals. Fictitious entries indicating repayment of huge amount of cash and subsequent withdrawal on the same day with a view to prevent the said amount from being classified as Non-Performing Assets (NPA).

IMPRUDENT BANKING:

Prudence is central to banking. In fact, the Prudential Banking norms of the RBI were followed more in breach than in practice.

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 The UCBs offered unviable very high interest rates as well as incentives to the depositors. The banks continuously defaulted in the maintenance of CRR and SLR. Observations made by the RBI in its inspection report were ignored. Establishment costs of banks were far in excess of 2% of the working capital. Ignoring the RBI directive, the Banks sanctioned huge loans to the prohibited and risky sectors. Many borrowers with no capacity to run business and repay amounts were sanctioned huge loans. Some of the big advances sanctioned against mortgage of immovable properties without considering the end use. Loan proposals instead of routing through the Branch Managers were directly recommended by the Directors. In several instances crores of rupees were sanctioned to the individuals, who were not even income-tax payers.

The Bank placed its funds with other cooperative banks in violation of the RBI directive. Loans were disbursed in cash. End use of loans was not verified. Advances were sanctioned for unproductive / consumption / ceremonial purposes. Excess drawl was allowed in many Over-Draft accounts. Ever greening of non-performing assets was resorted to. The system of internal audit did not exist in many of the banks. As a result of total mismanagement and frauds, the Non-Performing Assets which do not yield any income increased abnormally and the bank becames weak/sick.

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No. of Depositors Deposits NPA CRAR

1,38,000 297 Cr. 63.20% N.A.

A bank becomes sick when its NPA is more than 15%. A dozen banks had more than 80% its advances as NPAs. The fate of such banks can be well imagined. It is mandatory for banks to maintain 3% CRAR

How Umbrella organization can help to the Bank? First of all, as being a member of Umbrella organization, the Bank has to pay a Premium or Deposit. From that the UO will provide liquidity to the bank when it needed. Charminar Urban co-operative bank has to Settle their Payment, it can raise fund through UO. Umbrella Organization will help this bank to transfer their Investment from misplaced to proper Place by providing appropriate guidelines. Umbrella Organization may take strict steps like, All the internal data should be audited, revised and checked and ultimately show to the UO, from that it can may proceed further and could take proper steps. Umbrella Organization will limit to give loans and advances, mortgage to public, especially to Directors who frauds mostly, to take borrowings and etc. Specific Proof should be taken against the providing of loans, advances or mortgaging. It can remove or relocate the unviable Branches of the Charminar Urban Co-operative bank. The activities should be hierarchical. E.g. If any one wants loan than he should be approach the Manager of the bank instead of approaching directly to the Director. It should try to reduce their NPA

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The Umbrella Organization will establish the terms and conditions to borrowers, the over draft will be in limits and etc.

2) Surat Peoples Co-operative Bank:

The Surat Peoples Co-Operative Bank is serving since last 88 years to the people of Surat having network of 23 computerized branches out of them 21 in Surat and 1 in Vapi and 1 in Navsari. The Bank is the "First Registered Urban Co-operative Bank" of India and among the first 13 Co-operative Banks to get the "Scheduled Bank" Status. It is the first Bank to provide the "Depository Participant Services" in South Gujarat. The Surat Peoples Co-operative Bank Ltd was established in 1922 at Surat. Bank was registered on 10th March, 1922 and started functioning from 21st April, 1922.The Bank was first

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registered Urban Co-Operative Bank in India and became Scheduled Bank on 1st September,1988.

No. of Depositors Deposits NPA CRAR

12,759 Lakhs 1006.39 Cr 5.05% 21.98%

There is no reasons for fall, or we can say there is nothing to improve, but if we say there is nothing to improve than we start to fall. What will be the function of Umbrella Organization in this Bank? It will help to the Bank for Payment and Settlement of any transaction of Bank. It provides or helps in bringing Information technology, will help this bank to act more effectively and efficiently. It provide ATM network services an helps to partner bank to have ATM cards, Credit Cards, Debit Cards etc. at lower prices. It helps in management of Funds, and gives advises for portfolio management. Benefits of services provided by Umbrella Organization like Travelers cheque, Gift Cheque, demand draft and etc. It helps in NET Banking. If this bank will be the member of Umbrella Organization, it can gain nation wide advertisement by Umbrella Organization. New functions like Hire purchasing, Leasing, Insurances, Capital issue Management.

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Recommendation
What should Umbrella Organization has to do further?
(A) Umbrella Organization (UO) 1) There shall be a professionally managed national level UO which shall provide to the UCBs a range of services on the same lines as is done by UOs for credit unions in several countries. These services are: (i) Offering credit facilities (ii) Providing liquidity to meet short term mismatches

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(iii) Fund management services (iv) Investment banking services (v) Payment and settlement services/gateway (vi) IT Services (vii) ATM Network and services (viii) Management consultancy (ix) Capacity building services 2) Membership of the UO shall be voluntary. The regulators may consider issuing appropriate instructions to UCBs for subscribing to the share capital of the UO. 3) UO will be a non-deposit taking Non Banking Financial Company to start with. The conversion of the UO to a banking company may be considered in due course in the light of experience gained. 4) Its authorized capital will be Rs. 200 Crore and startup paid-up capital Rs.100 Crore. The paid-up capital could be called up in two or more installments depending on the need and response. 5) The capital will be contributed by the UCBs voluntarily @ 10 paise per Rs.100/- of assets or such rate as may be necessary. 6) The Governments may consider providing suitable fiscal incentives to UCBs for contributing to the share capital of the UO. 7) There shall be a onetime uniform membership fee of Rs. One lakh per member UCB which shall reside in a Reserve Fund.

8) Being a non-deposit taking NBFC, it would have access to the following sources for its working capital: (i) Borrowings from banks/financial institutions (ii) Deposits: term deposits from UCBs (iii) Debt instruments: bonds/debentures (iv) Refinance: against financial assets (loans and advances) including securities (v) Other miscellaneous sources

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9) Considering that the proposed UO would be a national level organization intended to strengthen the UCB sector and consequently promote financial stability, the Reserve Bank of India, which has played a pioneering role in promoting several financial and developmental institutions in the country may consider grant of certain reliefs and regulatory dispensations, which would help in making the UO sustainable, such as: (i) Deposits kept by the UCBs with the UO qualifying as CRR/SLR (ii) Permitting the UO membership of the Payment & Settlement systems (iii) Any other support that may be required in future, such as setting up of ATM networks, etc. 10) The UO will be a professionally managed organization having adequate number of independent directors. The CEO will be a person of repute, possessing wide experience and acumen in finance and banking. In the formative years, the Reserve Bank of India may closely guide and oversee the affairs of the UO through a nominee director. Subsequently, they may consider placing an observer on the Board. (Para 5.9.2) 11) The Reserve Bank of India may consider constituting a Steering Committee under the chairmanship of a senior official to work out the modalities for setting up of the UO. The Committee will have as its members the Central Registrar of Cooperative Societies (CRCS), Registrar of Cooperative Societies, Maharashtra (the state with maximum number of UCBs), representative each of the NAFCUB and four major UCBs. (B) Emergency Fund Facility Scheme: 1) In each state, emergency liquidity support to UCBs in distress on account of sudden pressures on liquidity could be provided through Emergency Fund Facility Scheme under a tripartite Industry Support Agreement (ISA). Under the Agreement, all the UCBs registered under a particular State Cooperative Societies Act should contribute a certain sum (say 0.05 % of their assets) to the Emergency Fund as deposits at a specified rate of interest (say at the prevailing interest rate for deposits for six months), which would be available to the participating UCBs as a soft loan (liquidity support) carrying interest, say at 8% [cost of funds (6%) +2% markup] for a period of not more than six months/one year. The quantum of liquidity support at a soft rate (First Tranche) may be capped at 50% of net worth of the UCB concerned.

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2) Under the ISA, a participating UCB should also commit to provide a line of credit to the Emergency Fund when called upon to do so (say additional 0.05% of its assets) at a specified rate of interest (say, the prevailing interest rate for one year deposit). The amount that could be raised through the line of credit may be used for providing liquidity support under Second and Third Tranches to UCBs, at rates higher than the loan under First Tranche say at 10%[ cost (8%) + 2%mark up} and 12%[cost(10%)+2% mark up) respectively. The Second and Third Tranches may also be to the extent of 75% and 100% of the net worth of the UCB concerned, respectively. 3) In states where the presence of UCBs is small and it is not viable to set up such a facility, UCBs could affiliate themselves with another state that offers such a facility. 4) In the concerned states an UCB Emergency Fund Facility Trust should be established. The Board of Trustees will comprise representatives of State Government, participating UCBs and State Federation. 5) Financial assistance to distressed UCBs from the trust funds may be made on the recommendations of TAFCUB. The modalities and terms and conditions for such support may be worked out by the Board of Trustees in consultation with TAFCUB.

6) UCBs registered under the Multi State Cooperative Societies Act having presence in more than one States may seek affiliation to the trust fund of the State where their registered Head Office is located, or they may choose to have their separate trust fund. 7) TAFCUBs may be entrusted with the responsibility of working as the Steering Committee for setting up of trust fund..

(C) Revival Fund 1) A large number of weak and sick UCBs (about 399; 23% of the total) need solvency support. 2) If UCBs with negative net worth were to be brought to positive net worth, an enormous sum of about Rs.2,500 Crore may be required. While RBI may pursue a menu of options, including mergers, with or without DICGC support, and financial restructuring for turn around of these banks, possibly, an amount of Rs.2000 Crore may still be necessary. However, such a fund could only be raised out of contribution from the net profits of UCBs. The total net profit of the sector

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being about Rs.1,000 Crore, mobilization of this magnitude of resources from the sector may not be feasible. Further, contribution from the profits to the Revival Fund would be resisted by UCBs. The Working Group also felt that the State and Central Government may not come forward to contribute to the Revival Fund for UCBs. Therefore, creation of separate Revival Fund for UCBs is not recommended. 3) UCBs not complying with CRAR may be supported from the Emergency Funds.

Conclusion
If we go through especially with Surat we can find that the ratio of weak co-operative bank is very low. As per the Vijay Parekh the administrative member of Prime Co-operative Bank the Umbrella organization is not necessity. As per their credit ratio, they have to keep 3% CRR, 25% SLR and they provide Loans and advances up to the 60%. So they have nearer 12% surplus. He said that RBI on the one hand says that enhance the weak UCBs, and on the other hand he tries and requests to the weak co-operative banks to merge with other banks and now RBI allowed to merge co-operative bank with nationalized banks also. The working group on UO is trying to decide that it should be at state level or National level. If it is at the National level than the different state may feel competition and motivated to grow more. Umbrella organization should in form of Company rather than credit Institute. As per the companies act 1956, it can issue share capital and raise the fund and the payment by the member to the Umbrella Organization becomes not necessary. It also have Memorandum of Association

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and Article of Association so it require the CEO and other member and directors with deep knowledge, understanding of UCB Sector. Working methodology of Umbrella organization is similar to NSE and BSE. It is complex to understand but it helps members to contact with any other member of UO easily.

Bibliography
Web Sites:
http://www.dicgc.org.in/DeregisteredBanks.htm www.rbi.org.in

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